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alstry (35.40)

It's Deflation....Demon.......Do you believe....yet?????

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July 08, 2008 – Comments (12)

Demon,

I hear all the arguments.  Keynes.  Printing money.  M3...MZM....MMM....AAA...AARP.

I went to college, I got my economics degree, and in the end I might as well purchased a roll of toilet paper with the value of the knowlege I received.  I have cross examined economists on the witness stand...at the end of the day they are generally paid shills to craft ends to meet their clients desired outcomes........anyone who spouts off economics as a basis for their investment decisions should be scrutinized immediately.

I try to live in the practical world....over the years it has seved me well but makes me early more times than I would care to remember.  I will make this post brief just to answer your question as I could write volumes on the subject.

I define money as wealth/assets, cash in the bank, and access to credit.  Each can be converted into money and spent.  Right now the Fed is printing money at a rapid rate increasing cash in the bank.  However, wealth and access to credit is dropping at a much faster rate than money is being printed.

Not only that, most of the money being printed is going to banks and other financial institutions simply to maintain solvency to offset defaulting debt and not to the consumer

Consequently, the ACCESS to money for most Americans, and many around the world......is shrinking at the fastest rate in human history.

Take a California family who thought he had a million dollars equity in their home a couple years ago with a two million dollar mortage(including a $500K HELOC to improve the house and buy two new luxury cars).  Let's also assume that family had a million dollar retirement account and $100K cash in the bank.

A couple years ago the family had a $100K in the bank and a net worth of about $2.1 million dollars.  Not bad.  Today, if their house has depreciated 50% and their investment portfolio is down 20%........then their net worth has contracted to $400K.

If their investment portfolio continues to fall and/or their house or their house falls in value just 15%....this hypothetical family will soon have no net worth.  At that point, the spending of the family will likely tighten further decreasing demand.

The above is playing out around the world right now......wealth is imploding for many day after day......so is their access to credit......as a result spending is decreasing day after day and rising defaults and slowing revenues are the evidence.

If wealth and access to credit continue to fall at a faster rate than money is being printed....I don't care what the economists say....eventually people won't spend, companies will go out of business, jobs will be lost, and prices will fall.

We destroyed the world's economy by issueing too much credit.  Many can't afford to service the dept now that they can't borrow to meet obligations.  False perceptions of risk were created with SWAPS.  Now the unwinding is taking place and the world is freaking out.

That is the two minute summary....I hope it helps.

12 Comments – Post Your Own

#1) On July 08, 2008 at 10:15 AM, Sqwii (< 20) wrote:

Hi ! I really agree with you that US is in a deflation right now !

 

If we look at the inflation rate it was in late june 4.5 and I think in late july 4.1 , 3.9, 3.7 and going down .... the next months.

 

So the US is in a deflation rate, what does that mean ?

 

Inflation is an increase in the total stock of money. So we will see a fall right now and the next months in good, services  and prices food etc....

 

What does that mean if we have deflation? 


Sqwii

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#2) On July 08, 2008 at 10:28 AM, FourthAxis (< 20) wrote:

U.S. specific assets dropping in value:

Homes
Equities
Wages

Sounds like deflation to me, because what most people know as inflation (price inflation) cannot be global. 

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#3) On July 08, 2008 at 10:42 AM, Sqwii (< 20) wrote:

Okay.

 

If we look at the general economy in US and look some months forward then we will see this changes:

 

- We ARE in a deflation now ! Homes, equities and wages will fall !

- Real GDP Growth rate : The growth rate have the minimum in August-September on 1.8% per annum. We will see from October an increase to 2% and in January 2009 2.3%.

 

- Gold prices ! We won't see any dramatic changes ! I think gold prices are natural the next months.

- Oil Prices : I think the top was the last week and we will see the oil falling to 128 late in this month and in October month we see 103$ a barrel. So the oil prices WILL decrease the next months, after October to December and January next we will see a rebound and a price of 124$ a barrel in January 2009. 

- Unemployment rate: This will increase and increase and in January the percent unemployed will be at 6%. Right now it is at 5.5% so we will see an increase in this !

 - Housing Starts : This is the new privateley owned housing units where thousands of units annual rate. This will be quite natural but a slowly decrease to 962 in January

- Retail sales: This is very voliatile and I think it will top in late August and then fall. 

