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Title: Not Your Father's Deflation: Rebuttal Peter Schiff argues it's Not Your Father's Deflation.
Source: [None]
URL Source: http://globaleconomicanalysis.blogs ... athers-deflation-rebuttal.html
Published: Dec 26, 2007
Author: Mike "Mish" Shedlock
Post Date: 2007-12-26 16:05:21 by Kamala
Keywords: None
Views: 296
Comments: 3

Not Your Father's Deflation: Rebuttal Peter Schiff argues it's Not Your Father's Deflation.

Among those rational enough to perceive the looming economic downturn, a heated debate has arisen that centers on whether the slowdown will be accompanied by inflation or deflation.

Those in the deflation camp believe that money supply will collapse as a natural consequence of the implosion of the biggest credit bubble in U.S. history. As loans go bad, assets, which collateralize these loans, will be sold at fire sale prices to satisfy creditors. It is also argued that a recession will reduce consumer discretionary spending, causing retailers to slash prices to move their bloated inventories. This is the way the situation played out in the 1930's and this is how many expect it to happen today.

My Comment: Indeed that is part of the debate but by no means all of it. Schiff misses many deflation arguments in that simplistic analysis. We will get to them momentarily.

There are several key differences between then and now, which argue against the classic deflationary scenario. In particular, the Fed's ability to pump liquidity into the market in the 1930's was limited by the gold backing requirements on U.S. currency. No such limitations exist today. This distinction is critical. When credit was destroyed after the Crash of 1929, the Fed was not able to simply replace it out of thin air. Today however, the Fed will likely print as much money as necessary to prevent nominal prices from collapsing. In fact, in the infamous speech that spawned his "helicopter" sobriquet, Ben Bernanke explained how the printing press can be used to stop deflation dead in its tracks.

My Comment: Schiff makes a false assumption that the Fed can replace credit out of thin air. The Fed is simply not in control of credit at all. The Fed can encourage borrowing but it cannot force it. The second failure by Schiff pertains to monetary printing. There are constraints on the Fed that he ignores. For example the Fed cannot simultaneously target both money supply and interest rates. Should the Fed pursue a massive printing campaign, interest rates will rise. Think of the consequences for housing and commercial real estate. Schiff ignores the consequences of interest rates on existing debt, much of which is variable rate. Furthermore, think about what rising rates would do to future expansion plans of businesses.

To fully understand the way inflation and deflation affect prices, we need to differentiate between assets, such as stocks and real estate, and consumer goods, such as shoes and potato chips. If we measure prices in gold, as we did during the 1930's, both asset and consumer goods prices will fall, with the former falling faster than the latter. So in that sense the deflationist are correct. However, in terms of today's paper dollars, this outcome is completely impossible. During deflation, money gains value, so prices naturally fall as fewer monetary units are required to buy a given quantity of goods. In the coming deflation, real money (gold) will gain considerable value, so prices will therefore fall sharply in gold terms. Paper dollars however, which have no intrinsic value at all, will lose value, not only as the Fed increases their supply, but as global demand for the currency implodes.

My Comment: While it makes sense that the demand for currencies other than gold fall, it is important to understand that it is not just the US dollar we are talking about. There is no major country on the gold standard so it is relative demand between other competing currencies that will determine how fast they fall in relation to gold.

In addition, we no longer have a US or even a Western world economy. Global wage arbitrage puts enormous downward pressure on wages. That pressure will not go away no matter what the Fed does.

Regardless of what anyone thinks, prices can only rise to the extent that people can afford to pay for goods and services or that banks are willing to extend credit. Without a driver for jobs, and with downward pressure on wages for the jobs we do have, prices will be constrained. If somehow prices rise above people's ability or willingness to pay for them, there will be not be buyers. Look one step ahead: Think of the consequences for jobs if people stop spending because they cannot afford to pay for things. Take still one more step: What does that do to the existing pile of consumer debt? Schiff fails to look ahead at what he is proposing.

The way I see it there are only two possible scenarios. The more benign outcome would we be one where asset prices fall, even in terms of paper dollars, but consumer goods prices continue to rise. This would be the stagflation scenario.

