Will the World End in Fire or Ice?
By Staff News & Analysis - December 18, 2014

Deflation Stalks the Globe … Crude oil trading at less than $60 a barrel for the first time in five years means lower gasoline prices and more money in consumer's pockets, right? And the knock-on effect of driving down consumer prices is great for everyone, correct? And the global economy needs all the help it can get as it drags itself out of recession, so what's not to love about lower inflation? Plenty of people are alarmed by the prospect of deflation, which can snuff out growth by making consumers reluctant to spend and companies unwilling to invest. Many of them work at the world's central banks. Most of their opponents subscribe to the Austrian school of economics, which is allergic to central banks' manipulating markets and asset values, and embraces the current trend. Next year may prove which view is correct. – Bloomberg

Dominant Social Theme: This deflation is bad, man. And it's coming … Feel the fear!

Free-Market Analysis: Think of inflation as fire and deflation as ice. How will this latest asset reflation end? Will it subside into ice – a tremendous monetary and price deflation? Or will the current asset expansion continue into a catastrophe of fire?

Often, as we've pointed out, the two look the same. When deflation appears after an enormous bubble, people claim that there is a deflationary mechanism at work in collapsing the market.

But in fact, the price and monetary deflation or disinflation is a product of asset INFLATION. It is inflation that does the damage, not deflation.

We are revisiting this meme for a third time in a recent span because the "fear deflation" meme is expanding rapidly. Now it's gone global! And Bloomberg is pounding it again.

But first, let's be clear right away on the modern definition of deflation. Deflation only comes in one color so far as the mainstream media is concerned: Deflation means price deflation, a subsidence of prices.

There is another form of deflation, of course, not used so often within a mainstream media context, which is monetary deflation. Disinflation can be a reduction in rate of price inflation or monetary inflation.

Here's more from this article:

The Trouble With Falling Prices … The euro region looks to be most at risk of sliding into deflation early next year. Consumer prices rose just 0.3 percent in November, a far cry from the European Central Bank's 2 percent target. And the ECB's preferred measure of where the collective intelligence of financial market participants says inflation is headed — the five-year rate on inflation swaps in five years' time — heads lower all the time …

Deflation prospects are also evident in the world's government bond markets. In the U.S. Treasury market, dealers have dissected the securities into so-called STRIPS — Separately Traded Interest and Principal Securities — at a pace that's swollen the market to $211 billion, its biggest since 1999. Strips, which lose value quicker than just about anything else if inflation accelerates, have instead posted returns approaching 50 percent this year, Susanne Walker reported for Bloomberg News this week. U.S. bondholders are so relaxed about inflation that they're almost horizontal.

And in Germany, investors are paying for the privilege of stashing their cash in government debt — another sign that they don't expect inflation to erode the value of their returns … Some countries are already in deflation. In Sweden, consumer prices dropped for a fourth consecutive month in November, prompting the central bank yesterday to commit to keeping its main interest rate at zero until the second half of 2016. Spain, which is at the mercy of the ECB's policies, has seen deflation for the last five months, with prices dropping by 0.4 percent in November.

Even in the U.K., where the economic recovery is relatively robust, figures yesterday showed inflation at its slowest in more than a decade, with November consumer prices rising just 1 percent. That helped drive the yield on 30-year gilts to a record low yesterday.

Do you feel the fear? We don't believe these phony deflation or disinflation price measurements. They are coming from the same people who brought us economic "green shoots" three years ago and are still proclaiming a magic recovery that so far cannot be found.

It is not deflation that haunts the globe. It is more likely stagflation from central bank money printing. That's what central banks do, after all. That's almost all they do. They debase the currency while shouting loudly that they are protecting it.

Now the proverbial ante has been "upped." No longer is Draghi shouting about EU price deflation. Bloomberg wants us to know that the entire GLOBE is to be gripped by this plague of collapsing prices.

From our point of view (and Murray Rothbard's), a little bit of deflation is a good thing. But not for the modern central banking crowd. They are obviously intent on inflating the hell out of this economy.

