Situation X: runaway DE-flation

The theory:

Most economists will tell you that modern price deflation is "impossible." They will tell you that in a modern, credit-driven economy, price inflation is inevitable. But we have had a major deflation as recently as 1929, and a very minor deflation 2001-2002. (remember when ford credit was advertizing "0% interest for the life of your loan!"? )

Runaway inflations are caused, according to keynsian economics, by a shortage of labor, and too much credit. An excess of labor supposedly causes a recession. But no explanation is ever given for deflation, since it is "theoretically impossible, except as an adjustment at the end of a period of hyperinflation."

America's biggest deflation occured 1850-1857. Some historians argue that it was the actual economic cause of the Civil War, just as they claim the great depression was the underlying cause of WWII. In this view, major wars occur about a decade after the deflation begins. Hence the Bank panic of 1904 would have led to a war in 1914. The crash of 1929 should have cause a war in 1939 . . . .

Basically, deflation happens when the public realizes, viscerally, that prices are falling, and things will be cheaper tomorrow than they are today. When this happens, people delay purchases as long as possible. This kills the banks, with no one taking out new loans. People quit buying houses, because they'll be cheaper next year. Companies lay off "non essential" labor, which lowers average incomes, and further presses prices down.

American consumers enter a new and amazing race, where the winner is the one who spends the LEAST over the next five years or so!

If this goes on for more than a year, it really WOULD be a survival situation, which is why I'm posting here.

The scenario

Prices are in a free fall, dropping by 5% per week!. There are stories in the news about it, although milk and gasoline are not falling nearly as rapidly. People are rushing to extinguish their outstanding debt, since the relative value of their old debt is INCREASING by 5% per week.

Here's your personal situation:

-If you work in marketing, imagine that you are laid off in the next 2 weeks

-If you work on the late shift, expect to be laid off within a month, as companies cut back on store hours or production

-If you work in any management capacity other than accounting, expect to be laid off within 3 months

-if you work in service, expect to be laid off within 6 months.

-if you work in production, your job is secure, but your employer cuts your pay by 10% per month.

-if you work for a national or transnational company, your time until layoff to be halved, as larger companies have more complicated debt and liquidity problems.

Rays of hope:

-if you can cut your household expenses, you may end up getting rich, relatively speaking. Whoever emerges from the deflation with the MOST CASH is a winner. So, do what you can to maximize hard currency (US dollars & cents, or your national currency) as quickly as possible.

The best way to raise CASH will be to raid any retirement funds or stock portfolios you have access to. Since the stock market is in a meltdown, it's losing money anyway, as other investors sell off securities for CASH.

Consider selling extra cars, boats, tools, furniture, or appliances, especially ones that cost money to operate.

You can save cash by lowering your utility expenses. Try to do your own laundry, grow your own food, cut your fuel use.


AN EXTRA:

Because of the sluggish nature of the government, US savings bonds still being issued according to the old rules, and will do so for at least TWO YEARS. For now, new series EE bonds will only pay the nominal 1% interest valid on the date you buy them, they will automatically double in value at the end twenty years, giving them a de facto maturity return of 5%. So, if you own a bond, its return relative to inflation, would be in the thousands per cent range. So get government bonds, any way you can! Everyone else is . . .


(After this thread dies down, I'll post a "tweak" to represent the kind of economic earthquake that occured in 1931, once the depression got really going . . . so stay tuned.

.

Wow, Now I feel all warm and fuzzy.
I certainly am no expert, and never claimed to be, but what you've stated here sounds like it has some validity to it.
I hope your wrong though. Do you have some sort of a financial background?

Originally posted by lombozo

I hope your wrong though. Do you have some sort of a financial background?

Yes, but nothing I'll be specific about on line. Bosses wouldn't like it.

By the way, I'm not making any predictions. This is merely an intellectual exercise, to get you thinking in novel ways. Besides, the previous 2 fed chairmen have stated that deflation in the modern world is impossible.

I'm just trying to get us all thinking. If you could get rich by raising as much currency as possible in the next couple of weeks, how would you do it? What could you get rid of, especially if your job were in danger?

