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Inflation or Deflation?

30 Jul

Inflation or Deflation? [courtesy Google Images]

Inflation or Deflation?
[courtesy Google Images]

There is always evidence of inflation.  Some prices are rising.

There’s also always evidence of deflation.  Some prices are falling.

Whether we live in a time that can be accurately described as “inflationary” or “deflationary” depends on whether prices are predominantly rising or predominantly falling.

Right now, we seem to live at a time that’s confused and unclear.  More importantly, we are living in a moment where it’s unclear whether we are headed to more deflation or more inflation.

To understand where we might be headed, here are some arguments:

 

Premises:

•  Inflation makes debts cheaper and easier to repay since they are repaid with devalued, inflated, cheaper dollars.

Inflation tends to stimulate the economy by making currency less valuable and thereby increasing the consumers’ inclination spend quickly and before their currency loses its value.

Inflation is typically associated with economic booms.

Inflation is great for borrowers and debtors and terrible for lenders and creditors.

As the world’s biggest debtor and borrower, in order to survive, the US government wants and even needs inflation.

•  Conversely, deflation makes debts more costly and harder to repay since those debts are repaid with deflated, more valuable dollars.

Deflation tends to slow the economy by making currency more valuable and increasing the people’s inclination to save their currency rather than spend it because it’s gaining value.

Deflation is typically associated with economic depressions.

As deflation persists, existing debts can grow so large in terms of purchasing power that the debts can’t be paid and debtors are increasingly forced to declare bankruptcy.

As world’s biggest debtor, the U.S. government can’t stand—and might not even survive—a prolonged period of deflation.

Government fears and hates deflation.

 

Evidence

A.D. 1971:

President Nixon stopped redeeming foreign-held US dollars with gold and thereby converted the dollar into a pure fiat currency.  The market price for gold was $45.

 

A.D. 1972:

The Nixon administration reached an audacious deal with Saudi Arabia:  the US would guarantee Saudi Arabian security; the Saudis would only sell their crude oil for dollars.  Later, a similar agreement was reached with OPEC.

Result?  Anyone who wanted to purchase crude oil on the international markets had to first have intrinsically-worthless fiat dollars.  The resulting international demand for dollars created the dollar’s perceived value and status as “petro-dollar”.  The dollar was implicitly backed by crude oil and therefore allowed to continue as World Reserve Currency—despite the fact that it was no longer backed by gold or silver.

Gold was $64.

 

A.D. 2000:

The US was the world’s only, undisputed super-power.  The US dollar’s value on the US Dollar Index (USDX) was 125.  The market price for gold was $273.

 

A.D. 2001:

Saddam Hussein began to sell Iraqi crude for euros and threatened the dollar’s hegemony as the world’s only petro-currency.  Gold: $265.  USDX: 125

 

A.D. 2003:

Under the pretext of seeking to destroy Weapons of Mass Destruction, the US invaded Iraq.  Gold: $417.  USDX: 80

 

A.D. 2011:

Prior to A.D. 2011, government policy was to inflate the fiat dollar.  Price of gold and the USDX are evidence of that policy.

However, starting in A.D. 2011, CNN-Money published “IMF calls for dollar alternative” and claimed,

 

“The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.

“The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system . . . . as a less volatile alternative to the U.S. dollar.

“The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

“The IMF also proposed creating SDR-denominated bonds, which could reduce central banks’ dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.”

 

That report went largely unnoticed, but it was big news.  The almighty IMF was saying:

 

1)  Since A.D. 2000, the fiat dollar’s value had fallen from 125 to 72 on the USDX and was therefore deemed too “volatile” to continue as the World Reserve Currency;

2)  The fiat dollar should be replaced as World Reserve Currency with Special Drawing Rights (SDRs) issued by the IMF.  That would make the SDRs the “World Reserve Currency”.

5)  Replacing the dollar with SDRs would serve the best interests of central banks and the global economy.

