Deflation Coming Soon

One predictable whine comes from longtime George Soros partner Jim Rogers, who says we are at a "peculiar time in world history". He decries the growing uncertainty, what he calls the recklessness, of "economic recovery action" by global central bankers, and the related action by government policy makers, as world finance markets enter "unchartered waters". These waters have a growing population of sharks, including distressed asset sharks. Their food base is abundant. Distressed assets, penny-on-the-dollar deals are abundant. They are not threatened by imminent reduction - let alone by global warming - bcause the global economy is deflating.

Distressed assets mean asset deflation. This in fact is highly normal in a deflating economy. As Bill Clinton said: "Its the economy, stupid!"

Th problem for folks like Jim Rogers is that not for the first time in recorded history, but at an unprecedented scale, we have the majority of central banks issuing money. Also unprecedented, the bankers often make an unambiguous or naked admission that they want inflation to return through the simplest of all mechanisms - debasing their currencies. This open admission has never happened before.

However, adding spice to the story, the economy's performance and the velocity of money circulation in the economy have "played contrarian": economic gorwth is at best "tepid" in nearly all OECD former-richworld countries, and money velocity is at all times, almost everywhere, worldwide, running lower than previous. This is deflation.

This is what we call a "de facto situation", rather like the very low number of sunspots in Sunspot cycle 24. And there is nothing we can do about it.

One of the biggest problems facing "Kiss and Tell" (the latest lie) central bankers, in their debasing strategy, is that any observer of this grotesque Money Play will instantly see that when a currency is going down, like the GB pound or Japanese Yen at this time, the real question is: Against what?

Normally, we would find solace along with Jim Rogers and other Gold Bugs. We would see that gold bullion and mining stocks were calmly inflating up, and up, or "appreciating" in debased currency units. Unfortunately, again like Sunspot cycle 24, this is not turning out to be the case: this year's peak of the cycle is likely to be the weakest since 1906, a year with a chilly, long and dry Springtime in Europe, followed by a short, hot and stormy Summer.

As for "Peak Gold" that also might be history and may already be 2 full years behind us.

Jim Rogers, unlike George Soros or Louis Moore Bacon is however staying long on gold, silver, the agro commodities and other "hard assets", while he also holds on to his US dollars, but not from any feeling they are a hedge.

As he put it when talking to Business Insider, March 10th: "I own the dollar, not because I have any confidence in the dollar and not because it’s sound – it’s a terribly flawed currency – but I expect more currency turmoil, more financial turmoil".

Any flight to the dollar will most certainly and surely be bad, or very bad news to Ben Bernanke, but a flight to the dollar may already be in the works. Again normally speaking, this could or should mean higher interest rates, but in no way means inflation. When people, companies, and countries for whatever reason flee to the US dollar as a safe haven, their perception of it being a safe haven makes it into one. US dollar interest rates rise. Inflation declines.

A rising dollar on the back of economic slow growth or stagnation, and even outright contraction in several major economies, is also very bad news for Jim Rogers' not-so-hard assets, almost all of them denominated and traded in dollars. Dollar up. Commodities down.

Although still having a science fiction edge to it, a global flight to the dollar process would signal very unusual things, and strange mechanisms at work in the world. One fast spinoff is already signalled by Indian government action - firm action - to slow or stop traditional Indian gold-buying, mostly for jewelry. Indian official reasoning is this traditional buying, in today's very un-traditional cirumstances will or can lead to further inflation.

Put another way, not buying gold is deflationary in today's Indian official economic readout of what is happening. For many analysts a linked and related policy, even inevitable, India has slipped back to trade deficit and net debitor status with the rest of the world.

The myth of dollar collapse is a long-running fairy tale, stretching back to Jimmy Carter and Richard Nixon. Supporters of the myth of course have mucho-ammunition, for example China and Germany agreeing to conduct "an increasing amount of trade" with each other in their own currencies, gold buying sprees by Hong Kong citizens, the performance of gold bullion through the ten years 2000-2011 but not since, and of course petroleum's reality-free price growth, at least until now.