If cash were suddenly king again, then it might be worth it to sell your car, while you still can, and max out the credit cards (!) while you still can. If people want their cash desperately, they will probably quit paying on unsecured debt like student loans and credit cards. Especially in disinflation, you wouldn't care about your credit score, and so wouldn't really mind if creditors turned in nasty memos about you to the reporting agencies. You wouldn't be borrowing money at a time like that.

Also, because of the relatively increasing cost of existing debts, you'd be seeing people 'walk away' from homes that are mortgaged at high rates, and vehicles they don't really need. This happened in the 1930's. People just left their homes. They didn't declare bankruptcy or anything, they just dissappeared, and headed for jobs picking fruit in california.

In a case like that, you might want to sell an extra vehicle, since so many cars will be repo'ed, that prices will drop soon anyway. In fact, you could probably sell your car this week, and buy it back for LESS next week. Of course, you wouldn't want to, because your cash will be worth even more the week after that.

See how crazy it all gets? A world turned upside-down . . .

.

Originally posted by dr_strangecraft
If you could get rich by raising as much currency as possible in the next couple of weeks, how would you do it? What could you get rid of, especially if your job were in danger?

My first reaction to your scenario would be to quit the job, and invent a new career as a cowboy 'Liquidity Consultant' advising Joe&Jane Public on how to raise as much currency as possible by selling/trading household assets...for a one-off cash-only consultancy-fee. If it were a national financial panic, there'd be no shortage of business!



[edit on 26-8-2007 by citizen smith]

One of the things you'd see in a deflation scenario would be the re-birth of mom and pop shopkeeping. Probably fleamartkets popping up in parking lots and open space, where you can buy locally made soap, deoderant, candles, bread, etc. Also vendors with pushcarts selling stews and soups, that kind of thing. The quality might be less than you'd have gotten from a recognized name, but then the price is only a fraction of the fancy stuff too.

The diner was a response to the Great Depression in the US. Instead of serving full meals, these small outlets sold sandwiches, light breakfasts, and coffee by the cup. Regular old fashioned restaurants all went out of business, unless they served the rich.

You'd see an explosion of "service" marketing. People who "take in laundry" for pennies per item, home canned foods for sale, probably homemade biodiesels and bread sold without a license or health permit out of the back of a car.

I think you'd do fine in the "advisor" category. If you were willing to be a shyster, you could set up the "Citizen smith Pyramid Plan" for investing. Con men make million when people get desperate--they're willing to believe anything, as long as its good news.

Originally posted by dr_strangecraft
If you were willing to be a shyster, you could set up the "Citizen smith Pyramid Plan" for investing.

I've got my shiniest suit pressed and a gallon of cheap aftershave ordered to keep me at my 'estate-agent-sleaziest'

Now, if you'd just like to sign ......... (here) and ............ (here) and make your $100 deposit to C.S. Enterprises we'll get you on the road to riches in no time

This thread isn't getting much traffic, so I'll give you my "tweaks"

Most homeowners with mortgages find themselves "upside-down" on their loans: the loan is for more than the real value of their home in current market prices.

This happened in the US as the Stock Market crash of 1929 turned into a recession, and finally a deflation.

People didn't bother to declare bankruptcy. They just walked away from homes.

So picture lots of suburbs with empty houses, as people disappear before their savings is impounded by banks. Watch people quit using banks as well, as cash is all that matters. You'd probably see some families come back and "squat" in their previous home that they had officially abandoned.

Also, watch repo men impounded cars when people quit paying; so many in fact, that people in the US trade their "wanted" cars for other cars registered in another state or country that won't be extradited back to their homes.

Also, as farm fuel becomes relatively more expensive, watch more farm labor jobs open up, further depleting the population in the suburbs. In the US great depression, the switch was from grain agriculture in the midwest to truck farming in california. Many farms in KS, OK and TX were merely abandoned by their tenants--the banks only found out when they sent a lawyer or sheriff to repossess the farm.

All of which opens the discussion for another ongoing thread: "Suburbs, the most dangerous place . . ."


Brother, can you spare a dime?