And this is one more reason why we often return to the "Wall Street Party" meme. We see no flagging in the intention of these "good, gray men" to turn off the money spigot. They want stock markets to inflate, prices to inflate and asset bubbles to inflate.

From a VESTS standpoint, one has to decide if those determined to inflate are going to be able to pull it off. Your investment patterns will be different in an environment of price inflation versus price deflation.

But we can feel the meme expanding. Bloomberg is even using the downward manipulation of the oil market to build a case for deflation in this article. What opportunism!

After Thoughts

The good, gray bankers want inflation in the worst way and are beginning to shout in chorus. All the more reason not to believe it?

Some say the world will end in fire,

Some say in ice.

From what I've tasted of desire

I hold with those who favor fire.

But if it had to perish twice,

I think I know enough of hate

To say that for destruction ice

Is also great

And would suffice.

-Robert Frost

  • We learned yesterday, the same thing we knew the day before – that zero interest rates will continue into the foreseeable future. The CBs and their minions continue to constantly reinforce the idea that ZIRP is “stimulative” and “inflationary”. Why should we believe a single word of what they so obviously promote – over and over, on a daily basis – as common wisdom? The opposite is, in fact, the case!! Zero Interest is DEflationary, not the reverse. The new money creation IS inflationary, but the zero interest rates are deflationary!! The equity market has been (along with Suntory Whisky in Japan, high-end condos in Manhattan, and the like) the beneficiary of all the new money creation, while ZIRP deliberately deflates the rest of the world economy and sucks the lifeblood capital out of every honest business. The result of these two policies working in tandem, is the continual migration of wealth from the 99% to the 1% – exactly as designed!! The very same bubble technique used in 2007 – 2008 has been used again only this time the bubble is in the oil patch. The result – as intended – will be the same!! However there is one proviso: each time we have a credit collapse it is ten times worse than the previous one:

    • Bail-ins are coming. If you want to wait for a signal, once Ms. Yellen goes on TV to reassure us all that the issue is “contained”, that is the signal to look for. By then it could easily be too late. It is long since time to exit the digital domain entirely and hold 100% hard assets under your personal control. What is a hard asset? IMHO, cash is the #1 hard asset for the immediate future. Cash currency. We are about to experience the biggest cash crunch in the history of the known Universe. Cash will be King again, and cash will be the #1 hard asset, until it isn’t.

      • Danny B

        Gregg, I’ve been trying to tell people to hold cash, NOT gold. Sure, gold will be very valuable AFTER the dust settles, IF you can keep grubby paws off of it. Food first, cash second, junk silver third and gold if you still have money left over.

        • You are wise, the one concern I have is if the PMs crash in a credit collapse, the posted prices may be very attractive ($700 for Gold? $10 for Silver?) but it may be next to impossible to actually buy any even if you pay a premium. The longer-range agenda is to destroy the dollar as the reserve currency and put in its place the IMF/SDR “special drawing rights”. If cash is King as I expect will be the case during the upcoming credit collapse and worldwide default event, that “hard asset” status for cash dollars may only last for a year or so. The reset to SDR is scheduled for 2018 (see link) so one will need to be out of cash currency (and into other hard assets) well before the beginning of 2018……. and of course the ownership of cash may be declared “illegal” at any time (just as Gold was in 1933) in the move to a totally cashless society. So many choices, so many risks, and maybe the simplest choice is the best: own PMs and suffer through any and all price declines but this is only a viable choice for those who know they will never be forced to sell. Cash is cash! Until it isn’t.

          • Bruce C

            When in doubt diversify. Cash, “junk” (pre-1965) silver coins, silver bullion coins, gold bullion coins, numismatic silver coins, numismatic gold coins, deposits in brokerage accounts at precious metals dealers, non-brokerage account money market funds. That’s about where I’d stop, but if you have millions to shelter then I suppose short-term US Treasury bills might be okay too.

