'It's the NEW AMERICAN WAY....' -- Keeping those land prices high

'I describe the present economic crisis in terms of economic resonance. The economy experiences oscillating money-flows between the commodity market and the bond market. When money flows from the bond market to the commodity market we witness the inflationary phase of the cycle. Inevitably, rising interest rates accompany this phase. At the top of the cycle the money-flow will reverse itself and will go from the commodity market to the bond market. This is the deflationary phase of the long-wave cycle that, no less inevitably, is accompanied by falling interest rates. These huge money-flows are driven by speculation. When the central bank intervenes in the market to control the rise of interest rates, it inadvertently makes prices fall; and when it intervenes to stop prices from falling, it inadvertently makes interest rates rise. The upshot is that the central bank intervention, rather than tempering movements, aggravates them. This is the fundamental flaw of Keynesian economics. At the present junction the Fed is buying bonds to combat deflation. Bond speculators know this and will buy the bonds first, driving down interest rates in the process. The result is more deflation, not less. The Keynes-inspired central bank action is counter-productive. Policymakers are blind and don't see this. They stick to their self-defeating monetary policy. They actually become the quartermaster general of the depression they are trying to avoid. As if cursed by a particular kind of madness, policymakers saddle society with the vampire of risk-free speculation. They turn the constructive energy of stabilizing speculation into a most destructive kind of energy: destabilizing speculation. The problem cannot be cured because bond speculation cannot be eliminated.'

'If you increase the workforce by 10% but only increase the resource by 5% then something is going to happen to the distribution of resources. ...the real reason for this crisis is not capitalism, but the actions of communist and socialist governments before they started the process of opening their economies. They created barriers to the integration of their labour force into the productive and enriching capitalist world economy, and then suddenly started 'dropping' the labour into the world economy at a rate that the capitalist system could not absorb. It is why we see the increasing divide in incomes between the rich and the rest. It is not the evils of capitalism, but rather the last terrible contribution of years of rejection of capitalism in countries like China and India. They created a flood of new labour into the world economy, and the result is that labour has been devalued. ...the fundamental causes...[:] government constraints and interference with free market capitalism.'

'The belief that pumping up the money supply through unlimited bond purchases by the central bank will bring about rising prices is a tragic mistake. A higher price level will never be achieved in this way. Bond speculators will have a field day. They would just buy the bonds in any amount. A vicious spiral of falling interest rates is engaged that, like the black hole of zero gravitation, will suck in and gobble up the world economy. -- ...the line between success and failure is hopelessly blurred. If the rate of interest goes down in consequence of Fed action, then: "hooray, we're dead on with targeting inflation. And that's good news". If, on the other hand, the rate of interest goes up, then: "hooray, the economy is turning around. Rates have risen for the very reason we were hoping for: investors are more optimistic about the recovery. It is a good sign." The fact that in the meantime the economy is wiped out, gets lost in the noise of loud self-congratulation.'

Pay-walled. Recommended. -- When a pyramid scheme nears its inevitable end... "...the public insist on being handed the empty bag because they think they're going to make money, they want in on the game, everyone else has been making money, they feel left out so they insist on buying these things at the peak, and they are the ones who lose everything."

'#1. Hold no debt (for most people this means renting). #2. Hold cash and cash equivalents (short term treasuries) under your own control. #3. Don't trust the banking system, deposit insurance or no deposit insurance. #4. Sell equities, real estate, most bonds, commodities, collectibles (or short if you can afford to gamble). #5. Gain some control over the necessities of your own existence if you can afford it. #6. Be prepared to work with others as that will give you far greater scope for resilience and security. #7. If you have done all that and still have spare resources, consider precious metals as an insurance policy. #8. Be worth more to your employer than he is paying you. #9. Look after your health!'

'#34. Energy prices are first affected by demand collapse, then supply collapse, so that prices first fall and then rise enormously. #38. # Taxation will rise substantially as the domestic population is squeezed in order for the elite to partially make up for the loss of the ability to pick the pockets of the whole world through globalization. #39. Repressive political structures will arise, with much greater use of police state methods and a drastic reduction of freedom.'