4)  The role of US Treasuries on the international financial systems should be replaced by bonds issued by the IMF and valued in SDRs.  That would dramatically reduce the demand for and value of US Treasuries.

5)  The price of crude oil should be denominated in SDRs rather than US dollars.  That would make the SDR the world’s “petro-currency”.

 

The IMF was clearly attacking the US dollar’s hegemony as “petro-currency” and World Reserve Currency.

 

  • USDX fell to 72, reversed, and began an initially slow rise to today’s 97—that’s a four-year, 35% increase in the purchasing power of the fiat dollar as measured by the USDX.
  • Gold hit its all-time high, $1911—and began a 4-year, 42% descent to (now) $1,100
  • the US military leaves Iraq.

 

You can see the probable correlation between the 35% rise in the USDX and the 42% fall in the price of gold–especially in the USDX low of 72 and the gold peak of $1911.

But were these A.D. 2011 events merely coincidental?  Or are they evidence that government’s pro-inflation policy of most of the previous 70 years was giving way to a pro-deflation policy?

Did the IMF threat to replace the fiat dollar as World Reserve Currency throw the US government and Federal Reserve into a panic?  Did that panic cause government and the Fed to start raising the USDX and lowering the price of gold in order to maintain the fiat dollar’s status as “World Reserve Currency”?

Remember, since A.D. 1971 the only thing that really gave the fiat dollar any value was its status as the world’s “petro-currency” and World Reserve Currency.  If the dollar lost either status, it would also inflate, lose much of its perceived value, and perhaps die in hyperinflation within two or three years.

Did the US government and Federal Reserve embark in A.D. 2011 on a policy of international dollar deflation in order to preserve the fiat dollar?  Did they risk the US domestic economy stagnating or even falling into depression, in order to preserve the fiat dollar?  Did they increase government’s debt burden and risk of insolvency in order to protect the fiat dollar?

IF the feds/Fed adopted a policy in A.D. 2011 to cause dollar deflation in the international/USDX level, that policy seems to have worked well enough to stop the IMF’s proposed replacement of the dollar as World Reserve Currency—at least, until now.

 

A.D. 2014

USDX 80  Gold $1,300

USDX deflation accelerates.  The USDX rises over 25% from 80 (2014) to nearly 100 in early A.D. 2015.  Gold falls another 15% to today’s $1,100.

Was the 2014 acceleration in deflation accidental?  Or was it evidence of the feds/Fed determination to preserve the dollar’s status as World Reserve Currency in the face of growing competition for that status from the Chinese Yuan?

 

A.D. 2015

Reuters recently published an article entitled, “Opportunities open up as U.S., UK prepare to go it alone on rates”.  According to that article,

 

“Amid all the uncertainty swirling around financial markets, one clear picture is emerging: U.S. and UK interest rates will soon rise, while most of the rest of the world is easing monetary policy.” 

 

In other words, much of the rest of the world is promoting inflation by lowering interest rates and increasing their domestic money supplies, thereby making it easier for domestic consumers to borrow and spend and more profitable for domestic industries to export goods to foreign countries.

The U.S. and UK, however, are allegedly preparing to raise interest rates and thereby increase the forces of deflation that make it more expensive for US and UK consumers to borrow and spend, harder for US and UK industries to export, and harder for the US and UK governments to repay existing national debts or borrow more.

If both the US and UK officially raise interest rates and thereby risk causing deflation and even economic depression, then the accelerated deflation seen on the USDX over the past sixteen months is probably not accidental.  It’s probably the result of intentional policy.

 

Why might government want to cause deflation?

On the domestic level, causing deflation is tantamount to economic suicide.

However, a strong dollar on the international level will tend to resist attempts by the Chinese Yuan and/or IMF SDRs to seize the roles of “petro-currency” and World Reserve Currency from the US dollar.

