Comments (17)

• jeff fisher

  Agreed.
  If one considers Bush's Budget in addition to the credit situation, I believe it is very likely that we are looking at decades of inflation.
  $3.1 Trillion is close to $10,000 per American.
  For every family of four that is $40,000 of government spending. That implies a family must earn at least $60,000 pre tax just to support Washington. Inflation on a grand scale is very likely, I am afraid.

  Published: February 7, 2008 10:05 AM

• David White

  "The majority of the people, suffering badly from inflation, would most likely blame the free market for their plight, rather than blame the central bank for the debasing of the currency."

  And why not? After all, the market's cure for what the government has in fact caused is the harsh medicine of economic reality, while the government's "cure" is more of the same drug -- non-savings-based credit -- that deluded them into fleeing reality in the first place.

  Accordingly -- as Jim Puplava is outlying in unfolding detail over at Financial Sense Online -- a hyper-inflationary depression is on the way, probably by 2010.

  Published: February 7, 2008 11:02 AM

• Fred Furash

  Jeff, $3.1 trillion is what? The US government's foreign debt? That's not the only government debt to be paid off, you need to count the total debt. This would include the entitlement obligations of the future, which the US government neither mentions in its financial reports, nor does it set funds aside for.

  Indeed, the total amount Americans will have to pay off in taxes to the government for all their promises amounts to over $50 trillion, and this is growing by 2-3 trillion per year as the population gets older. Moreover, the Democrats want to pass universal health care, which would jack of the deficit even more. They don't seem to even mention the budget disaster.

  When you count $50 trillion, it amounts to over $500,000 for an average household. Half a million!

  Published: February 7, 2008 12:31 PM

• Jaq Phule

  Fred,

  $3.1 T is just the projected budget for NEXT YEAR. I understand what you're saying about the $50T figure, but in light of 3.1T in a single year, it makes $50T look terribly unlikely, long term. We're talking about a national credit psychosis delusional enough to support quadrillions, quintillions, squillions, and possibly even zillions. What's a big long list of zeros? They just sum to nothing, after all...

  "Bring it on!"

  I'm thinking of emigrating to Mars. The weather sure is crappy there, but at least there's no looming depression of darkagian proportions on the slopes of Mt. Olympus.
  

  Published: February 7, 2008 1:05 PM

• Niccolo Adami

  With the time lag in the actual outward effects of increases in the money supply, I often wonder if cutting interest rates to deter contemporary economic crises really just aims at easing tensions and not necessarily at making any fundamental changes.

  
  I don't know how people can actually deny that recession is almost inevitable. I'm watching CNBC and the hot chick is talking about, "it's nice to see the glass half full," well... alright, except illusions aren't exactly going to pay the bills and buy the bread.

  Published: February 7, 2008 1:11 PM

• roman

  There truely is a disaster unfolding.

  But I have a nagging suspicion that your regime is well aware of the situation and has strategized that the best course would be to hyper-inflate it's indebtedness away.

  In the immediate term, mostly foreign creditors and holders of dollars that will stand to lose the most. At home, the average sheeple has no savings to lose, and if it can be done in a slow, managed way those that do and are in the know can move their wealth into real assets.

  And what are the chinese or japanese going to do when they're left holding the bag? Take on your war machine?

  It's brilliant actually.

  Published: February 7, 2008 1:11 PM

• Deacon

  Why isn't there a class-action suit developing for all those ARM holders, in light of the fact that Allen Greenspan had CRIMINALLY violated his chairmanship duties at the Federal Reserve when he publicly advised prospective home-buyers TO TAKE OUT ARMs; that is, any information related to the housing market coming out of Greenspan has tremendous weight, regarding whatever INSIDE INFORMATION the chairman may possess, so that any of his comments which might influence how prospective home-buyers purchase their mortgages makes him - and the Federal Reserve - liable if home-buyers are damaged by his advice ((by the way, when Leslie Stahl interviewed Greenspan on 60 minutes recently, she had asked him about whether or not he had had a conflict of interest in routinely visiting the White House during Bill Clinton's second presidency, to which question Greenspan had DECEPTIVELY answered: "We are one government," and about which response Leslie Stahl failed to remark to him that the Federal Reserve is a private, share-holding concern—NOT A U.S. GOVERNMENT AGENCY))? http://planneddestructionofamerica.blogspot.com/
  http://corporateamericawhatwentwrong.blogspot.com/

  Published: February 7, 2008 1:28 PM

• Axel

  One small technical note, the latest rate cut was 50 basis points to a current Fed Funds Rate of 3.00 according to http://www.bloomberg.com/markets/rates/index.html

  Published: February 7, 2008 5:05 PM

• Eliza

  "So if the government is determined to create inflation, there should be hardly any doubt that there will be inflation."

  That's the thing I've never understood. Why wasn't the Bank of Japan successful in reversing its deflationary spiral? They were printing yen, interest rates were zero--shouldn't it have worked?

  Published: February 7, 2008 7:00 PM

• Contrarian Investors' Journal

  Hi Eliza!

  Very good question that we have been grappling with as well. We've written an article, Recipe for hyperinflation that attempts to shed light into this question. Basically, the Fed alone (i.e. monetary policy alone) may not be able to win against deflation. But the government, in conjunction with the central bank, can.

  Published: February 7, 2008 8:21 PM

• jomama

  That's the core argument and the right one.

  Now lets look at some results here and
  here.

  Grim, isn't it.