Nicole Foss: "The excess claims to underlying real wealth are extinguished, and that is deflation by definition. Because deflation is the contraction of money and credit relative to available goods and services. And that's exactly what we're about to see. And I think, a lot of my view about how energy is going to play out, is really going to be quite colored by my view of what's happening with the financial system, and deflation, because the time frame for finance is much shorter than the time frame for changing any available energy supply. So while energy is a key driver on the way up, finance is the key driver on the way down because it plays out so quickly. -- ...demand collapse is going to set up a supply collapse. ...low prices are likely to mean no investment, no exploration, no drilling, no maintenance, and all of these things are going to set up a supply collapse a few years down the line."

'Bond speculators are watching. When the banks get overextended as they approach the limit set by their ratio of reserves to deposits, the speculators dump the bonds en masse causing a steep rise in the rate of interest. The corresponding drop in bond prices wipes out the entire capital and surplus of all banks simultaneously, as it happened in 1920 and, again, in 1980. The banks still have not recovered from the latter episode. So many, if not all of them are zombies, operating by the grace of government on negative capital. The abrupt and steep rise is followed by a slow, extended fall in interest rates. Such a fall has the effect of destroying capital across the board, as the liquidation value of debt rises. The banks are not exempt from capital destruction. The upshot is prolonged deflation feeding upon itself. This is the true explanation of the Great Depression of the 1930's, and this is the story behind Great Depression II now unfolding.'

'The economy started down a depressionary slide in 2008 and hasn't looked back. It is my thesis that the inflation, deflation debate is flawed because we no longer have reliable price signals. The overwhelming domination of program trading on various exchanges has fundamentally changed the way prices are created and represented in the economy. All 'efficient market' theories are dead. In place of reliable price signals (based on the supply and demand of buying and selling) we have price signals that are generated by computer algorithms... Program traders have a virtually infinite line of credit, pay virtually zero commissions, and are backed by banks on Wall St. with strong political connections who are ready to bail out any losing bets these computers make. In place of an exchange where buyers and sellers transact with each other to their mutual advantage, we now have 'Simflation,' a hologram of fake price signals masking the worst deflationary depression since the 1930's.'

'Deflation - good for you, bad for the state.' -- "Welcome to your government, the organized counterfeiters that won."

'...price deflation is a dominant social theme—a fear-based promotion that is being used, in our opinion, to justify the Draconian cuts that are being called for. ...there is nothing [wrong] with deflation in a free-market environment (it eases the pain). But the EU is anything but free-market oriented and price deflation in such over-leveraged communities is often a recipe for immediate ruin, and people know it. We begin to have a greater degree of certainty, then, that the powers-that-be are using the price deflation bogeyman as a methodology to implement greater control over Europe and also, ultimately, of Britain and the US. ...it is perhaps doubtful that serious price deflation can persist in the kinds of fiat-money environments that pervade the West today. Sooner or later, inflation will become more prominent—or so we believe—and thus we see the promotion of price deflation as something of a frenetic scare tactic for political purposes before price inflation begins to surge.'

'The overall point: "We all need to get on board with paying down debt like any responsible citizen debtor would." Is this so? We believe that suggesting the individual citizen now has a moral calling to live in penury and starvation because of the planned irresponsibility of central banking policies is absurd. We believe it is a kind of dominant social theme, as follows: "Nations have been living beyond their means for decades and it cannot go on without social chaos. Austerity measures will be implemented by the authorities for everyone's good." This meme certainly shoves the blame for the current situation directly onto citizens living in the West's profligate nation states. ...the main argument of deflationists seems to be that the money "goes away" during bankruptcies, etc. But in fact, banks that are damaged by recessionary ruin will almost always receive further monetization by the West's mercantilist central banks... ' -- It's biflation and it's theft.

'...incessant credit stimulation has so distorted Western economies that even after two years, these economies have not yet returned to a point where banks and other investors can tell the difference between a legitimate opportunity and one that has been kept alive by various forms of governmental chicanery. This is why "stimulus" and "bailouts" are ultimately so counter-productive. They actually retard economic recovery. For monetarists – and other types of non-free-market economic-oriented journalists inhabiting the mainstream media the inability of banks to lend and the subsequent shrinkage of the money supply is cause for alarm. It is actually the most natural thing in the world. What many economists and financial journalists are calling for in the midst of a downturn is for the printing presses to reignite and for yet more faux-money to enter the economy in order to reinflate.'