Faced with growing competition from other currencies and the threat of dollar destruction, it’s conceivable that the government and Federal Reserve embarked on a policy to make the dollar more valuable on the international level.  That might explain why they’re at least allowing and perhaps encouraging dollar deflation on the international level.

So long as the dollar is increasing in value (deflating), the world will demand dollars.  So long as the world demands dollars, the dollar will continue to retain at least some of its status as World Reserve Currency.

Nevertheless, if government and Federal Reserve policy is to support the dollar with international deflation, they’re risking the spread of deflation into the domestic economy and collapse of the US economy.  If so, for the powers that run this country, the dollar is more important than the American people or the U.S. economy.

Reuters:

 

“[T]he United States and Britain will be swimming against the global tide. No fewer than 37 central banks have eased monetary policy so far this year to boost growth, fight deflation or both.

Interesting, hmm?  37 central banks are fighting deflation while the US and UK appear to embrace deflation.  Are the US and UK super-smart or super-stupid?

Clearly, we are at some sort of inflection point in international finance.  The US and UK are either about to be brilliantly strengthened or catastrophically weakened.

 

QE4?

Are we getting closer to another dose of Quantitative Easing (QE4)?  Could QE4 cause sufficient inflation to reduce the deflationary pressures currently on the dollar and US economy?

If not, has government conceded that since QEs 1, 2 & 3 failed to cause much inflation, QE4 will also fail?

Has government grown so impotent that it’s resigned to suffering more deflation?  Or is government intentionally causing more deflation (at least on the international level) to protect the dollar’s status as World Reserve Currency?

Unless our government is bent on pushing the US economy into a depression, government should still prefer inflation to deflation.  Recent evidence of accelerating dollar deflation refutes that proposition, but let’s pretend it’s true.

If it were, we might ask the following:

 

1) IF government still wants and needs more inflation to stimulate the economy and pay off the national debt with cheaper dollars; and,

2) IF the government and Fed are convinced that QE4 won’t succeed at producing more inflation; and,

3) IF near-zero interest rates can’t cause more inflation and economic stimulation; then,

4) Are we doomed to succumb to deflation and economic depression no matter what?  Or,

5) Is there some other way to create inflation?

 

The answer to the question at #4 is “Not necessarily—we might still escape deflation.”

The answer to the question at #5 is “Yes—there are other ways to create inflation.”

 

Inflation by Declaration

Because they’re covert, creating inflation by printing more currency and artificially suppressing interest rates are preferred methods to cause inflation.  The public doesn’t understand them.  Also, their effects aren’t usually sudden and occur slowly.  Thus, these two methods (printing more dollars and lowering interest rates) are sneaky since, in theory, they allow government to avoid the blame for causing inflation.

But, if government were sufficiently desperate, it could cause significant inflation overnight by simply declaring that the purchasing power of the dollar had been reduced by, say, 50%.  The resulting inflation would be sudden, overt and undeniable. Government would have to take the blame. But sufficient inflation might be achieved to offset the forces of deflation that’ve been significant since A.D. 2008 and actually “stimulate” the economy.

Devaluation by declaration might be achieved by issuing a new pink currency to replace our green currency at a ratio and value that were designed to cause significant inflation.  There might even be a way to somehow suddenly increase prices by edict without actually replacing our green currency.

You might go to sleep on Friday with $20,000 in your bank account and wake up on Monday morning to learn that government had declared that the purchasing power of Friday’s $20,000 was reduced to, say, $10,000.  Creditors would scream.  Debtors would cheer.  Since most Americans are debtors, the cheers might drown out the screams.  For a while.

 

Inflation by Disconnection

Prior to A.D. 1971, paper dollars had value on international markets because they were connected to, and redeemable in, gold.  When Nixon stopped redeeming foreign-held dollars with gold, he disconnected paper dollars from gold, dollars lost value, prices rose, and American suffered a spike in inflation.  The disconnection of gold from paper dollars caused inflation.

