[la2al2tex]

In other words DEFLATION

Yep. The only dollars that would exist would be in your pocket. Or else you barter some bullets for those chickens there, etc.

It's not deflation, it is total systemic financial collapse. It always was a possiblity. I still don't think it's the most likely outcome, but I guess we're about to find out in short order.

So can deflation become hyperinflation? If the only dollars that exist are the ones in your pocket, at what point do those dollars become worthless? Is that when they run the printing press like crazy?

[shady28]

In other words DEFLATION

Yep. The only dollars that would exist would be in your pocket. Or else you barter some bullets for those chickens there, etc.

It's not deflation, it is total systemic financial collapse. It always was a possiblity. I still don't think it's the most likely outcome, but I guess we're about to find out in short order.

So can deflation become hyperinflation? If the only dollars that exist are the ones in your pocket, at what point do those dollars become worthless? Is that when they run the printing press like crazy?

This won't be allowed to completely seize up financial markets (this time). There may be some bank runs and such, but the fed will capitalize it.

To understand what is going on, you have to realize there is a 'velocity' component to money that gives it a multiplier effect. ie, the more times money changes hands in a given period of time the more financial 'work' it does.

When the velocity drops, which it is doing now (plummeting), then the easiest way to get the markets going again is to make more money. Think of it as (money) * (velocity).

This is not me blowing my opinion out btw, it's a well known economic principle: Velocity

A more simplistic explanation: link

The problem with the printing of money solution to economic activity is that, once economic activity starts going up again (ie, velocity starts to rise) it usually rises very rapidly. The printed money gets 'stored' until deflation turns to inflation. When people see that assets are rising and cash is devaluing (after deflation has abated), the floodgates of all that pre-printed money opens up. Velocity spikes as everyone begins to spend the saved up money, and you can wind up with hyperinflation.

That *might* still happen here, but right now we are just at the beginning of the deflationary phase. What we are seeing right now is the Fed and Treasury attempting to fend off deflation.

[shortonoil]

Money Market Stress

September 18th, 2008 12:36 pm
The money market is in a severe state of disruption in spite of the massive liquidity injection by the central banks of the world. Three month Libor for tomorrow is 3.40 percent bid and as of a few minutes ago there was no offer. Investors are allocating funds to the overnight market and that has prompted a bit of a scramble in the longer maturities such as the three month sector.

There was other troubling news, too. The Federal Reserve in a standard weekly announcement revealed that CP outstanding had declined by$52 billion in the week which ended at the close of business yesterday.

Additionally, the Colorado Diversified Trust with assets of about $200 million was not diversified enough and its exposure to Lehman caused it to break the buck. The fund ministers to local schools and governments in Colorado.

This was another source of tension and intensified the reexamination of portfolio holding by investors.

Finally, in a real world example of the extreme difficulty of funding at a reasonable rate, a AA rated bank paid 4.00 percent for $50 million of two week money. That demonstrates the significant pressure that even the most stellar names are facing.

If this doesn’t break, we will see a deflationary credit collapse. Either no one has the money to lend out or if they do have money, they don't trust the other side of the trade to be there the next morning so they can get repaid.

If the commercial paper market continues to freeze up like this, it also means businesses in every industry are going to seize up. They simply will not be able to do business, fill orders, etc.

Other bad news

Washington Mutual auction does not attract any bids-FT
The auction is being conducted by Goldman Sachs (GS), which has approached a number of banks, including Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC), according to people close to the situation. The lack of interest in WaMu means that Goldman may evaluate other options, including raising capital by selling off attractive assets, or attempting to raise fresh capital to allow the bank to stand alone.

FT

Money Market Funds are also freezing up. The only other place to destroy creditworthiness is top-rated commercial paper from non-financial corps and T-bills.

Banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group Inc. and Lehman Brothers Holdings Inc. to a broad range of financial institutions and the global economy.

* Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.

In the face of potentially huge gasoline and diesel shortages, this could create a catastrophic set of events that would shut the entire economy down!

[DantesPeak]

The Fed's response to this problem is, of course, creating even more money.

See my earlier post:

So the world money base has expanded about $400 billion this week, which is probably more than any whole year before 2007.

http://www.peakoil.com/post771632.html#771632

The Fed will add even more money if this doesn't work Friday, and if it that doesn't help, they might step in around the world trying to supply money directly.

If they resort to something like that, it could become a trigger for a worldwide dollar meltdown. It may not be too far away based upon the figures in the TIC report shortonoil quoted above.

[shortonoil]

DantesPeak said:

If they resort to something like that, it could become a trigger for a worldwide dollar meltdown. It may not be too far away based upon the figures in the TIC report shortonoil quoted above.

To get this ball rolling all it would take is one SWF to panic and start dumping Treasuries. That would most likely over burden the system until it would start a cascade of dumping ending in a worthless US currency.

Now we will find out if they really do, “hates us for our freedom”, or love us for our money?

[Jotapay]

Who's going to be the Freedom Hater?

[shortonoil]

Jotapay said:

Who's going to be the Freedom Hater?