          • Yep, that is a way that makes sense

          • Danny B

            Gregg, I read Brandon Smith. The guy really works hard. My complaint about most writers is that they don’t pay attention to enough factors. He covers a lot of ground. He believes that, after the crash, the SDR will be phased in. I believe that, this is the desire. I don’t believe that it will happen. The dollar was originally gold convertible,,, and then removed. There is talk about the SDR basket including currencies and gold. I don’t see this as being workable. Gold is poison.
            The R.O.W. bought a lot of gold. I don’t see them endorsing a fiat currency created by the same people who brought the world the U.S. dollar. I don’t see them surrendering the BRICS development bank or the Shanghai cooperation group. Same for the alternative to the SWIFT system. Look what happened to the EU States when they gave up the printing press. The SDR system would have all States borrowing from the world CB. I don’t see that happening.
            The EM States have no temptation to surrender sovereignty to an entity that is bound to hold them in thrall. There is no future for a world bank. Look at the EU central bank. It has no mechanism to account for the cultural differences between the northern States and the southern States.
            Jim Rogers said that the BRICS can probably make a go of it, IF they get rid of India. Can you imagine Norway and Brazil trying to use the same system?
            The U.N. would like to legislate away the differences between the rich and the poor. It just can’t be done. The same is true in the economic sphere. The SDR can’t possibly fit both the developed States and the emerging States. Just the demographic crash by itself insures this.

          • Hey Danny – I do believe that is the plan (SDR) and maybe it is designed from the beginning NOT to work so they can throw out the “basket” asap. Whether this will take place (SDR as world currency) may depend on how awful and desperate they can make things first – problem/reaction/solution. We both know how suddenly things can change in the markets. On the ground, so to speak, it takes longer. It took 3 years after the 1929 crash for the real bank “holiday” in 1932. If the target date is 2018 then they have some work to do, to prep the ground for a cashless SDR world. Time will tell.

          • dave jr

            Danny, I think it is probable that whatever currency the oil markets, oil majors, cartel, OPEC price the energy in, will continue to be the worlds reserve currency. Unless carbon credits can get pushed past the people, covering all energy sources, then IT would become the world reserve currency. But this is only for settling international imbalances in trade, nothing to do with the little people. The SDR has been gaining ground in this respect, so I won’t count it out. I don’t think the US dollar is going away from US domestic use, though it could get reset after another USG default and/or a fall from world reserve status.

          • Nonetheless, the goal seems to be to create some sort of internationally accepted currency, dollar based or not …

          • objektwerks

            I strongly concur with your assessment. A global currency, much less a global government, is counter intuitive to the tribal and individual nature of humans. The fight against the IMF/USD is well underway in earnest. If anything, the world is decentralizing. I’m betting on human nature and the endless pursuit of liberty and freedom as the driving forces behind future events.

        • Gold is always valuable. To wait until you need it to buy it probably guarantees you won’t be able to get it…

    • Danny B

      Re: Zero Hedge,,, it didn’t even work.

      The numbers just didn’t come out as planned by the Neo-cons. I’m not sure if any of their plans work out.

  • Bruce C

    Convincing everyone that the world is in deflation provides an excuse for more “money printing.”

  • Howard Bernbaum

    It really makes no difference, the result is the same. For the next 400 million years the sun will cycle with spurts of fiery outbursst, slowly expand, have one final convulsion and then collapse into a cooling charred remnant. Life on earth will vanish in the final cataclysm and earth will become a frozen orb, traveling through space, Its path unknown and released from the gravitational bonds that once bound it to the sun. We, as people, will battle each other until nature brings it to an end. Today’s happenings are trivvial in comparison.

  • Danny B

    The FED blew a bubble in tech and it blew up.The FED blew a bubble in RE and it blew up. The FED blew a bubble in oil and it blew up. From Gregg;

    So, do you think that there is any chance that the bubble in bonds will blow up?
    “Forget about the Fed’s language and its FOMC meeting. The real story is the $100 trillion bond bubble (more like the $200 trillion interest rate bubble based on bonds). When it breaks, it doesn’t matter what the Fed says or does.”

