Inflation vs deflation in US?

M

mtzianos

I'm copying a reply in the gold thread, as the Economics category is more relevant:

Recent price action (stronger dollar, precious metals crushed etc) suggest that markets don't think US debts will be "inflated away". At least not right now.

Can it really work without "inflating the debts away" ? Will US citizens pay with more valuable dollars the debts they have accumulated over the last few years?

How exactly are the US citizens going to manage servicing those debts, with interest rates rising AND the "real" value of their debts rising (as USD has become much stronger vs Euro, Yen, BP etc)? And with stagnant income, due to global wage arbitrage? Remember that 40% of the NFP jobs created during the last few years are real-estate related.

Will they become debt slaves? Will foreclosures soar?

In theory, they can deflate the housing bubble and let deflation take its course.

BUT IF THEY PLAN TO LET IT DEFLATE, I ARGUE THEY SHOULD HAVE LEFT NATURE RUN ITS COURSE 4yr AGO, after Bubble-I. Not create the housing MegaBubble-II and wait to deflate AFTER US citizens have loaded debt to their nostrils, to buy a home at 2-3x the price it cost 5yr ago!

This way, the lenders and the banking system will be the big winners.

But, if this scenario plays out, you can kiss the middle class goodbye in the US (I'm pretty sure the lower class is dead anyway).

In a world of fiat currencies, governments have the ability to CHOOSE: inflation or deflation. In the end, it's a political decision. My logic tells me that politicians always prefer inflation. Maybe with the US it's different...
 
Q1 outstanding U.S. debt by sector, courtesy Fed flow of funds and Bureau of the Public Debt, in trillions of dollars (Q1 2000 in brackets):

Federal: 7.8 (5.7)
Household: 10.3 (6.6)
Business: 7.8 (6.1)
Financial: 11.8 (7.6)

Total: 37.7 (26.0)

And this is going to be paid back in more "valuable" dollars? (i.e. USD stronger than it was 1-2yr ago?)
 
Quote from mtzianos:

I'm copying a reply in the gold thread, as the Economics category is more relevant:

Recent price action (stronger dollar, precious metals crushed etc) suggest that markets don't think US debts will be "inflated away". At least not right now.

Can it really work without "inflating the debts away" ? Will US citizens pay with more valuable dollars the debts they have accumulated over the last few years?

How exactly are the US citizens going to manage servicing those debts, with interest rates rising AND the "real" value of their debts rising (as USD has become much stronger vs Euro, Yen, BP etc)? And with stagnant income, due to global wage arbitrage? Remember that 40% of the NFP jobs created during the last few years are real-estate related.

Will they become debt slaves? Will foreclosures soar?

In theory, they can deflate the housing bubble and let deflation take its course.

BUT IF THEY PLAN TO LET IT DEFLATE, I ARGUE THEY SHOULD HAVE LEFT NATURE RUN ITS COURSE 4yr AGO, after Bubble-I. Not create the housing MegaBubble-II and wait to deflate AFTER US citizens have loaded debt to their nostrils, to buy a home at 2-3x the price it cost 5yr ago!

This way, the lenders and the banking system will be the big winners.

But, if this scenario plays out, you can kiss the middle class goodbye in the US (I'm pretty sure the lower class is dead anyway).

In a world of fiat currencies, governments have the ability to CHOOSE: inflation or deflation. In the end, it's a political decision. My logic tells me that politicians always prefer inflation. Maybe with the US it's different...
More...

It is a political decision as you pointed out. With conservatives in power in the US, the huge debt of middle / low class families is not going to be inflated away. So deflation seems to me a more likely outlook.

On the other hand, the US dollar could be devalued against currencies of countries like China and Japan that US has huge debt (i.e. trade deficit).
 
Quote from mtzianos:

Mish is making a case for deflation. But see the comments of visitors:

http://globaleconomicanalysis.blogspot.com/2005/06/questions-for-inflationists.html
More...

Printing money works when household / business want to borrow. i.e. individuals feel their job security in the future and business see growth ahead.

When asset bubbles stop growing, individuals will stop borrow and start to pay down debt / saving. That’s when deflation kicks in. The central banks can print money but not many want to borrow. Asset bubbles are always followed by deflation. Why you want to borrow when you debt will grow in real value overtime?
 
In short, Mish seems to think that by lowering the real rates to subzero after Bubble-I, the neocon government actually bailed out the banks.

But he thinks the neocons will not care about the American consumer, who is now on the hook after Bubble-II.

As discussed above, in the end it's a political decision.

My overall opinion about the current US administration is 100% negative. Still I don't think that even this US gov will make US citizens debt-slaves, after having endorsed/fueled asset-based consumption in last few years.
 
I think a lot of valid arguments point to a deflationary scenario and that is what bond traders are playing right now.
But the strongest argument that in the end the hyperinflation will win is the dept level. We have passed the point of no return and more and more dept is made to pay the already existing dept. This leads to an exponantial developement of dept which in 20-30 years will need the total GDP to be paid for.
This will be accelerated by a recession because income and tax pays are reduced. In the end, the FED has no other chance than to inflate the dept away or to declare all US-Bonds worthless.
So my thinking is that we get a deflation first together with the next recession followed by near zero interest rates and then a huge inflation, timing is uncertain but hyperinflation will come somewhere between 10-20 years from now.
There will be 2 live time opportunities from that:
1) ZB short if 30year rates near 2% (yes, possible) in 2-3 years.
2) Gold (but not now, maybe also in 2-3 years)
 
If hyper-inflation comes, will US Dollar lose its world currency status?
If Fed can keep a balanced budget with a 6% inflation rate, the national debt can be reduced by almost half in a decade. Double digit inflation is just too dangerous.
My concern is when politicians will discuss balanced budget amendment. When the debt reaches 10 trillion? They have to face the issue at some point down the road, the debt just cannot keep growing.
 
Quote from Topsurfi:

I think a lot of valid arguments point to a deflationary scenario and that is what bond traders are playing right now.
But the strongest argument that in the end the hyperinflation will win is the dept level. We have passed the point of no return and more and more dept is made to pay the already existing dept. This leads to an exponantial developement of dept which in 20-30 years will need the total GDP to be paid for.
This will be accelerated by a recession because income and tax pays are reduced. In the end, the FED has no other chance than to inflate the dept away or to declare all US-Bonds worthless.
So my thinking is that we get a deflation first together with the next recession followed by near zero interest rates and then a huge inflation, timing is uncertain but hyperinflation will come somewhere between 10-20 years from now.
There will be 2 live time opportunities from that:
1) ZB short if 30year rates near 2% (yes, possible) in 2-3 years.
2) Gold (but not now, maybe also in 2-3 years)
More...

I'm starting to think along those lines as well. If deflation happens, it MUST be followed by hyper-inflation, particularly if the US loses its reserve currency status. Once that happens, there's just no reason to play fair any more.
 
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