.

reply to post by dr_strangecraft


Okay, I'm not a big numbers and money person, so please forgive me for my questions, and please correct me if/when I'm wrong.

Is the deflation triggered by inflation?

I ask because right now, we seem to be in an inflation -- prices are high, paychecks are low. Unemployment is high, health benefits and retirement plans are practically myths, and debts are astronomical. Houses are being foreclosed, and yet there's no rush of people with money trying to buy them for cheap -- so I guess people aren't going out to get loans from the banks.

What would trigger a deflation in the markets? (How would this theory become reality?)


And as far as what I'd do for work -- I'm a pack-rat with an upbringing and an affinity for doing things the old/hard way. So I guess I'd be the one selling canned foods and offering to wash clothes.

Originally posted by Diseria

Is the deflation triggered by inflation?

This is a tough one to answer. The reason it's tough is because my personal opinion is very different from the consensus of economists and policy makers. They would say that inflation occurs when there's a shortage of labor; because employers have to offer more and more money to fill their positions. Inversely, they would say that a recession is a shortage of capital, or credit. This is why the US federal reserve bank lowers the prime interest rate; in order to make credit cheaper and more available.

Notice, in the consensus view, there's no room for a definition of deflation. I think most of them would tell you, as Keynes himself would, that deflation is simply an extremely severe recession, and that all the government needs to do in increase the money supply by printing more money.

But it turns out that Keynes was wrong about a lot of things. And I can show you periods of history when governments printed more money and the value of it still went up. Or I can show you periods (like 1977-1981) when they took money out of circulation and were still beset with inflation.

I'll tell you that we a touch of deflation between 2001-2004 in the US. Just barely, but it was there. The response of the US Federal Reserve was simply to quit publishing any statistics about the US currency supply. Generally, wars follow deflations, and bring back the inflation.

I still haven't answered your question, what causes deflation.

Ultimately, it is a sea-change in the attitude of the public. When the public quits believing in tomorrow, and would rather have a dollar TODAY, instead of 2 dollars in a couple of years. Anything that can change people's faith in the future would do the trick.

In france, it has been fear that the government would not make its interest payments on its government issued bonds. It has happened 5 times in the past 225 years, and it's the reason that De Gaulle tried to fight the US fed, and get france on the gold standard.

In US history, Bank panics have traditionally started deflation. Most economists would say that modern legislation has fixed that.

You have deflation on a local scale when theres a solar flare, and the credit swiper thingy at the supermarket wont work, and they're only taking cash. Of course, that gets fixed in a day, so there's no long term effect.

But I can imagine where identity theft becomes so commonplace that people say to themselves, "screw it, I'm going offline." They quit using credit and banks, and more conveniently, they quit paying on their debts. That could cause people to quit paying debts, and using credit.

I could imagine an EMP, or a major hack, that attacks the credit system.

I could imagine interest rates getting so high that people just refuse to pay their debts. Then the repossessions begin, and the spiral down starts.

Ultimately, if the public looses faith in financial authorities or our financial system. That's what causes stock market crashes. Likewise the opposite, when people develop and infatuation with those institutions.

I ask because right now, we seem to be in an inflation -- prices are high, paychecks are low. Unemployment is high, health benefits and retirement plans are practically myths, and debts are astronomical. Houses are being foreclosed, and yet there's no rush of people with money trying to buy them for cheap -- so I guess people aren't going out to get loans from the banks.

While the housing market and financial markets have peaked, that may or may not be anything more than a short-term adjustment. I would caution you to look at national and global trade statistics, rather than at your own local situation. The difference in the local economy between say, Las Vegas and LA right now is pretty startling.

.

Dr, you have so much knowledge that it boggles my mind. I extend my gratitude to you for being so patient with a tyro to the field...

I have no frame of reference for what's meant by short-term and long-term -- where's the mid-point between the two?
-- I've read articles that say for the last 5 years, the real estate market is "about to burst" (which I understand as "crash"); that the USD is dropping, or under serious threat, because of foreign markets trading their dollars for euros and such; that there's been a few near-crashes of and/or a general lowering of trade values in the stock market; that paychecks cannot pay the average American's bills, not including debts.