The more catastrophic scenario is one where asset prices hold steady or even resume their ascent, while consumer goods prices rise even faster. This of course is the hyper-inflation scenario, and is the worst possible outcome. I see no possible scenario where consumer goods prices fall in term of paper dollars.

My Comment: Schiff sees only two possibilities because he ignores a half dozen variables as well as downstream consequences of those variables.

Banks are unwilling to lend

Consumers and businesses are unwilling to borrow

Consumers stop buying goods they cannot afford

The Fed attempts to print but rising interest rates put an end to it

Global wage arbitrage

Jobs

I will add to the list in the recap at the end but for now let's continue with more of what Schiff has to say.

Many mistakenly believe that when the U.S. economy falls into recession, reduced domestic demand will lead to falling consumer prices. However, what is often overlooked is the fact that as the dollar loses value, the rising relative values of foreign currencies will increase consumer demand abroad. As fewer foreign-made products are imported and more domestic-made products are exported, the result will be far fewer products available for Americans to consume. So even if the domestic money supply were to contract, the supply of goods for sale would contract even faster. Shrinking supply will be a major factor in pushing consumer prices higher in America.

My comment: Once again Schiff is making an assumption. That assumption is the US dollar drops. It is a dangerous place to be when 90% think a certain something will happen. I suggest anti-dollar sentiment is indeed that bad even though the Euro is massively overvalued vs. the US dollar as is the British Pound. The fundamentals in the UK and EU are as bad as in the US and the property bubbles just as big. As an aside I do expect the dollar to sink vs. the Yen.

Even ignoring currency issues, Schiff is making another huge assumption about the of supply of goods. Take away the US market for goods and China and Japan have massive overcapacity. Without exports to the US and Europe, China would crash. This situation might change 10 or so years down the road, but export economies are not remotely close to being able to ignore the US consumer, at least not now or anytime soon.

Let's now turn our focus to stagflation. When someone says stagflation I am not sure what they really mean. It's important to have definitions so I will repeat mine. Inflation is the expansion of money and credit. Deflation is the contraction of money and credit. Stagflation does not really fit in to the discussion per se. By context though, it seems as if Schiff is talking about prices. For more discussion on the definition of inflation and deflation please see Inflation: What the heck is it?

I concede the prices of imported goods can rise as Schiff suggests and one of the ways is by tariffs. However, remember what Smoot-Hawley did to the great depression: Tariffs forced import prices higher, killed trade, and worsening the Great Depression. Was that "stagflationary" or "depressionary"?

There are other ways prices can rise and one of them is the effect of peak oil. Peak oil in and of itself simply does not belong in the inflation/deflation debate at all.

Schiff continues:

In addition, since trillions of dollars now reside with our foreign creditors, even if many of these dollars are lost due to defaulted loans, those that are not will be used to buy up American consumer goods and assets. As a result of this huge influx of foreign-held dollars, the domestic dollar supply will likely rise even if the Fed were to allow the global supply of dollars to contract, forcing consumer prices even higher. In fact, a contraction in the domestic supply of consumer goods will likely coincide with an expansion of the domestic supply of money. The result will be much higher consumer prices despite the recession. So even though Americans will consume much less, they will pay much more for the privilege.

My Comment: once again Schiff ignores wages, jobs and the ability of people to pay for massively rising prices. Furthermore, any influx of foreign dollars will likely be in the form of convertible deals like that we have seen between Bank of America (BAC) and Countrywide (CFC), Citigroup (C) and Abu Dhabi and Morgan Stanley (MS) and China Investment Corp. Those deals all involved shareholder dilution, none of them did a thing for US jobs or wages, and none of them is going to force any prices higher on anything, especially consumer goods that Schiff is talking about.

The real risk of course is that the Fed gets more aggressive as it realizes that the additional credit it is supplying is not flowing where it wants. If the Fed drops enough money from helicopters it will eventually reverse the nominal declines in asset prices.

Unfortunately, that road leads to hyper-inflation and disaster. No matter what, even if the Fed succeeds in propping up nominal asset prices, they can do nothing to sustain their real values. Consumer goods prices will always rise faster, leaving the owners of those assets poorer no matter how high their nominal values climb.

