Alarm bells ring at Fed (deflation alert)

Financial Review ^

[imawit]

"Last week had all time highs in payoffs for refi and purchases of existing homes"

Just wanted to clarify that this number is the total US agragate of existing mortgages paid off which comes from refi and sales of existing homes. This figure has nothing to do with new home mortgages because there are now existing mortgages on a new home that get paid off when they are sold. It also has nothing to do with the number of homes bought or sold or their values.

[Pagey]

bttt

[Southack]

"I know its not a popular opinion, but I do belive we are heading for deflation. IMO, the evidence is mounting..."

It's good that you think that way, since so many influential people have been working so hard to convince you that's the true "reality".

But, agitprop aside, are we actually heading for deflation?

How can you tell?

Well, first of all, you need to understand deflation.

"Deflation" means that your Dollar buys more. When you have deflation, things cost less.

Is "deflation" always bad? Of course not. People wait for "sales" at retail stores because they want to take advantage of localized, temporary deflation. People shop at "sales" because they want their Dollars to go further and purchase more things.

OK, now that you have some grasp of the concept of "deflation", how do you know when it is on the way nationally, rather than just in isolated localities like in a store?

It's simple; you watch the "speed of money".

Oh, but wait Mr. Southack, how can it be simple if no one knows anything about the speed of money?

Well kids, that's the rub. All of the doom and gloomers, i.e. those tireless souls who want you to shake in your boots and be afraid that the sky is falling, don't want to tell you about the speed of money.

They'll craft elaborate "articles" designed to convince you that deflation is on the way, but they won't mention word one about the speed of money.

Heck, most folks don't even know what it means.

The "speed of money" is how fast financial transactions occur. Wow, they never told you that in the NY Times, now did they?!

I wonder how they missed that little tidbit?

Now, if the speed of money is increasing, and if your Dollar is buying more things, is that really BAD for our economy?!

Of course not!

In fact, why is it bad that your Dollar can EVER buy more things?

In other words, WHY are these gloom and doomers worried about deflation? Isn't that just like being worried about a store having a sale?!

Well, the REASON that the doom and gloomers worry about deflation is that they are uneducated (or that they are educated but deceitful).

The economists at the Washington Post and at the San Francisco Chronicle may not even know the difference between the speed of money and deflation.

Nonetheless, their arguments confuse the speed of money with deflation.

They worry that financial activity will slow down.

Well, SOMETIMES when prices go down nationally, financial activity DOES slow down. This is what happened during the Great Depression.

What they fail to comprehend, however, is that MOST of the time when prices go down, financial activity speeds up.

You lower the price on your house NOT because of deflation, but rather, because you want your localized financial activity to speed up; in other words, you lower the price to sell your house faster.

Likewise, stores have sales to increase their own speed of financial transactions.

Stores don't lower their prices in order to slow down the speed of their money! No, stores lower their prices to ENCOURAGE their financial activity to pick up.

But the Leftist media doesn't want you to know those simple facts. They want you to be frightened. They want you to think that the sky is falling.

Of course, none of what the mainstream media wants will help you determine if deflation is coming or not, and it certainly won't help you to discern if the deflation in question will be bad (i.e. slow down the speed of money) or good (i.e. increase the speed of money).

For that, you're on your own (well, with a little help from me).

[AdamSelene235]

In other words, WHY are these gloom and doomers worried about deflation? Isn't that just like being worried about a store having a sale?! Well, the REASON that the doom and gloomers worry about deflation is that they are uneducated (or that they are educated but deceitful).

I think deflation would be great especially for my Fannie shorts. I can't wait to see how the Fed will try and "fix" it. No doom or gloom here, if the fiat system is destroyed, I'll be dancing in the streets.

[Southack]

"deflation would be great especially for my Fannie shorts...if the fiat system is destroyed, I'll be dancing in the streets."

Someone may be kind enough to hint to you that your Shorts will be paid in that "fiat system"'s currency. One wonders if your goals are therefore contradictory.

[AdamSelene235]

Someone may be kind enough to hint to you that your Shorts will be paid in that "fiat system"'s currency. One wonders if your goals are therefore contradictory.

No, when you short, it is treated like any other sale. You are paid in fiat. Naturally, one can trade the fiat for something more, stable.

Fiat and bonds are useful in the transition to deflation, but may need to be abandoned when the Feds come to the "rescue".

[Mini-14]

"This is really simple but it will not happen because the manipulators always want a string attached and the public is waking up to this and also feeling it with the increase in debt as they spend and the actual fact that one may never get out from under the rock that is the burden of debt let alone be able to earn a comfortable wage and living without the slavery that debt imposes which pushes the drop in economic activity which then begets recession which then begets deflation. You can't have your cake and eat it too. "

Very well said.