  Published: February 8, 2008 4:59 AM

• newson

  to eliza, regarding the falling cpi in japan, this is what stefan karlsson said on a mises blogpost:

  "I think there are 2 reasons why Japan has had price deflation despite the Bank of Japan´s efforts to inflate the money supply. Firstly, bank lending has fallen because of the sluggish economy and high debt burden. This means that broad money supply is rising relatively slow despite BOJ:s sharp increase of the monetary base. The broad M2+ CD measure of money supply has risen much slower in Japan than in almost all western countries.We saw a similar phenonema in the US during the great depression when the Fed increased the monetary base but broad money supply fell sharply because of the collapsing banking system. In an economy with fractional-reserve banking the behavior of banks and the public is at least as important as the central bank in determining money supply. Secondly, money demand has increased rapidly as interest rates are down to zero and prices are falling."

  this is the link - http://blog.mises.org/archives/007076.asp

  Published: February 8, 2008 9:05 AM

• fundamentalist

  Eliza: "Why wasn't the Bank of Japan successful in reversing its deflationary spiral?"

  Good question. I think it demonstrates one of the weaknesses of the monetarists's quantity theory of money. Increasing the money supply does not always cause an absolute increase in prices, but it always causes prices to be higher than they would have been without the increase in the money supply. For example, absolute prices in the US didn't rise during the monetary inflation of the 1920's and the 1990's because of huge gains in productivity during those decades.

  In Japan of the '90's, the Japanese people refused to borrow money in spite of the low interest rates, partly because of falling prices and partly because so many businesses were in such bad shape. Prices fell in Japan during that decade, but not as fast as they would have fallen had the BOJ not pumped so much money into the system. Had the BOJ allowed prices to fall naturally, Japan might have suffered a severe but short recession and then begun to recover.

  Published: February 8, 2008 12:52 PM

• ktibuk

  "In the immediate term, mostly foreign creditors and holders of dollars that will stand to lose the most. At home, the average sheeple has no savings to lose, and if it can be done in a slow, managed way those that do and are in the know can move their wealth into real assets.

  And what are the chinese or japanese going to do when they're left holding the bag? Take on your war machine?

  It's brilliant actually."

  It is brilliant but not new.

  But the biggest creditor to the US government and the ones that are going to lose the biggest are the actual US citizens that paid into government retirement funds. They say the entitlement amount is around 50 trillion dollars compared to 5 trillion dollars owed to other countries.

  The baby boomers who are going to retire and demand retirement checks are going the light the fuse.

  This turmoil in the financial markets is nothing compared to what is coming. US government has to erase its debt through inflation. There is no other way.

  Dollar is going to cease to be a reserve currency that can be outright exportable.

  The question is, can euros or some other currency take its place, or will the system have to go back to gold?

  Published: February 8, 2008 1:10 PM

• JIMB

  In my view, the current rise in commodity prices indicates the market is putting deflationary pressure on the U.S.... in fact, the dollar volume of other prices (homes, real estate) has fallen more than the dollar volume of rising commodity / oil prices and yet the prices of commodities and oil still remain buoyant. We've still yet to see several trillion of "I can't refi" and other loan issues hit the markets which will be a huge depressant to non-commodity prices.

  To bring the dollar into line the Fed will have to force non-commodity prices far, far down and those prices dominate trading volumes.... that is ** deflationary ** even if commodity prices should see a rise. On a total spending basis, prices will have to fall to keep commodities in line. In fact, oil and commodity prices would have risen (after being depressed) even without an inflationary policy, so their natural trend is up. To "stop the trend of commodities" means a severe tightening for everything else.

  You should know the thing the Fed most directly controls is the monetary base, which has been moving glacially (2-3% for the last 3 years). Although the Greenspan Fed lit the credit fire, it has been some time since the Fed "inflated" as is frequently asserted. What has grown is credit and leverage substituting for cash. But if the Fed doesn't provide cash (electronic and physical) for that leverage to clear, it will implode, as it did for mortgage banking.

  Suffice to say the "demand for dollars" has definitely fallen off and the government pushed too many people into a dollar short position in the U.S.

  In terms of protecting wealth, an investor should hold Gold and hard goods as well as cash, depending on their income and how their income is leveraged to the trends. Oil engineers probably will do well, as (I would guess) doctors (unless the socialists get "Health Care" implemented). People in other industries should be careful to protect themselves against loss of cash in their bank (many banks have no real net worth as their assets are worth far less than their depositor liabilities). What makes the difference in the case of banks is whether they can cash flow for a long period of time. If they can't, they're likely toast.

  Published: February 8, 2008 1:42 PM

• Elaine Supkis

  Japan has a FAKE depression. There is no magic to what is going on there: inflation in all commodities is shooting through the roof. But WAGES are collapsing. This way, they get negative prices despite obvious inflation.

  The 1% loans are not for the Japanese people to use for consumption. Just as here, the common man or common woman gets usury rates over 20% while business gets the cheap loans. And there are virtually no returns on savings.

  So no one saves. This is killing the US and Japanese banking systems but Japan has a gigantic trade surplus thanks to the weak yen/carry trade business. So they are floating on a $1 trillion FOREX cushion while the US drowns in red ink.

  
  Also, Japan is still a fortress that locks out virtually all value-added imports. Read my news service at Culture of Life news or read the Nikkei news to get an idea, what is going on. Please.

  Published: February 8, 2008 9:43 PM

• kel

  Japan exports most of the money it prints since there is not much borrowing at home. WE and the rest of the world receive it's inflation by borrowing there at cheap rates and inserting it into global stock markets. It's all part of the carry trade buisness.

  Published: February 9, 2008 12:59 PM