My Comment: This is where Schiff goes off the deep end. There is no risk of the Fed "dropping money out of helicopters". Schiff ignores the fact that the Fed is a private business. The Fed is no more apt to give money away than Pizza Hut is apt to give away free pizzas for a year to all comers.

At best, the Fed can provide liquidity. Yes, the Fed will do everything it can under the sun to get consumers to borrow and banks to lend. However, in the end the Fed cannot force either.

Ultimately the Fed will be constrained by ZIRP (Zero Interest Rate Policy), just as Japan was. Given massive overcapacity in housing, commercial real estate, restaurants, nails salons, etc there is simply no reason for businesses to want to expand business. Nor is there any reason for banks to be willing to extend credit to all but the most credit worthy borrowers. Rising defaults may even impair capacity to the point many banks are unwilling or unable to lend at all. The only reason expansion got as carried away as it did is the psychology at the time suggested residential and commercial property would forever rise.

That psychology changed. More on psychology in a bit as it is a key factor.

Liquidity from the Fed is in reality nothing more than a loan. Liquidity is not the same as free money and the Fed will not be giving away the latter.

Furthermore, liquidity is a coward. In the face of rising defaults spreading to commercial real estate, home equity loans, and even credit cards, the Fed's attempts to add liquidity will go straight down the drain.

Things ignored by Schiff

The Fed is a private business unable to give away money

The Fed would not give away money even if it could. Ultimately it would destroy their own wealth and power.

The Fed can provide liquidity (loans) but not capital (money). However, liquidity is a coward in the face of rising defaults.

The Fed can encourage but not force banks to lend or consumers of businesses to borrow.

The Fed can at most control either interest rates or monetary printing.

A massive printing campaign that actually found its way into the market would cause interest rates to rise, further putting deflationary pressures on both residential and commercial real estate.

There is rampant overcapacity in housing, commercial real estate, and autos, so there is no reason for businesses to expand.

Global wage arbitrage is an enormously deflationary force.

The Fed cannot create jobs or force wages higher. Even if the Fed found some back ended way to give money to banks, and they actually carried that plan out (both are doubtful) it would not help cash strapped consumers pay back loans.

Starting with one faulty assumption that lack of a gold standard changes things, Schiff ignores 10 major things that remain the same. Here is a bonus 11th: velocity. Let's discuss velocity through the eyes of Japan:

Some argue that Japan never went through deflation. One basis for that argument is that "money supply" as measured by M1 never contracted over a sustained period. The other argument is that prices as measured by the CPI never fell much. Once again we have a flawed argument about consumer prices and a flawed argument that only looks at money and not credit.

Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark.

In the end, one factor alone is going to seal the fate. That factor is called the psychology of deflation. Simply put, the Fed cannot force consumers or businesses to borrow or banks to lend.

The lesson from Japan should be crystal clear on this. If Schiff's argument held any water, Japan would not have been in deflation for 18 years. An argument that the US is not Japan is a red herring. Schiff's thesis is that lack of a gold standard somehow prevents deflation. That thesis has already been blown out of the water.

Finally, the massive consumer debt overhang in the face of global wage arbitrage and rising unemployment increases, not decreases, deflationary pressures in the US. If one is looking for differences, there is no internet boom to look forward to provide jobs and cushion the deflation blow as happened in Japan. Another difference is the savings rate. Japan had savings to draw from. The US does not. Once again this increases deflationary pressures in the US. Debt is deflationary when it hits the point it can no longer be serviced.

A careful examination shows there was only superficial analysis made by Peter Schiff when he argued It's not your father's deflation. The housing boom has gone bust. A commercial real estate bust follows. Consumer psychology and bank attitudes towards risk taking are changing slowly but surely. The rate of change will pick up rapidly once unemployment starts to rise.

In the final analysis, deflation is all about risk taking and psychology (the ability and willingness of consumers to borrow and the ability and willingness of banks to lend) not about the gold standard.

Mike "Mish" Shedlock

globaleconomicanalysis.blogspot.com

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#1. To: Kamala (#0)

the Fed's ability to pump liquidity into the market in the 1930's was limited by the gold backing requirements on U.S. currency. No such limitations exist today. This distinction is critical. When credit was destroyed after the Crash of 1929, the Fed was not able to simply replace it out of thin air. Today however, the Fed will likely print as much money as necessary to prevent nominal prices from collapsing. In fact, in the infamous speech that spawned his "helicopter" sobriquet, Ben Bernanke explained how the printing press can be used to stop deflation dead in its tracks.