[freeper12]

I think you may be missing the point....there real arguement is wether we are heading for deflation or not...not wether or not deflation will be good a thing thing...it won't if its anything but minor.

Things on sale are not deflation. Having a 30 year mortgage that you have to pay back with more expensive dollars in thr future is deflation.

[Southack]

Unless you know what the speed of money is doing (increasing or decreasing), you won't know enough about the future potential of deflation to make an educated guess about it.

[AdamSelene235]

Care to provide us with some data on velocity, Southack?

Falling prices decrease velocity as consumer choose to hold their dollars longer. In that sense, deflation can be self-reinforcing.

In turbulent times investors may also choose to store their savings in hard assets, thereby reducing velocity.

Currently money is being created like mad so there is little motive to hold on to it. This is why interest rates are depressed and I imagine velocity is high.

Personally, I think deflation and inflation are overly broad terms to describe our current situation. There are so many electric shocks and carrots build into our current system, it is difficult to know what the real market conditions are.

[Southack]

"Falling prices decrease velocity as consumer choose to hold their dollars longer. In that sense, deflation can be self-reinforcing."

Sure, sometimes that can happen, but it is the exception rather than the rule. Consider that sales PICK UP when a store lowers prices. Heck, if lowering prices didn't pick up sales speed, then why would anyone ever lower prices?! So it is pretty obvious that falling prices USUALLY increase the speed of money.

"In turbulent times investors may also choose to store their savings in hard assets, thereby reducing velocity."

Sure, but would you expect people to store their saving in hard assets if the value of those assets keeps decreasing? And if people decide to liquidate those assets rather than hoard them, will that increase or decrease the speed of money?!

[Southack]

"Care to provide us with some data on velocity, Southack? ... Currently money is being created like mad so there is little motive to hold on to it. This is why interest rates are depressed and I imagine velocity is high."

With the normal "conspiracy of incompetence" taken into account regarding the media, such data on the velocity of money is not always easy to obtain.

However, the media does publish some figures that can be used to ballpark the speed of money, such as the current target rate for the sales of new homes (running right around a rate of 960,000 to 1 million per year right now), so your guess that the speed of money is still high is a pretty good one.

[joanie-f]

Thanks for the ping, John. And for the eloquence, Leisler.

Oh our leaders know how to produce. No one beats us in producing studies, reports, collations, reviews, codes, laws, forms, rules, regulations, suits, counter sets of suits, counter-counter suits, appeals, pleading, reforms, programs, plans ….We could do even more if the last few holdouts would put down their engineering degrees and the last few loyal manufacturers quits being the kulaks of the Information Age .... Leisler

Well said! We are turning out communications/business degreed graduates from our colleges in record numbers, and our mechanical/civil/electrical/nuclear engineering, science, and higher mathematics classrooms are slowly finding themselves overrun with cobwebs. We have become a nation of paper-pushers (and paper requirers). When it comes to designing/making useful, nuts-and-bolts necessities, we leave that to the less elite cultures. What our myopia has failed to realize is that, when push comes to shove (i.e., when a few more 9/11’s are under our belt), all the paper, and all the red tape, in the world isn’t going to be useful in heating our homes, and moving from place to place, and keeping our food fresh, and providing shelter …. And when we are at the rest of the world’s mercy for all of those things, God help us.

Re: this article ….

It hardly pays to save in this country anymore. What investment exists that retains its growth potential outside of the potential for government economic interference? If one spends a significant amount of his time researching investment options and then places his money in what he believes to be a strong, reliable, reasonable-yield, long-term investment, odds are that, somewhere along the way, government interference (be it in the form of punitive capital gains taxation, fed money policy, etc.) will declare such individual, personal research and decision-making pretty much irrelevant. It’s called artificial manipulation of a free economy. So investing has devolved from a science to a crap shoot.

In that most insidious way, the government has robbed its citizens of the ability to enjoy financial stability, and (even more abhorrent) the ability to function as an individual on a level financial playing field. Bottom line: we are at the mercy of Congress and the Fed -- one of which is a rogue branch of government, and the other a completely unconstitutional one. And their powers (economically-intrusive legislation, taxation and the implementation of ‘monetary policy’) are two of the most liberty-erosive domestic forces at work in our society.