Secretary of State Kissinger subsequently negotiated a deal whereby the sale of all crude oil on international markets could be achieved only by payments in fiat dollars.  Kissinger connected fiat dollars to crude oil.  That connection gave new value to the fiat dollar.  Inflation persisted at a modest rate and the dollar retained its position as World Reserve Currency.

It follows that if today’s government really wanted to cause dollar inflation, no matter what the cost, all they’d have to do is disconnect fiat dollars from the sale of crude oil. If other currencies could also purchase crude oil, the dollar’s petro-currency hegemony would be eroded.  As that hegemony disappeared, the dollar should spiral deeper into inflation, devaluation and worthlessness.

To some extent, this erosion is already happening.  During the 1970s, 80s and 90s, the dollar was used to purchase nearly 100% of crude oil sold on international markets.  Today, only about 80% of international crude oil sales are made with dollars.  Over time, that percentage is certain to decline further.  If the dollar is no longer “the” primary “petro-currency,” the dollar’s value (purchasing power) will fall.  That’s inflation.

My point is that government has the means to create significant, sudden and overt inflation if they really wanted to do so:  just cause or allow the “petro-dollar” to be increasingly disconnected from its link to crude oil and status as exclusive “petro-currency”.

 

October 20th?

All of which leads me to a recent report by Stansberry Research entitled “First Look: U.S. Dollar Substitute to Go Public on Oct 20th?”

According to Stansberry,

 

“On Oct 20th of this year, the IMF is expected to announce a reserve currency alternative to the U.S. dollar.”

 

Remember the CNN-Money report from A.D. 2011 that the IMF had threatened to create an alternative World Reserve Currency to replace the fiat dollar?  That new currency was to be based on SDRs.

IF the Stansberry report is accurate, it may be that on October 20th, we’ll see a new, international currency that either supplants or replaces the US dollar as “petro-currency” and/or World Reserve Currency.  One result of this new currency should be at least two or three years of significant dollar inflation.

If the US government wants inflation (at least for a couple more years), a new World Reserve Currency would achieve that object without placing exclusive blame on the US government.

 

•  After reading the Stansberry report, a SecretsOfTheFed.com headline asked “Is the IMF trying to beat China in the creation of a new reserve currency?” SecretsOfTheFed.com speculated:

 

“Earlier this year, China announced that they will have their new SWIFT system fully functional by either September or October and can then fully float the Yuan currency worldwide. . . . However, a new report from Stansberry Research is alleges that the IMF sit by idly while the East wrests control from them over the [next] global monetary system, and could be finalizing plans of their own to replace the dollar before China does.”

 

Could it be that the dollar is admitted by all to be near death and no longer worth fighting for?

Could it be that the real battle for the title of “World Reserve Currency” is not between the (nearly dead) dollar and the Chinese Yuan—but between the Chinese Yuan and the IMFs SDRs?

Are we less than three months away from the end of dollar deflation and the resumption of dollar inflation?

 

Perhaps, those questions will be answered October 20th.

Whatever those answers may be, it looks, seems, and feels as if we’re on the verge of “something big”.  Big inflation or big deflation.

I expect we’ll see another six to twelve months of deflation (at least) followed by a last attempt to cause inflation and perhaps even hyperinflation.

The dollar won’t die in deflation.  It might die in hyperinflation.

Either way, “something big” concerning our monetary system seems imminent.

Buckle up.

 
9 Comments

Posted by on July 30, 2015 in Inflation/Deflation, Money

 

Tags: , ,

9 responses to “Inflation or Deflation?

  1. wholy1

    July 30, 2015 at 1:48 PM

    How about the possibility of BOTH, at times concurrently and other times more cyclically?
    Haven’t seen/heard that old late’70s’80s word “stagflation” much lately.
    Can’t really see the cost for “survive to thrive essentials” declining according to the trend.
    Discretionary/impulse items depends on many factors such as FRN exchange rate, mfg location, utility, WAR etc.
    An increasing number of the People are getting wise to the blatant financial, government UN-judicial and political crap/corruption occurring.