Is he a friend of Dick "deficits don't matter" Cheney?

Ron Paul for President - Join a Ron Paul Meetup group today!
The Revolution will not be televised!

robin  posted on  2007-12-26   16:17:19 ET  Reply   Trace   Private Reply  


#2. To: All (#0)

www.howestreet.com/articles/index.php?article_id=5368

Battle Royale

Buenos Aires, Argentina Monday, December 24, 2007 - Christmas Eve

---------------------

*** That noise you hear isn’t sleigh bells ringing – it’s the sound of pumps working day and night… what markets take away, the feds have a hard time replacing…

*** The problem with working the pumps is that the pumps don’t always work… central banks are rapidly losing control…

Hear that noise? It’s not sleigh bells ringing. It’s not children singing. No, that’s the sound of pumps working night and day. In addition to cutting rates, the Fed and the European Central bank are pushing up and down on their pumps as hard as they can – lending extra money as fast as borrowers will take it.

The idea is to replace the liquidity that the markets are destroying…and prevent the free market from working. That is, the feds try to artificially increase the supply of cash and credit…so as to avoid correcting mistakes.

As we explained on Friday, it’s almost impossible for an economy to correct mistakes when the price of money is going down. Instead, mistakes are typically made worse. A guy who is deeply in debt, for example, finds that the easiest thing to do is to borrow more! Already, the feds have practically sunk the entire economy with too much debt; now they’re trying to put more debt into the system.

Economist Gary Dorsch describes the situation:

“The worst is yet to come for the global banking system, which faces potential losses of more than half-trillion dollars from investments in toxic sub-prime US mortgage debt. “The problems in the financial sector remain with us,” said Bank of England chief Mervyn King on Nov 19th. “A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets,” he said.

“To defuse the crisis, the Fed, the European Central Bank, and the Bank of England are pumping enormous sums of money into the banking system, at below market interest rates, to prevent a “credit crunch” from triggering a global stock market meltdown. “Central banks are working together to forestall any sharp tightening in credit conditions that might lead to a downturn around the world,” King declared.

On Friday, we saw some effect – the Dow rose 205 points.

But what markets take away, the feds have a hard time replacing. This is the Battle Royale we’ve been talking about. Inflation vs. Deflation; Markets vs. Market Manipulators.

The markets clearly want to go down…they want to correct the mistakes of the past five years…maybe the past 25 years. And that is what the headlines are telling us. This morning, for example, we find CNN telling us “credit card defaults are alarmingly high.” The LA Times adds that “job data” in the Golden State give rise to the “fear of recession.”

And Robert Kuttner, writing in the Boston Globe, tells us that a “perfect storm” has hit the U.S. economy. Where do they find people like Kuttner? The man misses the point completely. He thinks laissez faire economics has failed. It is a case of “free market fables thoroughly discredited by events,” he says. What to do about it? Give the economy some of that old elixir – central planning! No kidding. He says fixing the situation “will require a repudiation of free-market economics.”

Get ready for it, dear reader. When this thing blows up, people like Kuttner are going to look like they have some sense. They’re going to prescribe more regulations…more government programs…more central planning and meddling. And the voters – who never seem to have a clue – are going to go for it. They’re going to believe that capitalism has failed…that capitalists are greedy…and that we’d be better off having apparatchiks and hacks running the economy.

Of course, you know the real story, don’t you, dear reader? It’s not the free market that prints up dollar bills and floods the world with them…or creates Sovereign Wealth funds…or sets the Fed’s interest rates. But that is a long story…we’ll come back to it.

Besides, today is Christmas Eve. Surely we have something better to do than to dig around in the dustbin of the world’s monetary system…or bring out some old shopworn relic of Soviet Era economics, like Kuttner, just so we can tell you what a moron he is. And surely, you have something better to do listen to us.

You don’t?

Well, then we’ll just keep going. But in the holiday spirit, let us say that we love people like Kuttner; he may be a disaster as an economist…but he is a delight to a financial observer with a sense of humor.