Black Hole of Zero Interest Theory - '...why is it that the inordinate money creation by the Fed is having no lasting effect on prices? It is because the Fed can create all the money it wants, but it cannot command it to flow uphill. The new money flows downhill where the fun is: to the bond market. Bond speculators are having a field day. Their bets are on the house: if they lose, the losses will be picked up by the public purse. But why does the Fed under-write the losses of the bond speculators? What we see is a gigantic Ponzi scheme. The Treasury issues the bonds by the trillions, and promises huge risk-free profits to the bond speculators in order to induce them to buy. Most speculators believe that the Treasury is not bluffing and they buy. Some may believe that the Fed is falsecarding doubts and they sell. But every time they do they only see foregone profits. What we have here is a rare symbiotic relation between the government and the speculators. The world begs to be fooled.'

'Public sector employees are inherently parasites. It cannot be otherwise. The policeman, fireman and teacher do not directly produce anything. Their employment and the wages and benefits they can collect must therefore inexorably track the actual productive output of the nation. -- You cannot continually offshore your better-paying labor to China for the purpose of being able to have a $30 DVD player, destroying the $40/hour skilled job base and replacing it with $7/hour burger flippers and espresso-shot-pullers, and maintain the ability to commit compound annual growth rates of 5, 6, 7% or more to public-sector employees. Doing so inevitably destroys the tax base necessary to meet those commitments, and once the destruction has occurred it cannot be un-done. You cannot falsely-report "growth" that is in fact no such thing, but rather is simply the addition of more debt, thereby creating false demand that never existed on an organic basis, and continue this process forever.'

"YOU WANT CHANGE!!! Here it is: *jingle-jangles* Makes a lot of noise, but it's worth nothing! If you want CHANGE!!! you have to create it yourself!" -- O-BAM-BAM! *gurgles*

'A major change is upon us. We are at a phase transition point, with multiple properties that may undergo abrupt change: will we go to steam (hyperinflation-currency collapse) or ice(deflation)? I feel that we are right on the cusp of one of these transition to crisis moments. We need to monitor the situation. Unfortunately, a currency crisis could occur quickly and preclude monitoring. If we go deflation then we can change ourselves as a solution.'

'Think of the option volatility formula and the introduction of listed options as similar to Einstein's E = MC2 and the introduction of nuclear weapons, but instead of splitting the atom into mass and energy—listed options allowed 'financial engineers' to split the dollar into separately traded units of reward and risk with the result being the current 750 trillion dollar derivative mushroom cloud exploding in our face and destroying fiat currencies around the world, principally the dollar. #The black hole on Wall Street that is about to swallow the U.S. economy ...there is no rate of destruction of capital (i.e., exchange units) at this point that will ever wipe out the over supply in the system; even if the price of all the trillions of US government exchange unit based dollars and dollar-bonds in circulation went to zero there would still be trillions worth of worthless exchange units left over hiding in the 'dark pools,' back alleys and unreported accounts...' -- Worth of worthless

'If nobody recognizes a defaulted debt on their balance sheet, does it exist? What does "deflation" mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults. Trillions in probable and provable losses quietly exist out of sight on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct in spades. -- Perversely, when a bank sells a ruined loan 'asset' to the Federal Reserve, it is a double shot of money to the system - the money initially created upon the issuance of the original loan which is still out there in circulation, and a second bolus when the Fed creates money out of thin air to buy the failing 'asset' from the bank.'

'#5. ..all countries which issue the vast majority of debt in their own currency (US, Euro, UK, Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. #6. As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation. #7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.'

'One of the foremost experts on structured finance and derivatives presents a holistic overview of not only the current economic fiasco, and in 10 brief minutes with Max Keiser she provides more succinct, unbiased and relevant information that most pundits are able to convey in years on and off TV but also highlights the bigger problem of how the administration keeps treating the US public as a bunch of stupid infants, throwing paper blankets over raging systematic fires that are anything but doused.'