But I don't know whether or not prices in general are rising... (they certainly seem to be)

...I realize that most of this stuff fluctuates, and I'm not one for slippery slopes that lead to apocryphal ends. But at what point can one rest assured that the market will go this way or that (inflate or deflate)?

My interest was piqued because, well, in short: I've too much debt, no way to pay it back (after paying for the basic necessities), and the house isn't selling. I'm trying to understand the economics involved so that I'm not caught with my ass in the wind, to be crass; either I put my money in the bank and strive to pay off the debts, or I re-stuff the mattress, tell Salliemae where to go, and turn the back yard into a farm.

I'm not looking at you as being a fortune teller... but you understand this stuff. (Would it help any to mention that I'm a 25 y/o English major? I have neither the experience nor the schooling to understand the finer points...)

[edit on 29-8-2007 by Diseria]

If we didn't have to face a war 10 years after, I'd say that this might be the cure for the average American credit habit. It would force Americans to once again rely on their local resources for a living and not the massive, bloated oil hungry transport infrastructure system we have now. For Christ's sake, Walmart ships fresh produce from as far away as Chile right now. It would probably totally destroy both China and India's economies worse than ours. With Americans not buying massive amounts of oil from the Middle East, the extra money that has kept the Saudis, Iranian govt's afloat will dry up and they'll fall. The American car wreck will turn into the global pile up. Without the funds to pay for them, the 25% of US military forces will finally be brought home after being deployed since 1942! Trust me when I say there will be silent cheers amongst the ranks of the military who've witnessed the massive subsidies we've paid to Korea, Japan and the NATO allies to station our troops in their countries. Korea and Japan can finally get down to settling their blood feud over the brutal Japanese occupation of Korea before and during WW2. My money's on the Koreans. Both China's might want a piece of that action,too. Paybacks is a mother. India and Pakistan will finally get to nuke each other in peace. The UN will go away and with the US forces gone from Europe, Russia will look again at conquering all of Europe under the new Czar. The UK might be able to hold out against the Bear. South America and and sub-Saharan Africa won't be affected as much because their economies are already a shambles. Chavez won't last long without US oil dollars to fund his socialist agenda. Castro just needs to kick the bucket and let the rest of the Cubans sort out there differences. I feel that it will actually be quite a painless change for Cuba. Most of the Cubans who came to the US really don't want to go back and the few who do go back will find everything crumbling and ruined, so only the worst diehards will actually stay there. The rest will just have a nice visit with old relatives. I think I've digressed far enough.

Originally posted by Diseria


I have no frame of reference for what's meant by short-term and long-term -- where's the mid-point between the two?

There is no definition, it's just a question of how big picture you want to get. Short term is often taken to mean a single market movement, up or down. Long term is a big movement, made up of "sub-cycles" if you will. All a question of perspective.

For a historian of the price of silver, centuries can be "long term" and decades are "short term." For a floor trader at NYMEX, short term can be 5 seconds, and long term is 30 minutes.

-- I've read articles that say for the last 5 years, the real estate market is "about to burst" (which I understand as "crash"); that the USD is dropping, or under serious threat, because of foreign markets trading their dollars for euros and such; that there's been a few near-crashes of and/or a general lowering of trade values in the stock market; that paychecks cannot pay the average American's bills, not including debts.

Whether or not those predictions are true, the wording you use, that I'm sure you borrowed directly from those articles, makes me think they are written by people who want to advise you for a fee, or want you to invest in their "safe haven during the coming crash!"

But I don't know whether or not prices in general are rising... (they certainly seem to be)

With paper money, unbacked by gold or anything other than the "full faith and credit of the Federal Reserve," Inflation is expected by the bankers as a given. The only question is the relative speed at which the currency loses value.

...I realize that most of this stuff fluctuates, and I'm not one for slippery slopes that lead to apocryphal ends. But at what point can one rest assured that the market will go this way or that (inflate or deflate)?

Every one of my economic forecasts is a probability statement. I always include "if x happens, y should follow; if x doesn't happen, then look for z" statements. Did I ever tell you that handicapping racehorses is one of my hobbies? It's all about probabilities, baby.