I don’t know if Iran is still holding its stash of T-bills, but it would make a good excuse for mr. fear and misery to kill a few hundred thousand Iranians.

Let’s just hope that doesn’t happen. The karma is getting a little tattered over here on this side of the pond.

[shady28]

DantesPeak said:

If they resort to something like that, it could become a trigger for a worldwide dollar meltdown. It may not be too far away based upon the figures in the TIC report shortonoil quoted above.

To get this ball rolling all it would take is one SWF to panic and start dumping Treasuries. That would most likely over burden the system until it would start a cascade of dumping ending in a worthless US currency.

There is a bad assumption at the heart of thinking that dumping treasuries will cause the dollar to devalue. Right now, there is more demand for treasuries than there are treasuries. If they liquidate their treasuries, they have plenty of buyers. Pray tell, what will they do with those dollars they get? Convert to another currency or different governments debt? Or do you have some forlorn hope that they will buy gobs of gold, thus destroying not only the US currency system but their own as well? You think they will shoot themselves in the head?

The reason the Fed asked the Treasury to make more debt - so they could liquidate it and inject cash into the economy. All the money that normally was going into other asset classes has gravitated to safe havens - specifically treasuries.

Every shred of evidence out there shows that the Fed has been battling a deflationary typhoon - and they are losing big. If they were not losing, credit and asset markets would not be locked up as they are now.

[Dreamtwister]

safe havens - specifically treasuries.

The 3 month bond rate yesterday was 0.05%. Even the 30 year rate today is only 4.35% - FAR LOWER than even the stated inflation rate.

Safe haven? Dude, you should do stand-up.

[shady28]

safe havens - specifically treasuries.

The 3 month bond rate yesterday was 0.05%. Even the 30 year rate today is only 4.35% - FAR LOWER than even the stated inflation rate.

Safe haven? Dude, you should do stand-up.

Give us your safe haven, dude...

What are you into? Gold? Lets see how that does in 6 months vs treasuries.

[Dreamtwister]

safe havens - specifically treasuries.

The 3 month bond rate yesterday was 0.05%. Even the 30 year rate today is only 4.35% - FAR LOWER than even the stated inflation rate.

Safe haven? Dude, you should do stand-up.

Give us your safe haven, dude...

What are you into? Gold? Lets see how that does in 6 months vs treasuries.

Gold is good, but my wealth preservation strategy is heavily leveraged into lead and copper.

[Revi]

They seem to be minting lots of money to prop up dying banks. Why won't this cause inflation? Is it because it is never in the hands of us little people at all?

Nobody lending any money means none is being created.

They are just trying to stave off total financial freeze up.

Is it working?

[DantesPeak]

The $100 billion the Treasury raised in special issues this week has been mostly deposited with the Fed. The Fed apparently has directly lent most of this money back to banks and brokers.

To over simplify then, the Treasury has acted as a second Federal Reserve and created $100 billion in new money. That's because the Treasury has facilitated the financing of $100 billion in assets formerly just owned by banks/brokers and now 100% financed by the Fed.

This is in addition to the creation of $300 billion in new money, mostly in dollars - even in Europe. The combined effects of the new money will have powerful effects on some asset classes at first, and will eventually bleed into the world economy - causing widespread inflation.

It takes about two years for the effects of monetary expansion to be fully reflected in retail prices. The price of basic commodities like gold, oil, grains are likely to rise first.

[shady28]

safe havens - specifically treasuries.

The 3 month bond rate yesterday was 0.05%. Even the 30 year rate today is only 4.35% - FAR LOWER than even the stated inflation rate.

Safe haven? Dude, you should do stand-up.

Give us your safe haven, dude...

What are you into? Gold? Lets see how that does in 6 months vs treasuries.

Gold is good, but my wealth preservation strategy is heavily leveraged into lead and copper.

Then let's watch lead and copper, and see how well they do over the next 6 months or so vs treasuries.

You might want to research the reason why treasury yields would be so low.

[Jotapay]

Then let's watch lead and copper, and see how well they do over the next 6 months or so vs treasuries.

You might want to research the reason why treasury yields would be so low.

You know what lead and copper are used to make, right? It doesn't trade on a market. You academics.... you better learn sometime, for your own sakes.

It amazes me how out of touch you people are sometimes.

[Revi]

What are lead and copper used to make? Are you talking about old plumbing?

The market is down again. It's below 11,000.

Looks like the bottom is falling out of the economy again.

[ubercrap]

What are lead and copper used to make? Are you talking about old plumbing?

I thought maybe he was referring to ammunition?

[Jotapay]

Bullets, along with some powder and primers.

[jbrovont]

Philosophy and knowledge make a man wise and his law just. Copper and lead make him free.

What are lead and copper used to make? Are you talking about old plumbing?

The market is down again. It's below 11,000.

Looks like the bottom is falling out of the economy again.

[jbrovont]

Back on topic, many ARMs are based on the LIBOR. A sudden jump in this could cause their payment to jump along with it. I'm not sure what happens to an ARM based on the LIBOR when it locks up - I've seen a lot of mortgage notes and I've never seen that addressed.