Debate between Daniel R. Amerman (Inflationist) & Michael 'Mish' Shedlock (Deflationist) -- My view: It's both: we're in a state of DISINFLATION. Only if the speed of debt destruction continually outpaces money printing is it deflation (or if you just price things in gold). The policy has always been continual inflation and the policy will be enforced. Disinflation explains why asset prices are falling whilst consumer goods are still rising. The uncertainty disinflation causes leads to price volatility regardless of actual changes in the credit+money supply.

Great interview. So right now it's both deflation AND inflation: deflation of credit, inflation of money. Deflationists assume credit loaned always leads to actual production—not so—thus 'disinflation' might be the more accurate term for current credit/debt contradiction/deflation in the U.S. In terms of prices, it's price-deflation where paper-priced goods are priced in gold (since the value of paper money has to deflate against something of real value), and price-inflation where paper-priced goods are priced in devalued paper. The bottom line: everyday consumer goods will rise in price whilst the real-terms fall in non-consumer goods prices will be masked by a generalised rise of all prices in nominal terms (house prices will rise and rise but be worth less and less) thus 'wealth' is being eroded/stolen. -- See Biflation (A simultaneous price-inflation for consumer goods and price-deflation for non-consumer goods): http://en.wikipedia.org/wiki/Biflation

Comment: Scaramanga: 'Schiff argued that prices will indeed go down in a variety of asset classes as measured in gold i.e. there will be widespread deflation but against gold only—and not against the US dollar. So when you talk about *prices* it must be prices in gold to make sense to Schiff. In his view that is the true form of deflation. I suppose he would call it "real deflation" as he seems gold-oriented on everything. So there is common ground between Schiff and Mish if we are talking about prices in gold: then they are both deflationists. But as measured in dollars...then there is the parting of ways. A fiat currency destroys our ability to gauge financial consistency, which is exactly the point.' -- Points of disagreement (from this article and others): Mish thinks that US creditors have full faith in the dollar. Schiff doesn't and thinks that if confidence collapses government *may* force the Fed to inflate its out of a debt worsened by raised rates resulting in hyperinflation.

'Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed. It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. Children whose parents are being destroyed by debt now, will keep those memories for a long time.'

Ut oh. 'Negative money bomb' coming. -- More on the great inflation/deflation debate: Comment: Max: "...the big problem is that the banks simply won’t say how big the black hole on their balance sheet is. if they told us then we would have an idea of when the push of trillions of new central bank debt would create inflation.. but it seems for every trillion in fresh stimulus the banks come back and ‘discover’ another 2 trillion in bad debt.. this looks like it’s going to go on for some time – with another bank stock crash possible as a means for the banks to pay themselves another huge round of bonuses.. eventually. and mish concurs, there MIGHT be a huge spike in inflation.. but so far the deflationists are making the most money."

'... a fixed fiat system will not be able to prevent governments from the issue of bonds, which is of itself a dubious practice in ordinary circumstances... However, if a country is running an overall current account deficit, under the fixed fiat system, the country will find that money is flowing out of the country, and that there is a process of deflation taking place. This deflation will make the purchasing power of the currency increase, and will therefore make the goods and services of the country more attractive, as the currency will provide more goods and services per unit. This will mean that a current account imbalance, as soon as it appears, will start to correct itself. ...governments will not be able to hide irresponsible policy behind a wall of monetary policy. The current account balance between countries will become main the determinant of the relationship between their currencies.'

'Maybe ... credit card companies act as quasi fractional-reserve bankers, because merchants do not insist on immediate payment in actual money. Just as bank runs (in a fractional-reserve system) could collapse the money supply and hence prices back in the early 1930s, maybe in today's economy a widespread "pulling out of credit" could have similar effects. This seems to be the deflationist argument, but I have never seen it spelled out carefully. It might be right, but no one has yet convinced me. In any event, I offer the following observation: Suppose it's true that "velocity" will fall (a favorite deflationist claim), meaning that the average dollar bill turns over fewer times per year and so can support a lower level of prices. Still, what if the specific prices that take the brunt of the fall, are associated with corporate stock and US Treasury bonds? It's entirely possible that "general US prices" fall according to some measure, while the prices of milk, eggs, and gasoline rise.'