Now…back to our story:

The problem with working the pumps is that the pumps don’t always work. There, that seems simple enough.

And here we turn to Ambrose Evans-Pritchard, writing in London’s Telegraph newspaper, for elaboration:

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of U.S. monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

“Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

“York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.”

Ai yi yi. Merry Christmas…

Mark

If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower

Kamala  posted on  2007-12-26   16:19:36 ET  Reply   Trace   Private Reply  


#3. To: All (#0)

globaleconomicanalysis.blogspot.com

Peter Schiff Replies to Deflation Rebuttal

In response to Not Your Father's Deflation: Rebuttal, Peter Schiff graciously responded in the comment section on my blog with the following three points:

1. I believe that eventually long-term interest rates will head much higher to reflect significantly higher inflation expectations, particularly here in the U.S. where a lack of domestic savings in the absence of willing foreign lenders will put even more upward pressure on rates.

My Counter: In long time frames I happen to agree. US rates will eventually head higher, just as Japanese rates will eventually head higher. The question is when and in what order. Long term rates in Japan fell to .25%. They can fall to that in the US. I am not saying will, I am saying can.

In shorter time frames there is an enormous pent up demand for US treasuries as treasuries are nearly universally despised domestically. Never before in history has everyone turned bearish right at a market top. Perhaps this is it.

I doubt it.

However, let's assume Schiff is correct: Long term rates quickly start to rise because foreigners will not finance our debt. What would that do to default rates on housing, store expansion plans, hiring, wages, prices of homes, and prices of other assets? Unless and until consumer debt is wiped out, rising rates would massively increase default pressure as well as pressure asset prices.

2. Any credit the Fed provides will be spent. It is not necessary that the banks that originally borrow it loan it to Americans to buy houses or U.S. businesses to buy equipment. They can use it to buy oil, gold, wheat, foreign currencies or invest in foreign dividend paying stocks. As long as the Fed enables banks to borrow dollars below the rate of inflation, they will borrow all they can and invest the proceeds in appreciating or higher yielding assets.

Then those dollars will be spent into circulation bidding up consumer prices.

My Counter: Citigroup (C), Morgan Stanly (MS), Merrill Lynch (MER), E*trade (ETFC), Ambac (ABK), MBIA (MBI), and Countrywide (CFC) are so capital impaired they all needed cash infusions, some from foreign companies, just to be able to continue operations.

We have not yet even seen the fallout from Alt-A or pay option ARM resets. And the fallout from rising credit card defaults has also not yet begun. For more on Credit cards please see Credit Card Defaults move to Forefront of Deflation Debate.

There is also the commercial real estate implosion and its aftermath to consider. For more on this topic, please see Commercial Real Estate Dominoes Collapse.

It is an enormous stretch of the imagination to think that banks are going to be rushing into wheat, foreign currencies, oil, or anything else, in light of the above.

For the sake of argument however, let's assume banks start speculating in wheat, corn, and oil. In that case, (assuming prices do go higher which is certainly not a given) prices of food and energy would be bid up still further beyond the average consumer's ability to pay for them. This would increase pressure on defaults and bankruptcies. Consumers are already having trouble enough right now. Foreclosures and credit cards are proof enough. On the other hand, should the speculation fail, banks would be still further capital impaired, possibly bankrupt.

The housing bubble at least provided jobs. Speculation in wheat would not create any jobs. In fact it would do nothing but increase the malinvestments that would blow sky high, sooner rather than later. Where are the jobs going to come from to allow people to pay back existing debt or keep buying stuff?

3. Yes, all currencies are troubled, but the dollar is unique in that the American have borrowed so much money that we can not afford to repay, and have a phony economy that can not function without access to low cost imported products and foreign vendor financing. In the coming crisis, the U.S. will enter a serious recession; the dollar will fall sharply, sending both consumer prices and interest rates soaring. There will be wide-spread unemployment, and assets prices, such as stocks, bonds, and real estate will fall (if inflation gets out of control, stock and real estate prices might rise in nominal terms, but in that case their real declines will be even greater.) I can assure anyone that if they think they can ride this out is in U.S. treasuries or by stuffing dollar bills under their mattresses, they will be very disappointed. Just ask anyone in Zimbabwe who might have reached a similar conclusion.

