Notes From Underground: The Inflation Fears are Muted as a Renewed Threat of Deflation Appears on the Horizon

Global equity markets have been under pressure as the economic data from all regions of the world has been weaker than expected. British industrial production numbers were horrid and other areas in Europe have also experienced worse than anticipated activity. Low-money rates have been successful in pumping up many asset classes, especially since Jackson Hole Speech of August 27, 2010. The developed world’s CENTRAL BANKS have been creative in finding ways to keep REAL INTEREST low if not outright negative, making investors holding of cash a losing endeavor.

The looming possibility of a default by Greece and other European peripherals is exerting great pressure on the large European banks, pushing them to hoard capital and curtail lending to ensure having adequate reserves. The ECB is also facing the probability of large losses on their holdings of Greek debt placing restrictions on the European creation. The problem is further magnified by the fact that large U.S. banks have sold large amounts of CDS (CREDIT DEFAULT SWAPS to European creditors, putting more pressure on the balance sheets of the systemic-risky lending institutions. If there is a legally declared DEFAULT, the hit to the large global financial institutions could be LEHMANESQUE.

This is not a new story but it seems to have gained in significance because the developed economies have weakened and thus, the impact from any large credit event would be more harmful. U.S. GDP at 1.8% is not strong enough to shoulder the burdens of a recessionary Europe and a battered Japan. The U.S. housing market is a continuing drag on the balance sheets of banks and consumers. If the FED proceeds with the expiration of QE2 and fails to communicate any type of plans for further action to stimulate economic activity, will  Bernanke and the CLASS of 1937 just allow deflation to set in as the developed world leads the way for a massive LIQUIDATION of all asset classes in order to restore strength to devastated balance sheets? The answer to the question I pose is going to drive trading for the next six months as markets are left to conjecture as to the path that the economic and political policy makers choose to take.

I believe that the fear of DEFLATION is what keeps Chairman Bernanke awake at night and it is having more sleepless nights of late. The FED will have to examine all of the tools at its disposal to determine what will be available to prevent a mass LIQUIDATION OF ASSETS. Analysts have spent much time contemplating QE3 but what we may see will be a repeat of the FED fixing long-term interest rates at a level that will mean a NEGATIVE REAL RATE of interest-forcing money out of BONDS and into other assets. This was done in the 1940s and only removed in 1951. A hat tip to Professor Kevin Waspi for recommending a Bernanke paper delivered in January 2000: “Japanese Monetary Policy:A Case of Self-Induced Paralysis.” It is an important time to be aware of the thought processes of the FED chairman. The paper is very easy to read and well worth the effort.

In his conclusions for Japan to relieve the heavy burden  of DEFLATION, Mr.Bernanke advised taking all types of NON-STANDARD measuresHe advised the Japanese MOF and BOJ to undertake policy with ROOSEVELTIAN RESOLVE and said:
“In the end, the most effective actions he took were the same that Japan needs to take. Namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment, In short, to do WHATEVER WAS NECESSARY TO GET THE COUNTRY MOVING AGAIN (emphasis mine).”
  I am trying to prepare the readers of NOTES FROM UNDERGROUND to be prepared for many different FED actions and not to fall prey to the limitations of QUANTITATIVE EASING. It’s exactly why I live a world of 2+2=5.

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16 Responses to “Notes From Underground: The Inflation Fears are Muted as a Renewed Threat of Deflation Appears on the Horizon”

  1. Fred E. Says:

    You hit it right in the bullseye. Bernanke’s very essence is not repeating the “mistakes” of 1937. Deflation (which was a positive phenomenon in the 19th century but is deadly in an age of high debt realtive to GDP) will be fought by him tooth and nail. The Fed will continue to monetize the debt, and buy assets such as mortgages and S&P futures in a vain attempt to stem the downward spiral. The dollar will make new lows as agricultural commodities and precious metals make new highs. Farmland will be sought after while housing tracts will be shunned. A topsy turvy world.

  2. Rob Syp Says:

    Thank you Yra for the reality check on a Sunday evening for us people who follow your writing’s and use the market.

    Heard someone say recently (40 years ago the average debt per US citizen was like $1900 now it’s $43,000 and there’s more opportunities to make a buck today if you know how)

    The craziness of just about everything these days seems to only enforce that the above statement is true.

    I read something earlier today that said “You can not fail with a plan”

    Reading your blog everytime it comes out tells me I am working my plan.

    Again, thanks always for the insight…

  3. Inflation Fears are Muted as a Renewed Threat of Deflation Appears on the Horizon | JSMineset Says:

    […] to fall prey to the limitations of QUANTITATIVE EASING. It’s exactly why I live a world of 2+2=5.More…Select LanguageAfrikaansAlbanianArabicArmenianAzerbaijaniBasqueBelarusianBulgarianCatalanChinese […]

  4. USIKPA Says:

    Yra, could you kindly explicate how the FED can FIX long term interst rates in the current environment?