'Quoting Eric Reasons: "Every business model relying on intellectual property law (patent and copyright) is heading for massive deflation in our lifetimes. We've seen it with the music industry and newspapers already. The software industry is starting to feel it with the maturity of open source software, and the migration of applications to the cloud. Television, movies, and books are next. I've come to question the ability of copyright and patent law to foster innovation, but leaving that aside, the willingness of people to collaborate and share, and the tools provided for it on the internet, may render these laws obsolete. Why is deflation a better descriptor? Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies." -- ...when you're dealing with what I've been calling "infinite goods" you can have a multiplicative impact on the market.'

'The Internet crashed the economy. But that's also why the current crisis should be seen as a cause for celebration as well: the Internet actually did what it was supposed to by decentralizing our ability to create and exchange value. This was the real dream, after all. Not simply to pass messages back and forth, but to dis-intermediate our exchanges. To cut out the middleman, and let people engage and transact directly. If I can create an application... without borrowing a ton of cash from the bank, then I am also undermining America's biggest industry — finance. While we rightly mourn the collapse of a state's economy, as well as the many that are to follow, we must — at the very least — acknowledge the real culprit. For digital technology not only killed the speculative economy, but stands ready to build us a real one.' -- Would you like some free free with your free, sir?

"The US will suffer both higher monetary inflation and worse economic deterioration, not one or the other, but BOTH, and with steadily increasing intensity. ...the staggering direction of monetary aid for rescues of dead banks, for nationalization of dead corporations, and for stimulus to an insolvent nation guarantee more damage. The huge monetary growth guarantees that the asset prices will continue to fall, and that the great tempest will grow in magnitude and danger. Why? Because bad money drives out good money... It acts like a cancer, one that has essentially destroyed the fundamental foundation of the nation. This extremely important point will lead to the ultimate downfall of the Untied States, as their inflation will destroy too much capital in determined yet mindless application. -- To clarify most clouds of confusion, it is best to refer to ‘Falling Asset Prices’ instead of ‘Deflation’ in almost all cases."

Quoting Gary North: "Why anyone worries about price deflation is a mystery to me. With the power of money creation through the purchase of assets, there is no theoretical limit to how high prices can rise. Because people associate rising prices of whatever they sell or own as a sign of prosperity, there is always support for fiat money." -- Mish: "There is virtually no evidence consumers want to borrow. Likewise, there is virtually no evidence, none, that banks are about to go on a lending spree. Moreover, there is no evidence the Fed is attempting to force banks to lend. And finally, there is no evidence the Fed is considering charging banks a fee to keep excess reserves with the FED, or that if they did, that it would accomplish anything other than a deflationary collapse. Fears of massive inflation are at this point ridiculous."

"Bottom line: The first quarter brought the greatest credit collapse of all time. Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year! And even if you include all the government borrowing, the overall debt pyramid in America shrunk at an annual rate of $255.3 billion. Think consumers are about to go on a spending spree after a massive $13.87 trillion collapse in net worth? Think banks are going to start lending with this employment picture and household debt? I don't and boomer demographics makes the situation even worse. Don't forget the bleak employment picture. There is no source of jobs."

42:50 On the Fed-sanctioned pyramiding of frb/credit-money to fuel asset booms.

'Richard Jerram, a senior economist with Macquarie bank, told investors that “the proposal has become practical with the broad penetration of electronic money and credit cards in Japan”. He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.' -- *shudders*

On The Endogenous Money Stock theory: Basil Moore: “In the real world, banks extend credit, creating deposits in the process, and look for reserves later”. 'Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. -- ...causation in money creation runs in the opposite direction to that of the money multiplier model: the credit money dog wags the fiat money tail. Both the actual level of money in the system, and the component of it that is created by the government, are controlled by the commercial system itself, and not by the Federal Reserve. -- ...we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it. We are therefore not in a “fractional reserve banking system”, but in a credit-money one... -- Banks won’t create more credit money as a result of the injections of [fiat] Base Money. Instead, inactive reserves will rise.'