The list of claimed reasons for imminent dollar collapse (against what?), usually include ever rising oil prices, of course running with higher gold prices, higher food prices, generalized inflation, fewer buyers of US debt, and supposedly logical corollaries of this like lower interest rates outside the US but higher rates inside. Add in the geopolitical frills and thrills, like an Israeli military strike against Iran's nuclear assets, and Bob's your uncle. Bingo! Jim Rogers' gold and hard assets (and the dollar) fly and he doubles his money!

If however oil prices did continue to rise, given that about 70% of all traded oil is paid for in dollars, this alone, even without an irradiated Tehran would help maintain international demand for dollars. Even better however, declining or stagnating oil purchases and settlement in other moneys, or by barter deals with offset trades, all of these also tend to reinforce the US dollar's world value!

Reduced purchases of US debt can also, quite easily, reinforce the world value of the dollar, or at least create problems for Bernanke when trying to debase its value with QE Infinity. Interest rates have to rise, the dollar strengthens, deflation continues.

Worst of all however, for the Dollar Decline mythmakers, rising interest rates are pressured by US dollar appreciation, revaluation, or growth in its relative value against other currencies, but the reasons for this can seem as hazy as the answers you will get when asking astrophysicists why Sunspot cycle 24 is so weak. What concerns us is the economy, stupid. This will deflate further, when and if the US dollar appreciates.

When this happens isnt at all sure, this is astrophysics! But we could suggest its already long overdue.

The stock market reminds me of 1999. It’s bullish nature does not reflect future economic expectation.

I remember blog posts from the day that nothing could stop the stock market run. Transition years later and you hear comments like the 4th quarter -.1% GDP drop was the best negative drop ever. It has since been revised upwards to +.1%.

There is lots of cash sloshing around in various areas. People with crappy credit and no savings can buy homes and cars at relatively low interest rates. It got tight for a while, but it is back to SNAFU. If the s**t goes sour, the FED will buy the bad paper..

Deflation is over. Housing bottomed and liquidity is increasing.

Jim Rogers misses yet another call.

I can sort of see the argument for both - inflation and deflation.

Inflation - printing presses working 24/7 and a government that would make a drunken sailor blush.

Deflation - why do interest rates keep going down and banks anxious to sign people up for loans that have rates that would have been unthinkable in all of our lifetimes? If the case for runaway inflation was so solid, it seems like everyone would want to take out a loan that could be paid back with monopoly money and no one would want to make such a loan. Yet that is obviously not the case.

I guess one day we’ll know how this movie turns out.

We just *had* 6 years of deflation. Housing. Employment. Stocks. Salaries.

Now, after all of that time and deflation, we have a recovery. Stocks up. Employment up. Liquidity up.

Jim Rogers has gotten economics backwards both times...6 years ago and now today.

I get that and you may well be right.

However.

The banks are still lining up to lend you money at what - 3.6%?
http://www.zillow.com/mortgage-rates/

Admittedly the rates have nudged up just a bit. But still - if the inflationary case is so iron-clad then this is not rational behavior on the part of the lenders.

Like I said - you may well be right - I certainly wouldn’t bet against it. But it does seem odd that people are advertising to give you money hoping for a 3.6% annual return on those dollars.

It seems the debate is one or the other. That is not how things work.

We will have and are having inflation of essentials. There will be deflations of non essentials. Money is looking for a place to land right now.

I think that is what will happen and, truth be told, IS happening and has been happening for several years now.

One thin I liked about Elizabeth Warren was her speech about real inflation and how people were being crushed by it, even though it “technically” didn’t exist. ONe of the areas of inflation that is absolutely killing people is the increase in taxes.

I am not using the word inflation according to its correct definition (increase in money supply) but rather as a description of people’s money getting them less stuff.

and the informal definition of deflation is that we have no money to buy things.

My point ,and I think yours, is that very few of these articles point out we will have BOTH inflation and deflation, and that distracts us from the whole truth. But once that is admitted, there is no solution to present except the “invisible hand” mentioned in the Wealth of Nations.

I think we have asset deflation still occurring, and necessities inflation just getting started. Meaning, deflation being one vise jaw, and inflation the opposing vise jaw, with us working stiffs (supporting the entire economy) in between the two. We are getting squeezed from both directions, and regardless of what media reports and analysts say, it is nowhere close to being over, or even beginning to get better.

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