    Many very intelligent sources out there from whom to get a broader perspective:

    Richard Martin – The WakeUp Call. Very good macro economic/financial statistical analysis. Recently relocated from Singapore to the Malaysian island state of Penang. His primary mantra is “get the Hell-o out while One is still able. Would be there myself if I was a tad younger. Absolutely wonderful and inexpensive place! To the X-Gens and Millennials, got only one exclamation: “YOU HAVEN’T LEFT YET?!”

    Raúl Ilargi Meijer – The Automatic Earth
    Nicole Foss – Australia
    Jim Wille – The Golden Jackass
    Martin Armstrong
    Gerald Celente – Trends Research
    Jim Rogers – Am investor now located in Singapore
    Simon Black – SovereignMan. Relocated to Chile
    Doug Casey – CaseyReport. Relocated to Argentina
    Marc Faber – Gloom, Boom & Doom Report. Relocated to Chiang Mai in northern Thailand
    Just to mention a few.

    All of the [D]elites have already set up remote fortress digs.

    The United Snakes Corp, Washington D[e]C[eit] is now FULLY in control of what was once known as the “United States of America”. A corportocracy is succeeding in establishing a technocratic feudalism. When WW3 and gun confiscation occur, it’s a done deal.

     
  2. Toland

    July 30, 2015 at 2:50 PM

    China itself has called for the IMF to issue the alternate world reserve currency. This is probably because China’s economy, as currency structured, does not support it issuing a reserve currency. One reason is that China’s economy is based on running a trade surplus, but the reserve currency issuer needs to run a deficit. Economists call this the Triffin dilemma.

    “This dilemma was first identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.”

    http://en.wikipedia.org/wiki/Triffin_dilemma

     
  3. Roger

    July 30, 2015 at 5:45 PM

    The US Dollar Index (USDX) is a poor proxy for deflation. The USDX measures the strength of the US dollar versus other currencies, whereas deflation measures the strength of the US dollar versus goods and services. The USDX and deflation fluctuate pretty much independently.

    Wikipedia: “The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.”

    Wikipedia: “In economics, deflation is a decrease in the general price level of goods and services.”

    Indeed, the “general price level of goods and services” can go down (deflation) while the USDX is going any which way – up, down or sideways.

    How little the USDX has to do with inflation or deflation is proved by the fact that the USDX is again around 100 – which is where it started when the index was launched in 1973. Meanwhile the “general price level of goods and services” in US dollars is nowhere near its 1973 level.

    @Toland

    “China itself has called for the IMF to issue the alternate world reserve currency.”

    Yep, in a 2009 speech, the governor of the People’s Bank of China said the world reserve currency should be issued by the IMF. And recently, officials at the People’s Bank of China have been lobbying for the IMF to include the Chinese currency in its reserve currency basket which already consists of the dollar, euro, yen and pound.

    The IMF did just recognized the Chinese renminbi as a reserve currency. And China did just announce its gold reserve to be 1650 tonnes. But, as you say, the Chinese economy, being trade-surplus based, is not suitable for an issuer of a world reserve currency. So perhaps “regional trading currency” is a better description of what China wants.

     
    • Adask

      July 30, 2015 at 8:23 PM

      The USDX indicates inflation and/or deflation in relation to six other major currencies. That means that while the USDX does not measure inflation/deflation on the domestic level, it does indicate inflation/deflation on the international level.

      More, because the USDX measures a value in relation to six other currencies that are also in a constant state of up-and-down, inflationary-deflationary flux, the USDX provides a measure of relative inflationary/deflationary trends on the international level, rather than objective measure of inflation/deflation at any one time. Today’s 97 on the USDX is not equal to the 97 that we may have first seen, say, eight years ago because the purchasing power of the euro, yen, pound, Canadian dollar, Swiss franc and Swedish kroner are no longer the same today as they were the last time the USDX registered 97.