"The retreat of the shadow lenders has created a credit freeze globally; and when credit shrinks, the money supply shrinks with it. That means there is insufficient money to buy goods, so workers get laid off and factories get shut down, perpetuating a vicious spiral of economic collapse and depression. To reverse that cycle, credit needs to be restored; and when the banks can’t do it, the Fed needs to step in and start “monetizing” debt. So why don’t Fed officials just say that is what they are up to and put our minds at ease? Probably because they can’t without exposing the whole banking game. The curtain would be thrown back and we the people would know that our money system is sleight of hand. The banks never had all that money they supposedly lent to us. We’ve been paying interest for something they created out of thin air! Indeed, their credit money is less substantial than air, which at least has some molecules bouncing around in it. Bank credit exists only in cyberspace."

"Here is the central problem for the Bank of England. The only way to justify QE is through the fear of deflation, but the only measure that is showing deflation is the RPI. The bank's remit does not extend to RPI so that it can not use the RPI as an excuse to print money. As such, they subtly conflated the measures, planted the idea of deflation in the mind of the media, and 'lo and behold', deflation has appeared. It now looks like, post hoc, that the Bank of England can justify the deflationary scare. Through smoke and mirrors, the media have accepted the deflationary argument and continue to accept QE. However, if the media were paying attention, they would note that the deflation is on RPI and, in part, due to the very policies that the Bank of England is actually pursuing. -- QE is simply a way of printing money to buy bonds and support the bond market. The policy is therefore really about printing money to support profligate government spending through printing money."

'Deflation or Hyperinflation. The short answer is both. The prerequisite for hyperinflation is a deflationary depression. There is a major misconception among many economist and financial experts that the deflationary scenario we are in now will lead to a deflationary collapse. But this is a fallacy. The current deflation is the necessary initial stage of hyperinflation. We ar currently experiencing massive deflationary pressures. The total global losses in stockmarkets, real estate and commodities are estimated at $85-$95 trillion. This is what governments are fighting. The financial system has issued debt instruments and derivatives of $100′ s of trillions, linked to these assets. This is why the financial system is bankrupt and this is why the amounts printed by governments so far are a mere drop in the ocean. But we haven’t seen the end of the asset deflation yet. We are likely to see worldwide asset losses of at least $130-$170 trillion before this is over.' -- Biflation.

On fixing the money supply and sub-dividing units as price deflation occurs: "Instead of inflating the money supply, as an economy expands, the units of currency at the start simply increase in value. This does pose some practical difficulties, such as a unit of currency increasing in value so much that it becomes difficult to exchange for anything but ever larger items. To illustrate with an extreme example, if there were one thousand units of currency in the year 1066, then each unit of currency today hold nearly enough value to buy a city. The way around this is not to increase the units of currency, but to sub-divide the currency into smaller units. Just as today there are pounds and pence, as the value of a currency increases, it would need to be divided into pounds, pence and 'x'. At no time are any more pounds created such that the pound is never watered down. Dividing a pound into pence does not devalue the pound, it is the increase in supply of pounds that devalues the pound."

Simultaneous price-inflation for consumer goods and price-deflation for non-consumer goods caused by a generalised monetary inflation.

'Deflation is inflation’s polar opposite. It’s what happens when prices go down and you get more bang for your buck. Sounds good right? But deflation, like inflation is complicated and much less understood than inflation. It can lead to what’s called the deflationary spiral and grind the whole economy to a halt.'

The failure will be global. 'Bernanke has guaranteed it by tying The Fed to every other major central bank in the world via his "unlimited swap lines." The nightmare scenario that is staring us in the face, right here, right now isn't hyperinflation. It is in fact a collapse of monetary systems driving demand for dollars through the roof in a crescendo of attempted redemptions into collapsed ("no bid") asset prices - a demand that Ben will not be able to meet, as the collateral backing those dollars will have all been exchanged for toilet paper. Whether Bernanke holds all this trash on his balance sheet or manages to scam Treasury into exchanging it for T-bills, the result is the same - there is no collateral behind Bucky and as employment collapses no production to replace it with either. The mad scramble will be on, and as it happens trade will be choked off by not a collapsing dollar but other currencies collapsing around the world.'

