Deflation or Inflation

I've been wanting to pose this question to some of the more financially astute members here for a while. Will the end result of this "Credit Crisis" be a hyper-inflationary environment or a deflationary one?

I've been leaning toward deflation for a while now. I know that most goldbugs (nothing wrong with the shiny metal but it's still just shiny metal with few industrial uses) are in the inflation/ hyper-inflation camp, and I'm sure I will catch at least a little grief for my thesis. There are a couple of reasons why I believe that deflation is the more likely scenario. First in a hyperinflationary environment you can pay down debts with the devalued currency, and even though financial institutions do get paid back, they are paid back with money that is less valuable than when they made the loan. Second I know that inflationists are always harping on the M-series of types of money (m1, m2, m3) in circulation. However, I've never heard an inflationist even mention the effect of available credit on inflation/deflation. If the M's are expanding while available credit is contracting isn't that net neutral if not deflationary. Available credit is fungible with cash, you can buy the same things with a credit card as you can with cash.

Though the M's aren't as easy to find out now, I do know that many financial institutions have been pulling HELOC (home equity credit), lowering card limits, tightening lending standards, and generally lowering the availabillity of credit. The tightened lending standards have already put the housing market down in a major way, what happens to everything else when one can no longer hit the Home Equity ATM and pay off cards, buy the new hummer, or other spending?

Related, but in an oblique way is the recent downturn in commodities. Over the past year, I've seen oil runup ten dollars in a day due to some drunk Nigerian with an AK near a pipeline (only slightly hyperbole there). Yet, when a major millitary power flexes it's muscle in an area where an important pipeline that connects to the oil rich Central Asian region, we have a continuing drop in oil. Gold also has taken a beating recently and is near it's chart support of around $800 and ounce.

another thing is that credit has not been marked down to accurately reflect the amount of credit destruction/deflationary forces present, mark to model and mark to fantasy allow these valuations to be still in fantasy land, so the whole picture is SKEWED.

SO long as the mortgage market is seeing rising foreclosure's the banks will be in a world of pain, since this =falling prices= erosion of banks collateral/capital base. this is deflationary. however will the printing presses be run faster to outpace this, contrary to popular belief the presses have not been running much, and most of monetary inflation was due to credit hyperinflation.

i believe regarless of the speed of the printing press the key to putting a floor under the value of our dollar is the maintanence of the petro dollar, and the question i have is should the euro get in trouble (when the ECB has to cut) will the globalists cut the petro/dollar link to maintain the legitamicy of the transnational currency. or perhaps the fed cuts in tandem and that would not be necessary but the petro dollar link is the key to wether we have a long period of slow/no growth or a steadily deepening recession that turns into a depression

other things to keep an eye on are any spikes in the long term interest rates (i.e 20-30 year bond yields) should they go very high, this could lead to a hike in interest rates, or a default on debt by U.S or debt forgiveness by our foreign creditors (read michael hudson's article "a grand global bargain".

many investment banks will need rescuing, Private equity will step up in the future and provide the credit creation needed to match investor (read baby boomers) ROI demand. Soverignty of nations is being eroded. Some call the long term plan a horrible conspiracy, (while i believe in many conspiracy's) and think some are necessary to keep the public from knowing truth they can't handle well.........i think the plans to eliminate soverignty and consolidate political power in the hands of the financial elte in a world setting just may be the inevitable course, for a imperfect system we call capitalism, in the context of fractional reserve central banking. i guess thiis is still a conspracy, i mean the central banki/fed was a conspiracy to deceive the public and congressmen after the meeting at jekyl island.




[edit on 13-8-2008 by cpdaman]

You confused me with this post.
I for some reason thought it was another Obama and tire pressure post!


But, as for the economy.... I don't think we can keep bailing out companies. We need to have a free market in which companies can fail. The companies that practice risky practices need to be able to fail. If a company took on too many high risk loans, they should fail!

Lets take Fannie Mae and Freddie Mac. These are supposedly government entities now ... practically. But, the problem is that they are not acting like it. Freddie Mac has given millions of dollars in donations to people like Al Sharpton.

Now, why are these companies giving away money, while they are constantly asking for more money from the taxpayers to bail them out?
While I don't know the details, I listened to a whole show by Limbaugh on this issue. Normally, I don't agree with everything Rush is saying, because he has his own spin...

But, I don't want to bail out a company who is donating money to personal individuals. Especially charletans like Sharpton.... what a loser.

also in addition, the outsourcing of labor to the "east" as well as the weakness of union's today, puts downward pressure on wage inflation, which add's to the potential of a deflationary path IMO, while i think arguing inflation/deflation is= trying to figure out a magic trick by watching the magicians eye's= a diversion from bigger issues

Will bretton woods II fall apart?

What factors are effecting the sustainability or benefit to those who created the petro-dollar?

Will long term interest rates on gov't debt spike, causing one of the three scenario's i mentioned in the first post?

What role will Private Equity play in the future of credit creation and investment and how could this overshadow the stock market and investment banks now that their model of structured finance is dead, and we need to constantly create more debt in order to avoid a deflationary collapse.

sorry for the bit of deflection

john mauldin article www.marketoracle.co.uk...

So, two forces that I have touched on in this speech are going to come together. First, we have destroyed - we've vaporized - 60 percent of the buyers for the structured credit market and badly wounded the survivors. We've got to create something to substitute for that, as we need a smoothly functioning debt market to allow for growth and a healthy business environment. It is absolutely necessary for individuals to have access to credit for purchases. If we all had to go to cash, it would be a disaster of biblical proportions.

So, we've got demand from two sources. We've got a demand from a retiring generation, from a pension generation, demanding equity-like return, when they can't get equity-like returns from the equity market. We've got a demand for credit funds - we've got to replace the people we've vaporized

For all intents and purposes they're going to look like banks. They're going to put their green eyeshades on, and when they loan you money, they're actually going to expect it to come back. And they're going to expect it to come back with a level of risk return commensurate with the level of risk they're taking. Instead of going through the messy business of getting depositors to put money into accounts, depositors who can come in and out, and having to service them and let them write checks and all of that stuff, they're going to go to investors and say, "Give me $100 million or $200 million or $500 million, and I can attack this market and give out loans in this manner, and I can generate these returns - 8 percent, 9 percent, 12 percent."

Further, while private credit will initially compete with banks, I think that at some point banks will see this as an opportunity to return to their recent and very profitable model, which is to originate loans and then sell them off. Properly run, private credit will be good for the managers as well as the investors. And there is no reason that the management cannot be the banks. In some ways, they have an obvious advantage in this market, as it will be easier for them to attract large investors like pension funds and sovereign wealth funds.

[edit on 13-8-2008 by cpdaman]