      However, by observing whether the trend in the USDX is falling from 97 to 80, we can see that the dollar is inflating on the international level. Likewise, if the USDX is rising from 80 to 97, we see evidence of a deflationary trend on the the international level.

      In fact, it’s possible for the USDX to show the dollar is “deflating” (gaining value) in relation to the six foreign currencies even though the dollar is actually inflating (losing value) on the domestic level. How? It’s easy if the six foreign currencies are, on average, inflating even faster than the dollar. In relation to those six, fast-inflating currencies the slow-inflating dollar will seem deflationary (losing value) in relation to the six foreign currencies.

      Confusing, hmm? Wheels within wheels. Even so, if the USDX indicates that the dollar is deflating in relation to the other six currencies, that will slow US exports and diminish the perceived profits for US companies operating foreign subsidiaries.

      If this seems confusing, it’s because not one of the seven currencies that make up the USDX have any fixed value. What is the value of a fiat yen in relation to a fiat pound if neither of them has an intrinsic value? Without some fixed, tangible value for at least one of seven fiat currencies, the whole fiat currency market is something like an LSD experience.

      I agree that the USDX does not provide an objective measure of the magnitude of the dollar’s value on the international level, but it does provide a good indication of the relative direction of the dollar’s value on the international level.

      It’s entirely possible to have dollar inflation within the domestic US economy at the same time we’re having dollar deflation within the international economy–and vice versa–at least temporarily.

      The question is: Can government cause and sustain prolonged dollar deflation at the international level (which would support, strengthen and sustain the US dollar’s role as World Reserve Currency in the international sphere) without also causing deflation at the domestic level (which could put the US domestic economy into an economic depression)?

       
      • Toland

        July 30, 2015 at 9:59 PM

        The USDX indicates inflation and/or deflation in relation to six other major currencies.

        I think the issue Roger is trying to point out is that the USDX does not indicate “inflation” or “deflation” simply because the definitions of these terms exclude currency exchange rates.

        At least that’s how these terms are normally used by economists (not that what economists do should hold you back in any way). Are you using nonstandard definitions of the terms “inflation” and “deflation”?

         
  4. Adask

    July 31, 2015 at 3:14 AM

    Am I using a non-standard definitions of “inflation” and “deflation”?

    Probably.

    But how ’bout this? How ’bout asking if whoever decided to define “inflation” and “deflation” to EXCLUDE currency exchange rates also created a “non-standard” definition of those terms.

    I won’t deny that there are “non-standard” definitions of terms here, but are those definitions created by me–or by the “economists” who support this system and who claim that concepts of inflation and deflation can’t apply to fiat currencies? I don’t know, but I’ll bet that those terms apply to price fluctuations in gold and silver coins. If so, why don’t those same definitions also apply to fiat currencies?

    Is the exclusion of fiat currencies from the arenas of inflation and deflation intended to prevent people from sensing and asking about some of the seeming aberrations and logical contradictions that might flow from indicators like the USDX?

     
    • Toland

      July 31, 2015 at 6:06 AM

      There is no need to wonder. It’s certain that the definitions of “inflation” and “deflation” were non-standard at the time of their creation, because only through wide adoption (which takes a while) does a definition become standardized in economics.

      Also, it gives the wrong impression to suggest the standard definitions of “inflation” and “deflation” specifically target foreign exchange rates for exclusion. It is much more likely that the decision was made to use “inflation” and “deflation” to refer to the prices of goods and services, since there are sound reasons for this choice. But foreign currencies are “money” (again as economists usually use the term), which is neither a good nor a service.

      By the way, non-standard definitions are great, and I think they should be encouraged. My only concern is that using a non-standard definition for a technical term that already has a standard definition in all the dictionaries can cause major confusion unless the author clarifies up front that a non-standard definition is intended.

       

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