My interest was piqued because, well, in short: I've too much debt, no way to pay it back (after paying for the basic necessities), and the house isn't selling. I'm trying to understand the economics involved so that I'm not caught with my ass in the wind, to be crass; either I put my money in the bank and strive to pay off the debts, or I re-stuff the mattress, tell Salliemae where to go, and turn the back yard into a farm.

[edit on 29-8-2007 by Diseria]

It would be foolhardy for me to advise, or you to listen, when we are anonymous strangers at the high-tech confessional booth called the internet. I would advise anyone with high debt to keep in mind "relative dread."

Two guys are in the mountains, hunting. They've killed some game, and got blood on their clothes. They are confronted with a raging grizzly bear. One guy stops to put on his running shoes. The other guy says, "you'll never outrun a grizzly bear." The first guy replies, "I don't have to outrun the grizzly; I just have to outrun you."

It's like that when thinking about your debt. If global debt threatens the WHOLE SYSTEM, the bankers will invent a new system real fast and it'll be a system that somehow includes them being paid, if they can manage it at all.

Think about your own dread of your debt, compared to Sallie Mae, or your home-mortgage lender. The student loans are unsecured debt; they cannot erase your education or repossess your degree. What happens if you don't pay? (I let you answer that one yourself.) But can Sallie Mae honestly afford to have 30 million well-educated americans in the jails and living on the streets? Not good for business, not at all.

And let's think about the home-lender. Your lender is a corporation, a fictive legal person, who has no real use for an empty house, other than to sell it to someone else. And 5 million empty houses isn't exactly going to make yours sell quicker. Nor is it going to keep the mortgage payments coming every month.

Point is, your lenders feel dread, too. They cannot afford for everyone to walk away from their legal/financial obligations. So when it gets bad enough, they lower rates, lower payback amounts, do something to make it "all right" for Joe and Judy Sixpack. Notice, they won't fix it until a lot of people complain. SO just be sure not in the first group of people to go under. You don't have to have perfect credit, just better than some of the other wage-slaves, and you'll survive, even thrive.

Plus, things stabilize as you get older. Honestly, once you are older than the bank loan officer, or the IRS agent, or whomever, they tend to not treat you like crap as much as they do a person in their twenties. You get a stable career, get some money on the side, and then you develop a safety net over time.

When frau dr. and I got married, we were two grad students with no means of support. We would go to grocery store openings to eat the free hors dourves. We'd go to art openings and have canapes and finger sandwiches for dinner. Now, we throw the parties.

Remember what my grandma told me. She's the one who was living in the boarding house in 1929 when the crash hit, and who ended up owning that same boarding house seven years later:

"Your property is what you can use. Your debts are only pieces of paper."

.

reply to post by crgintx


Seriously digressed...Which thread are you replying to? Not that some of your opinions aren't spot on.

Now Dr. you were saying...

reply to post by dr_strangecraft


Is there a rough time-line on the possibility of de-flation? Or for when you think the PTB will start responding to the credit crunch / housing crash?
Any thought about the notes released from the Feds last meeting and the chairman not seeming to fully grasp the situation or have a solution?
Also what do you think is a good minimum amount of cash to have on hand in a financial crisis? Is that a naive question? Will it even matter?

Originally posted by kosmicjack

Is there a rough time-line on the possibility of de-flation? Or for when you think the PTB will start responding to the credit crunch / housing crash?
Any thought about the notes released from the Feds last meeting and the chairman not seeming to fully grasp the situation or have a solution?

Oh, you misunderstand my intentions with this thread. This thread is for entertainment purposes only. It contains no predictions. This scenario is merely speculative fiction, to help survivalists prepare for every scenario. I was merely trying to get people to expect financial survivalism, in addition to all the nukewar / red dawn-style situation x scenarios.

I never make finanical predictions on the internet. So no one with whom I have prior contractual obligations would ever have reasons to penalize me for breaching non circumvention / non-disclosure agreements. again. I'm being a good boy, Phil.