"Banks and brokers were, in effect, printing their own proprietary issues of "money" via complex securities and as a result their supply of money grew to exceed by at least one order of magnitude the money printed by central banks. ...quadrillion dollar worth private currencies - paper assets - have fuelled the globalisation process, massive and unprecedented world GDP growth, mergers and acquisitions, and large scale industrial / infrastructure projects, until natural boundary conditions kicked in, ie, the earth ran out of raw materials and natural resources in sufficient quantities. -- The power of central bankers may have been permanently eroded given that the centre of gravity has now shifted. It lies with the financial markets and their participators who transact the deflating quadrillion dollar plus paper asset equation of which fiat currency is a much smaller quantum."

"... the emerging economies lent their new found wealth from their increasingly large workforce into the West, and in doing so allowed the emergence of the so called 'service economy', or 'post-industrial economy'. The lending was built on an unfounded belief that, because the West had been economically dominant for so long, it would always be in a position to pay back the lending. The problem with the lending was that there were no productive wealth creating opportunities to soak up the money, (e.g. investment in manufacturing was being directed towards the emerging economies themselves) such that the money pouring into countries like the UK and US was directed into asset price inflation (real estate), consumption and consumer credit, and excessive government borrowing. ... the world economy has been shaped around a perception of growth in wealth in countries like the UK and US, whilst the real growth in wealth has been taking place elsewhere." -- Hollow-gram (Recommended)

Murray Rothbard on the correlation between falls in industrial commodity prices and general deflation: "The fact that industrial commodity prices have fallen sharply means precisely nothing for the reality or the prospect of inflation or deflation. Industrial commodity prices always fall in recessions. Most laymen and economists think of industrial commodity or wholesale prices as harbingers of the move of consumer prices, which are supposed to be ‘sticky’ but moving in the same direction. But they are wrong. One of the most important and neglected truths of business cycle analysis is that consumer prices and capital goods or producer prices move in different directions. Specifically, in boom periods capital goods or producer prices rise relative to consumer prices, while in recessions, consumer prices rise relative to producer prices. As a result, the fact that industrial commodity prices have been falling in no sense presages a later fall in consumer prices. Quite the contrary."

Notes added -- 'There are four basic causes of deflation—two operating on the demand side and two on the supply side of the “money relation.” The economic processes associated with these factors may be categorized as #Growth Deflation [Demand-side. Benign. Falling prices due to technological improvement and using capital more productively], #Cash-building Deflation [Demand-side. Benign. Savings and underconsumption], #Bank Credit Deflation [Supply-side. Benign. Lack of confidence in fractional reserve banks, purgative bank runs, eventual collapse, reduced lending in the short run.], #Confiscatory Deflation [Supply-side. Malign. Government "austerity measures" resulting in severe restrictions on bank withdrawls and the expatriation of money.]'

Comment: Ben: "A couple more reasons for wanting to avoid deflation; #2. Assume deflation of 2%. Banks need to pay some kind of interest to attract deposits (say 0.5%). To make a profit, they need to be lending at another 1%, say, above what they are paying on deposits. This means lending at 1.5%, a real return of 3.5%. -- If there was inflation of 2%, banks can pay their depositors 2.5% (0.5% real return) and lend at 3.5% and the real return charged on their loans is only 1.5%. -- The numbers are fairly arbitrary but I hope the principle is clear. A potentially profitable, wealth creating business would have to be able to produce a real return of 3.5% in the deflationary scenario to be viable, but only produce a real return of 1.5% in the inflationary environment to be viable." -- See the 'Divisional Currency' model inside for potential solution to this conundrum.

'The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.' -- Meanwhile, in Japan: 'The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.' -- Pfffft!

"How deflation creates hyperinflation: #1. Deflation slows the speed of money to crawl due to fears about the deteriorating economy. The public hoards cash, or, in the case of the US, short term treasuries. #2. The slowing speed of money and debt destruction force the government to create huge quantities of cash to prevent prices and the economy from collapsing. However, because the public is hoarding cash (or short term treasuries), most of the money doesn't reach the real economy, which leads the central bank to print even more money. In essence, cash hoarding acts as a dam, preventing the enormous quantities of printed money from affecting prices. #3. Deflation weakens economy until it leads to a loss of confidence. With doubts about the government's solvency growing, the velocity of money quickly picks up speed, and a flood of hoarded cash comes out of hiding, entering the marketplace all at once and creating hyperinflation."