Two fascinatingly idiotic excerpts from this eye-opening article:

Deflation is not necessarily a bad thing. The world economy has enjoyed booms while prices were falling, during the 1920’s for example .... thirteen Fed staff economists

Chickens always come home to roost. Have these ‘thirteen economists’ ever studied what occurred in this country in the 1930’s? (helpful hint: 30’s follow 20’s)

The U.S. government has a technology, called a printing press .... that allows it to produce as many U.S. dollars as it wishes at essentially no cost .... sufficient injections of money will always reverse deflation .... Fed Governor Bernanke

We should all sleep real well tonight knowing that among our fed governors are those who possess the same mindset as the proverbial ditzy woman who believes that, as long as she doesn’t run out of checks in her checkbook, she can still keep spending (Keynes would be proud).

Two of the most corrosive (individual/private, as opposed to government) economic traits which have emerged in American society over the past decade have been (1) the enormous increase in personal debt, and (2) the sad fact that the financial markets are now ruled by a ‘casino mindset’ as opposed to an ‘investment mindset.’ (Pseudo) government monetary policy and lawmaking has encouraged both sad (fatal?) characteristics.

On a national level, the best way to return to economic sanity: demand economic rationality and accountability from Congress, abolish the Fed, and return to the gold standard.

On a personal level, the best way to avoid being pushed around like cattle in a pen in such an economic climate: get out of debt, and invest in precious metals.

[AdamSelene235]

With the normal "conspiracy of incompetence" taken into account regarding the media, such data on the velocity of money is not always easy to obtain.

YOU MEAN YOU DON'T EVEN HAVE ANY DATA !!!!!!!!!!!!!!!

You bring up velocity ever friggin time the D word is spoken as if it were some tailsman that wards off argument. I figured you at least had a chart or two to share with the class.

Sheesh.

[Southack]

No such luck!

[AdamSelene235]

No such luck!

ooooh!! (Throwing empty beer cans at the screen)

Change back to the pink bull...I found it easier to be annoyed with the pink bull than with my country.

Tell me, hypothetically speaking, if you were designing a country...would you set the fiat system the way it is now? Would you use fiat at all?

[RnMomof7]

Say thanks to the one world Government folks

[Southack]

"Tell me, hypothetically speaking, if you were designing a country...would you set the fiat system the way it is now? Would you use fiat at all?"

Keeping in mind that the reason to use "fiat" is so that all liquidity demands can be met (rather than starved ala the Great Depression), and that the reason to NOT use fiat is to prevent inflation/hyperflation via overzealous currency printing and government indebtedness, I'd use a hybrid of the two.

To wit: I'd back a paper-based currency with either land or oil, depending upon what the new government in question could most afford to squander, but I'd lean towards land (you can always tax it and they can't take it away) and let anyone claim possession of whatever appropriate amount of real estate was contained inside the new country's national parks/forests (adjusted for surveyed assets such as timber, oil, gold, water, et al).

In this way I could issue ALL of the currency that the new country's economy required (just like fiat currency), yet the "loss" of the ownership of the land would have a mitigating impact upon the future politicians of the country (just like a "backed" currency), such that freely running the printing presses would be forever unpopular.

But that's just me.

[AdamSelene235]

I would have chosen something that was:

1. Portable

2. Fungible

3. Durable

4. Easily sub-divided

5. In extremely limited supply

Land only satisfies 3,4 and 5.

I would also like to see free market competing fiat backed by various non-state players.

[Southack]

"Land only satisfies 3,4 and 5."

True, but reasons 1 and 2 favor individuals and pretty well doom governments (when combined into a currency that has 3,4,&5, at least). Substances that meet all of your requirements such as gold and silver and salt have all been used at various times in history, and none of those nations have achieved anything close to what the U.S. has accomplished. Remember, you asked me what I'd do for a new country, not what I'd do if I wanted the "ultimate" capitalist tool for individuals.

"I would also like to see free market competing fiat backed by various non-state players."

You've already got it. Various private currencies have included Green Stamps, Visa credits, airline miles, title insurance policies (or simply paper-based land titles), and a host of other tradable units.

People freely trade their paper currency for stock brokerage bits that exist only in the electronic ether. Many stock sites "give" new traders more electronic currency units than what are sent in to the brokerage, too (e.g. $50 deposited into your new account). Yet no paper Dollars went into those new accounts. Mere electronic bits were changed.

Likewise, there are privately backed systems that move "money" backed by gold (e.g. egold, or in the case of paypal, backed by credit) across the Internet.

Shoot, you name it and there is probably some form of private "fiat" currency system out there somewhere.

But why get all worked up about a currency? All that it does is facilitate trade and store value. Life would simply be less efficient without it, and life can only get marginally better due to improving it. Surely there are less efficient aspects of life that could use more tweaking than our currency; concentrate your efforts on those less efficient areas and you're liable to get a much better return on your efforts.