Perpetual Deflation Causes Inflation

Economics / Inflation Oct 01, 2010 - 04:46 PM GMT

It does not amaze me that most people have not studied enough to have a very good understanding of the current macro economic environment.

That hyper-inflation theory only works when the rest of the world has a strong currency to run to. The world saves in US dollars (and Euros), e.g via the Yuan peg, so there is no danger of a run away from bonds any time soon. The entire globe dumping dollar reserves for non-monetary (i.e. low stocks-to-flows) commodities doesn't work either because it would implode the global economy-- that only worked when a small portion (e.g. Weimer Germany, Zimbabwe, Chile, Argentina, etc) of the world flighted to commodities. Instead, the world has no realistic alternative but to allow the central banks to monetize the debt via perpetual lowering of the sovereign bond interest rates in order to prevent an interest expense spiral[1]-- halving of the interest rate (e.g. 1%, 0.5%, 0.25%, 0.125%) also halves the interest expense and can go on mathematically forever.

Fundamentally the nature of a global debt trap is that no nation-state has enough free capital to write off the debt or standards-of-living deficit, thus all governments have to continue to be supportive of piling on more debt. The developing countries have an excess of idle human capital which counts as a liability greater than their accumulated production-- much of which is badly mis-appropriated to exports and speculation.

We will see inflation in commodities, because the declining interest rates and public sector debt crowding, is a deflation[1] that forces companies to lower labor costs to stay alive. With 7 - 10 developing world workers hired for every outsourced westerner, demand for basic commodities increases (but not 7 to 10 times more, because developing world people are more frugal, thus money multiplier and velocity-of-money is relatively lower).

We have deflation of the western hemisphere (any finance-able "asset" and demographics[2]) and inflation of the developing world ("things every human buys"). Mixed in with this is massive mis-allocation of capital due to centralized interference, e.g. Yuan peg is causing real estate speculation bubble:

http://www.marketoracle.co.uk/Article22633.html

and export infrastructure bubble (driving profit margins near 0, or actuarially negative) because individual Chinese capital can't escape to greener pastures (e.g. other less developed countries). The western countries are complicit in enforcing the Yuan peg:

http://www.marketoracle.co.uk/Article23054.html#comment95070

(so they are either lying about wanting, or too compartmentalized to get, a free market for the Yuan to appreciate)

Private gold ownership is of no near-term threat to the Yuan peg and resultant mercantalism, so it provides a near-term release value for inflation. China is very wise to promote gold ownership, as it allows them to continue their Yuan peg longer. And at the end game, they can confiscate this gold, just as USA did in 1934.

The end game comes when the public sector has displaced so much of the private sector, that rationing of production becomes intolerable for voters, i.e. riots and war. The Obama health care bill is a rationing mechanism. Thus the end game is implosion of the western hemisphere which will drag the developing world mis-allocations into their Great Depression (as what happened to USA in 1930s as Europe imploded).

This is why gold & silver are the most preservative, i.e. gold has the highest marginal utility of any commodity due to its highest stocks-to-flows ratio (copper etc have only 6 months supply above ground). The world is in deflation as priced in gold and silver. However, it is likely at the end game, monetary metals investors will find their gains stolen via taxation:

http://www.marketoracle.co.uk/Article20327.html

Hyper-inflation is a shortage of cash, and the government must replenish the cash to masses, else hyper-inflation can not occur. The western masses have a negative net-worth:

http://www.getmoneyenergy.com/2010/03/net-worth-of-whole-entire-world/

So any cash they receive will be used to pay down debt. The developing world has rising Gini coefficients with capital controls, so personal savings is mis-allocated instead of solving the mass standard-of-living deficit. This high global debt and standard-of-living-deficit load on the masses, is nothing like the situations that caused hyper-inflations, nor the Japan deflation. Japan internally financed much from their very high personal savings rates, which is opposite of the current situation. Also Japan's deflation did not involve the entire world, so it did not drive global mis-allocation and basic commodity inflation any where near the degree that is happening now. Japan's deflation was the first straw of the breaking of the global fiat camel's back.

[1] http://professorfekete.com, also it is crucial to understand that since the marginal-utility-of-debt went negative in 2008, all increases in public debt, force the GDP to decrease:

http://www.marketoracle.co.uk/Article16212.html

You may read my more extensive comments:

http://www.google.com/search?q=site:marketoracle.co.uk+Shelby+Moore

[2] http://goldwetrust.up-with.com/economics-f4/changing-world-order-t32-105.htm#3692

By Shelby Henry Moore III

antithesis@coolpage.com

short bio, I have published articles on FinancialSense.com, Gold-Eagle.com, SilverStockReport.com, LewRockwell.com. I am the sole or contributing programmer of numerous (some million+ user) commercial software applications, such as Corel Painter, Cool Page, WordUp, Art-O-Matic, etc.. I have an education in engineering and math.