 

Sqwii comment please

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#4) On July 08, 2008 at 10:44 AM, saunafool (98.67) wrote:

alstry,

You make a good point, but I still have my doubts. Maybe it is because there are different definitions of inflation out there...

I'm still betting on falling asset prices and rising prices of stuff that people buy. Deflation of assets, inflation of liabilities. I don't see how the price of everyday goods will fall when oil is at $140/bbl. Shipping costs alone have tripled over the past few years.

Dow raised the price of everything 25% in April, then another 20% in June, plus added fuel surcharges on every delivery. I've seen this with every manufacturer I've worked with in the past 3 years--everyone is raising prices like crazy, just to keep up with rising input costs.

Check out my last blog post. Please add your comments on how you see oil prices going down. If I saw a way where oil prices fell, I'd believe we'd have deflation across the spectrum--assets, wages, and the price of everyday goods.

Instead, I see probably the worst of all worlds for Americans: rising costs and falling wealth. Very tough out there right now. 

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#5) On July 08, 2008 at 10:54 AM, Sqwii (< 20) wrote:

Saunafool !

 

Read my blog !

 

We won't see the oil under 100$ a barrel anymore ! 

But until October we will see a decrease in oil before it will bounce again !

 

Sqwii

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#6) On July 08, 2008 at 11:19 AM, FleaBagger (28.98) wrote:

I just don't think that the tightening of the credit market (deflation) will be able to compete with the rampant borrowing and spending of a congress and a president desperate to buy votes (inflation), so that inflation will win over the next 2-4 years, though nonessential consumer goods, homes, and securities will be sold at fire-sale prices. I still think silver and gold are excellent investments right now.

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#7) On July 08, 2008 at 11:28 AM, alstry (35.40) wrote:

At the peak, the value of homes was over $20 Trillion.....if homes devalue 50%.....that is $10 Trillion dollars of lost wealth....much of it margined with mortgages.

You think the government is going to double the national debt in a few years just to offset the decline in home prices???????

We could add in stocks and bonds and we are probably looking at another $5 to $10 trillion of lost wealth.

Factor commercial RE and there is another few trillion......

We are talking about tens of trillions of dollars....the current budget is around $4 trillion.  We haven't even factored the slowdown in state and local spending.

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#8) On July 08, 2008 at 11:54 AM, jesusfreakinco (28.91) wrote:

But as the USD continues to fall, commodities will continue to rise.  I agree that much of the economy is in a deflationary mode, but some will be increasing significantly as long as the USD is weak and getting weaker.  The fundies on the USD continue to deteriorate across the spectrum.  Are you a USD stabilization guy or how do you factor in the falling dollar and its impact on import prices?

JF 

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#9) On July 08, 2008 at 12:01 PM, alstry (35.40) wrote:

JF 

Who said the US dollar is continuing to fall???????

Inflation and deflation technically refers to the quantity of outstanding money.....everything is simply rising prices and falling prices.

You think the fundies of the China or Europe or Japan is any better than America?

You and I go a long way back....and you know I always tell it as I see it.....I could be wrong.....and I am wrong way more than I care to admit......but this is simply the way I see it until things change.

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#10) On July 08, 2008 at 7:07 PM, XMFSinchiruna (27.49) wrote:

Who said the US dollar is continuing to fall???????

 

I do.  :)  Oh wait, I'm sorry... I forgot how great the chart looks.  :)

 

Stagflation, folks.  Think Weimar Republic.

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#11) On July 08, 2008 at 7:14 PM, DemonDoug (65.96) wrote:

alstry, it's funny - i wrote my recent inflation blog, it took me a few hours, i didn't even know you had posted this - but anyway you can see my argument laid out there.  the bottom line is that decreasing wages plus increasing prices = economic hardship and guess what that's what's happening.  In your latest blog you even state that - companies are lowering their sales forecasts and laying off people and raising costs.  Banks are even doing this - with the drop in the fed funds rate mortgages haven't dropped, this means banks are charging more for their loans while making less loans. on and on we go.

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#12) On July 08, 2008 at 7:49 PM, alstry (35.40) wrote:

We have three camps developing:

The hyperinflationists, the stagflationists, and the deflationists.

The first screws savers, the latter rewards savers, and the middle pretty much screws everyone.

It is my opinion we are at an inflection point right now and within the next six weeks or so we should all have some pretty good direction.

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