My commentaries are kept short for a reason and are never meant to constitute a complete argument. For a fuller explanation of my position I suggest reading my book, "Crash Proof".

My Counter: Now we are getting somewhere. Here is something I wholeheartedly agree with Schiff about: "American[s] have borrowed so much money that we can not afford to repay".

Debt that cannot be repaid will not be repaid by definition. It will be defaulted on. That is the very essence of deflation. Rising foreclosures and credit card delinquencies are already proof of concept.

Here is a second statement by Schiff that I wholeheartedly agree with: "There will be wide-spread unemployment, and assets prices, such as stocks, bonds, and real estate will fall."

Once again those ideas are central to the deflation debate. Rising unemployment will increase the number of defaults and bankruptcies.

Yet, somehow we are supposed to believe that in spite of enormous and growing capital impairments fueled by rising unemployment and falling real estate values, that banks will be speculating in wheat and other commodities. This just is not plausible.

However, should it happen, it would only add to the malinvestments to be defaulted on. The problem is there is no way for consumers to pay back debt, and there is nothing the Fed can do about it. The Fed cannot create jobs, build stores, or give money away.

As an aside, one argument I expected to see from Schiff but did not was the creation of government jobs. However, Japan tried that approach and it did not work. There are no guarantees it would be tried here, or if it was that it would work. After all, deflation is about willingness and ability to extend/take credit. Once sentiment peaks, like a pendulum it has nowhere to go but the other direction. Led by housing and now shifting into commercial real estate, leverage buyouts, mergers, and even retail spending, the pendulum has reversed course.

Because the Fed can encourage but not force lending, that shift in the pendulum affects the Fed greatly. The Fed can enhance the current primary trend (as it did in the creation of the housing bubble), but neither the Fed nor anyone else can reverse the primary trend.

Regardless of encouragement, who are banks going to be lending to when asset prices are falling and unemployment is headed higher? And those are conditions that both Schiff and I agree on. With enough defaults, banks will become so capital impaired they could not lend even if they wanted to! We are seeing signs of that in Citigroup already.

And as I have said before, the Fed is a private business. The Fed is not going to give away money any more than Pizza Hut is going to give away free pizzas for a year to all comers.

As far as Zimbabwe goes, Zimbabwe was massively running the printing presses. The situation in the US is drastically different. In the US, credit has far outgunned monetary printing (proof can be found by comparing M3 to base money supply). Printing does not work because it does not get money into the hands of those that need in debt.

Global wage arbitrage is a massive deflationary force putting huge wage pressure on US jobs. Rising unemployment will do the same. Rising unemployment will affect sales as well as prices. Prices of goods and services cannot rise above peoples willingness and ability to pay higher prices. That is a simple economic fact.

Already we are seeing massive price cuts by retailers this holiday season. See Blue Christmas for Target as an example. This is happening in spite of rising raw materials costs and energy costs. Good luck to stores that think they can raise prices. Perhaps some high end or specialty stores can. It's clear there is downward price pressure in nearly everything else but essentials like energy and food.

To date, I have not seen a single plausible all encompassing theory that started with massive consumer debt accompanied by rising unemployment and sinking housing prices that leads to hyperinflation prior to a deflationary collapse happening first.

This discussion with Schiff has obviously not changed my mind. If anything, Schiff appears to be adding to the deflationary hypothesis by agreeing with my assertions that unemployment is going to rise, housing will continue to slump, and most importantly debt cannot be repaid.

Nonetheless, in case I am missing something I am going to read his book. This is a critical subject as far as how one prepares for the outcome so it is important to consider all points of view.

The reason the inflation/deflation discussion is important is because there is are dramatic differences in how one prepares for each outcome in terms of investment ideas. Many people have been writing to me wondering what to do. I will offer some ideas on how to prepare for both hyperinflationary as well as deflationary outcomes coming up shortly. Finally, I would like to thank Peter Schiff for taking the time to add to this discussion.

Mike "Mish" Shedlock

globaleconomicanalysis.blogspo t.com

Mark

If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower

Kamala  posted on  2007-12-27   7:18:59 ET  Reply   Trace   Private Reply  


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