Also what do you think is a good minimum amount of cash to have on hand in a financial crisis? Is that a naive question? Will it even matter?

I refer the right honorable poster to the answer I gave some months ago, in the survival thread entitled "survival investing."

reply to post by dr_strangecraft



I am not financially saavy, or I wouldn't be in the trouble I am in. So I am trying to figure out what you mean but cash being worth a lot, but homes and valuables are not. Can you clarify this?
And I would be too worried about racking up more debt, to have things turn around again. Wouldn't the debt still be there when things picked up?

Originally posted by nixie_nox
. . . .I am trying to figure out what you mean but cash being worth a lot, but homes and valuables are not. Can you clarify this?

Those are different stages of deflation. The housing thing comes at a later point.

But imagine this, just with your own personal finances. Imagine that the price of everything you buy begins to go down. A lot. Suppose that every Sunday, prices of the stuff you buy goes down by 10%. That means, if you spend a $100 a week on groceries, then next week they would only cost $90. The second week they'd only cost $81 dollars. The third week they'd only be $72.90. They'd drop 10% each week, from the previous week.

Now, what would this mean. Lets say you wanted to buy some groceries for $100. But if you can delay that purchase just one month, those same groceries would only cost you $65.61.

So, wouldn't you try to delay all of your purchases by one month? Your money will be nearly twice as powerful in a month's time in this scenario.

Now, imagine everyone doing this, nation wide. What will happen to all the stores that sell stuff? They can't sell stuff, because people are doing everything in their power to delay purchases. They are doing without, in order to be richer in the future. Think about a TV appliance store that just got a load of big screen, HD TV's. Everybody wants one, but they decide to wait, because they'll be cheaper tomorrow.

So, the store lets people go. They cut prices, which drives down prices nationwide, which speeds up the deflation of TV prices.

So, everything you can do to cut costs especially in the first few weeks makes you "richer" in the future. So if you can just do without groceries for a week, or stall your rent, mortgage, or car payments, you'll be doing great in a couple of months.

Think what that does to banks. They'd need SOME people to pay, or they'd go broke. So they lower interest rates, which lower prices nation wide. THey might even call you, and offer to write off 10% of your debt, if you'll just send them one more payment on time . . . but you know that if you can hold out 30 days, they'll be even MORE desperate next month.

See the vicious circle. The people who get rich are the ones who can live without expenses, and still get a bit of income. But pretty soon, no one buys anything anymore. They quit buying cars and computers and game systems. They even grow their own vegetables and bake their own bread, to save money that will be worth more next week. After a couple of years, how is that different from the Great Depression??????

It's not.

.





[edit on 31-8-2007 by dr_strangecraft]

Originally posted by dr_strangecraft

This thread isn't getting much traffic, so I'll give you my "tweaks"

Many farms in KS, OK and TX were merely abandoned by their tenants--the banks only found out when they sent a lawyer or sheriff to repossess the farm.

All of which opens the discussion for another ongoing thread: "Suburbs, the most dangerous place . . ."


Brother, can you spare a dime?

.

With the Real ID Act, you won't be able to do that. The OWO or the Olde World Overlords who are very real won't allow folks to escape from their financial subjugation like they did during the depression.

reply to post by dr_strangecraft



Thank you very much for taking the time to explain.

What kind of circumstances would start de-flation. What events have to fall in place?

Very intersting topic!

Originally posted by crgintx

With the Real ID Act, you won't be able to do that. The OWO or the Olde World Overlords who are very real won't allow folks to escape from their financial subjugation like they did during the depression.

The truth is, debt is a civil contract between two parties. The debtor has to be willing to abide by the provisions of the debt. In our society, denying your debt has a heavy social cost. You can't get any more cool toys unless you pay on your outstanding loans. You can't get the nice job, nice house, nice car and other perks unless you play their game.

But in a world where banks are folding, where no one accepts plastic money (and maybe not even paper), in a world where governments are shocked to find their soldiers demanding cash pay, or else hiring out as merceneries, In a world where playing their game has more penalties than rewards . . . .

How much your ID even matters, at that point, is a philosophical question.