Disclaimer: My writings are my personal opinions, not to be construed as statements-of-fact. Do you own research. Licenses to think and communicate have never interested me too much, so I am not a licensed research, journalism, investment, legal, nor health professional. Please consult the proper authorities for all matters covered in my writings. I disclaim all liability for what you do after reading my writings. No one can predict the future, and if there is a physical world investment that never loses value, I haven't found it yet in my 44.1 years here on Niribu.

Comments

Shelby Moore
10 Oct 10, 00:09

Buy food NOW!

Could this be the big one, that starts the rationing of food?

http://www.agweb.com/article/shockwaves_from_fridays_usda_production_report/

My take on this is that we are likely to get another inflation run (higher interest rates, lower dollar) starting now and running until the next liquidity crisis in 2011 or 2012, a repeat of early 2008. Then the liquidity crisis will rescue the dollar and send the interest rates to new lows, a repeat of late 2008. This global crash will again abate the demand temporarily and crash commodity prices again. Remember that runaway hyper-inflation is impossible (the negative net-worth of masses is a margin call), unless the governments respond by handing out cash in orders-of-magnitude more than current cash flow of consumers. The governments are instead going to bail out the "too big to fail" and sustain the entitlements. What is underlying through these gyrations between inflation and deflation, is that each gyration will take another segment of the western population in poverty. This is the Great Harlot's regression towards a one world order (global socialism) of the "share and share alike" level.

Shelby Moore ("author of this article")
28 Oct 10, 14:50

Deflation, not hyperinflation

I thought I explained it sufficiently in the above article, yet people continue to follow the incorrect logic of this writer Gonzalo Lira. He writes recently that the recent fast rise in commodity prices is a sign of arriving hyperinflation:

http://gonzalolira.blogspot.com/2010/10/signs-hyperinflation-is-arriving.html

It is impossible to get hyperinflation with respect to general commodities, when the unit-of-account (the currency) is global and wages are not increasing at same rate as commodities are, because if the entire world has to pay runaway spiring up prices for commodities, then pretty soon no one has any more money to buy anything, and the global economy implodes. At that point, no one can sell the commodities they held, and there is a crash in prices.

In other words, the stampede (aka public confidence, Sinclair "currency event") logic doesn't work, and thus it is impossible to get hyperinflation when the dollar is the global reserve currency, all other currencies must devalue with the dollar, and hyperinflated quantities of currency are not literally and physically being distributed to all the people every where in the world. The reason all other currencies must devalue with the dollar is because oil and commodities are always available to be purchased with dollars. This is why the US military is stationed all over the world, to make sure that the dollar remains liquid for purchasing commodities and oil. We know that socialism's entitlement and other distributions are just barely keeping the people level in terms of nominal cash flows, no where near hyperinflated increases in distributed currency to the general populace and especially not worldwide in every country.

Hyperinflation can only occur when a local currency is destroyed, by a stampede out of that local currency to commodities. In that case, the price of commodities rise in runaway upward spiral with respect to that local currency, but do not rise with respect to the currency that the rest of the world is using. Thus such hyperinflation is sustainable until the local currency dies.

The only hyperinflation that is possible on a global reserve currency is relative to gold and silver. And this is happening now. This is actually DEFLATION, because everything is getting cheaper with respect to real money (gold and silver). And deflation is exactly what is expected during a debt implosion.

Commodities will rise in price only as fast as the developing world wages rise. We will see periods of boom and bust over the next years or decade, as the global reserve currency (the current fiats all hinged to dollar) dies with respect to gold and silver.

I have made dozens of comments on this site, which further detail my logic:

http://www.google.com/search?q=site:marketoracle.co.uk+Shelby+Moore

I have also discussed this in great depth and quoting from numerous articles (from this site) at my forum (which is free, I sell nothing, I am software developer, ad-hoc economist, and ad-hoc theoretical physicist):

http://goldwetrust.up-with.com/economics-f4/shelby-s-newsletters-t38.htm#3834

I recently explained that we are in global devaluation, which is not the same as hyperinflation, and is much more insidious, perpetual, and hard to escape from:

http://goldwetrust.up-with.com/economics-f4/shelby-s-newsletters-t38.htm#3816

Cheers.

Shelby Moore ("author of this article")
03 Nov 10, 13:46

deflation = West-->Developing

The above article which I wrote, may make more sense after reading about how how the deflation of perpetually declining interest rates (the bond bubble) is keeping the westerners locked into bonds and unable to go invest where the growth is, i.e. transferring REAL wealth (purchasing power) from the westerners to the developing world, which means deflation for developing world wage earners, and inflation for westerners:

http://www.marketoracle.co.uk/Article23909.html#comment96005

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