  5. Denarius Says:

    With all due respect, Ira, you have made an assumption that may prove fatal to your analysis. That assumption is that the “Expert of the Great Depression” was assigned the job of avoiding a repeat of that decade. Instead, consider the opposite, that his main task is to orchastrate the emulation of those events, that his goal is to get this decade to rhyme with the 1930s. I present these objectives for your consideration:

    1. impoverish the middle class to confiscate their land assets, making them serfs
    2. make life so miserable that people will clamor for salvation through the NWO
    3. make the currency so debased that people will readily accept a NWO substitute
    4. get the president re-elected as the only one who could deliver their salvation.

    As far as ending this Greater Depression with a war, it’s too late, the war has already started. Let’s review; WW-III, the Cold War, ended with the collapse of the “Evil Empire” in 1989. WW-IV began with the invasion of Iraq in 1991. It continues, and expands, to this day, obviating the need to begin a new conflict, notwithstanding the attack on Lybia for its oil and gold reserves.

    While you’re thinking outside your old box, consider the true equation is, 2+2=fish.

  6. perl Says:

    great read

  7. bigtom Says:

    “….on the horizon” How far out you don’t say. I’m sure far enough out anything is possible and can happen. However, at the moment and for the very near future inflation is the mode, Massive monetizing would be in order to “Fix” low long term interest rates, which would then force ‘real’ money out of bonds and onto the ‘velocity’ index, which would then be your inflation to???? Of course we are both in the conjecture world here, but the fed is stuck, and it is a matter of how they choose to escape this rock and the proverbial ‘hard spot’. Your emphasis here”….so DO WHATEVER WAS NECESSARY TO GET THE COUNTRY MOVING AGAIN.” Yra, it was thru intentional government policy that got us here in the first place, what makes you think they want to come up with an intentional governmental policy to get us”…..OUT OF HERE!”(emahasis mine)

  8. Shauna Delzingaro Says:

    Between the rock and the hard place as Sinclair would say.

  9. bob Says:

    Yra,

    well written about bernie, but you forget that he is held down by obunco (obama)
    who is intent, and must in order to elevate Islam to control all nations, thus
    his magic is making a runaway hyperinflation which is in place and not
    even you can reverse its course before 2033

    the dip in the economy, til 2033, is not an incline it is a straight line down
    with no give no ebb nothing but accelerattion to oblivion, as planned by obunco

    take another look at the usa econ and then goose the world econ with it and
    see what comes, yep will be a disaster, a disaster well planned by obunco

  10. bob Says:

    Ira, #2 of 2 of today

    if you want to know the day by day decline of the econ, and the scoop on
    gold, then read Jim Sinclair, the Wizard who is always right, even down
    to making a last stand in Connecticut the land of the retards

    Sinclair has been in the econ business since its inception and can easily
    make a trend line, so that the reader knows what is going on and can
    act accordingly, thanks Mr. Sinclair

  11. yra Says:

    Thanks to all who wrote in today.For the record,I have known Jim Sinclair for a long time and respect his thinking on the geo-political investment landscape immensely.Jim has taught me much over the last 33 years and his views are not to be read and merely cast aside.For all the new readers,this BLOG is meant to be for traders whose time horizon is far shorter then investors ,but the end result is that NOTES FROM UNDERGROUND is meant to shed light on the impact of the global macro world.NOTES takes its name from the work by Dostoyevsky and like Fyodor it tries to bring a perspective that is not reliant on the economic models that the math class has used to expropriate economics.If your economic analysis is devoid of the irrational aspects of political input then it is the purpose of NOTES to shed some light and hopefully provide the ability to make better trades.Politics and economics=political economy and that irrationality lends itself to the belief the 2+2=5 is also a beautiful thing.
    The IMF appointment of one Christine Lagarde is fraught with politics and cannot be measured with simplified equations.I will always look behind the numbers to see what the deeper impact can/will be and hopefully lead to profits and maybe most importantly prevent being entrapped by the superficial analysis of Wall Street shills.If this doesn’t work for you as a reader,the BLOG is like a distasteful TV show—turn the page and stop subscribing.That is truly a free market response

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    […] Notes From Underground: The Inflation Fears are Muted as a Renewed Threat of Deflation Appears on t… Global equity markets have been under pressure as the economic data from all regions of the world has been weaker than […] […]

  13. kevinwaspi Says:

    Thank you for the Hat Tip Yra, and keep up the good work!
    Kevin

  14. Seanm Says:

    DO WHATEVER WAS NECESSARY TO GET THE COUNTRY MOVING AGAIN.

    That would be the commoners new programme. It could be called TAFL.

    Tar And Feather Lynchings.

    Anything short thereof would be as dissapointing as the Feds programmes.

  15. Arthur Says:

    Long Notes! Thanks Yra.

  16. all of humanity Says:

    inflation and deflation are illusions. what is really worth measuring is what i call REAL VALUE – how much someone will pay for something. in other words, products are only worth what people will pay for them, no matter what the asking price is.

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