"By some estimates, combined losses in commodities, stocks, bonds, real estate are greater than $60 trillion. This is beyond rescue. It is virtually impossible to overstate the dire consequences resulting from the severity of the declines recently experienced in almost all asset classes—from both a technical and fundamental viewpoint. From a fundamental perspective US consumers had come to rely on borrowing against growing asset prices to sustain their lifestyles. Most of today's globally-interconnected economy was based upon growth in the US consumption. This game has ended badly. Asset dependency will eventually be replaced by living off of income and savings, but not after we escape from this disastrous period. As unemployment rises income generation will become increasingly difficult, and we cannot begin to save until our mountainous debt is paid off. For most of us, this is the equivalent of the world being turned upside down on our heads."

"... they seem to be imagining that people are 'hoarding' cash in the expectation that prices will drop further in the future. In making such a statement, I have a feeling that they are imagining the mythical 'homo economicus'. This is the idea that people will make rational economic decisions. Anyone who knows of people loaded up with consumer credit will know that this is indeed a mythical creature. According to the ITEM club, what consumers apparently are doing is sitting on piles of cash so that they can buy things cheaper in the future. It appears that the man in the street is listening to the economists, and actively withholding their spending until prices fall. However, this is to ignore another impact of the current economic position. Every day that goes by, there are more and more headlines of job losses and falling house prices. Might it not be more likely that consumers are not spending for the following reasons: ..." -- MUST READ debunking of keynesian deflationistas.

"Mr Flassbeck said that the greatest threat now came from deflation of the sort suffered during the Great Depression, when falls in wages of 10 to 15 per cent in some economies triggered a drastic slump in consumer demand and brought world growth to a virtual standstill." -- Wrong. Fallacy. Keynesian propaganda. The UN wants the world to crawl back inside a burst debt bubble. Not going to happen.

'#First, we will continue to plunge into a major deflation period which will be characterized as a "recession," and later in the year as a "depression." Deflation and inflation are always monetary phenomena. #Second, deflation will evolve into a run-away-hyper-inflationary depression because of what government will do to try to prevent deflation. Keynesian economics says "create the money, let people borrow it and spend... spending will trigger an active economy." That's true when you're fighting deflation and recession. But the government, as usual, is engaging in overkill, and the amounts of money they are creating will not be just sitting there lifeless forever. Eventually the banks will lend, because if they don't lend, they don't make any money, and bankers are in the business of making money. So they can't sit on their money forever out of fear. Fear will fade, and bankers will get back to their real business. When that happens, we are headed for the classic hyper-inflation.'

"... It is very simple. A strong economy is one in which you create things that others want exchange with you. Without that, there is nothing. Government can not make wealth. It can not produce anything, it can only spend the money of those that create wealth, which is those who create something with value in exchange. The only role government can have in wealth creation is to set up an environment in which wealth creators can thrive. Destroying the value of money is not such a situation, and nor is the taxation implicit in money printing. It is simply a way of pretending that the fundamental problems do not exist. If you do not sell enough goods and services that people want, eventually they will not want to sell you anything, as you do not have anything they want in return. ***It can not be put more simply than this. All the rest is nonsense. All the rest is window dressing that hides this reality.***" -- Emphasis added.

"Quite simply, the UK is not efficient enough at producing goods and services to continue to compete in world markets on the current exchange rate. This has simply been hidden through a false confidence that arose out of demand for the £GB to support lending into consumption. The illusion of the £GB was built upon a false confidence in the efficiency of the UK as an economy. It is actually not very efficient. In light of this, the £GB can only continue falling until it reaches a new equilibrium that reflects the true state of the UK's efficiency in the production of goods and services. This problem can only be compounded by the production of more currency... all of this money creation and borrowing amounts to is an attempt at pretending that the economy is actually still producing enough wealth to support the UK's high standard of living." -- Hologram

'"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily. Regarding the dire situation in the United States, Ordonez said he backed the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.' -- But, but... you said confidence and then... Oh forget it.

"It's not deflation!"