    The fire and ice debate is both affected and clouded by the wild swings in valuation. These can turn on a dime with little warning. The change in valuation changes sentiment. Sentiment changes velocity. It is said that “money makes the world go round” NOT TRUE. Profit makes the world go round. We will have both fire and ice. The money supply grew at 6 times the rate that productivity grew. We have had massive inflation over time. We have had massive deflation in the money supply. The FED’s $ 26 trillion was used to offset the huge drop in the availability of bank money. GOV tried to resuscitate the valuation of RE and bring back positive sentiment. They are doing the same thing in equities.

    This “wealth effect” can only be transient if it is due to currency creation and NOT wealth creation.
    Global wage arbitration has ensured that GOV can’t do anything about domestic wealth creation. All the ploys to improve sentiment fall flat after time.
    That time is coming.

    • From Danny B: “The Fed blew a bubble in tech and it blew up. The Fed blew a bubble in RE and it blew up. The Fed blew a bubble in oil and it blew up. Is there any chance the 100 trillion bubble in bonds will blow up?” It’s a rhetorical question of course! Everyone and their brother was forced into equities during the last 5 years. Once the equity bubble pops (imminent) everyone and their brother will be forced into bonds ~ safe haven, a what? Bonds and the dollar.

      Once everyone and their brother has been forced into bonds the final bubble will pop…… on schedule.

      • We are not sure it is imminent. Maybe. Maybe not.

        • Yes I am a tad over the top there. The more I see the more certain I become that we have run the course in equities. But the more certain I become, the more likely it is that I am off in my timing. : )

          I think we agree where all of this will end. Thx for reigning me in.

  • The wild enthusiasm of yesterday’s 300 point rally in the Dow (and today’s 200 point higher overnight into the opening) may not even last out the day. The quiet trading I have hoped for has not materialized – the best I can hope for, is that this rally will carry through to the end of the year. Lets hope so. God help us if equities collapse into the close again today.

  • john cummins

    BOTH, fire followed by ice.

  • dave jr

    The world will end in fire for those invested in ice and the world will end in ice for those invested in fire. Or the world could go on for millions of years with or without investors and their arch-nemeses, the authoritarian manipulators and with or without any gnashing of teeth. Simply find your place and be happy with it. Unfortunately, there are the unhappy who think others possess theirs, and need to gain it by hook, crook or any perceived effective, if not somewhat acceptable means.
    Invest in yourself, your abilities, and all that you deem worthy among your family and friends and that which you can trust or confront face to face. Then you are the master of your own destiny. The war can go on around you. If it arrives on your doorstep, they can take your stuff; but they can not take your ability or knowhow to replace it with bigger and better without diminishing their prey (take your life). If they do anyway, out of ignorance…go fish!, because I wouldn’t want to be here anyway, worrying about the prospects of others arguing about, or contributing to fire and ice.

    • dave jr

      With nothing to do but betting on the actions of others is to be crippled…self inflicted or not.

  • Bruce C

    I can understand price deflation as a result of decreased demand (whether it’s due to poor business prospects and thus less capital investments or limited consumer incomes or even just a change in sentiment, for example, people choosing to save/invest for retirement instead of consuming so much in the present; or, because of ZIRP, the paying off of existing debts as the guaranteed mathematical equivalent of earning the debt’s interest rate + one’s marginal tax rate on savings (sans the liquidity).)

    However, other than existing debts paid down by businesses and individuals, I don’t see where any other existing debts may be extinguished. Therefore, I don’t see how there can be “tremendous” monetary deflation. (Understand that when a debt is paid off the “monetary base” is reduced – or deflated – by roughly 90% of the amount.) Credit/debt is continually increasing, not decreasing, so I don’t see how there can be any net monetary deflation.

    At this point, things appear differently from different perspectives.

    Starting with a global macro perspective, foreign countries hold US dollars in reserve either in the form of US Treasury bonds or physical but mostly (I think) digital cash. They use those dollars to buy oil and any other commodities priced in dollars. That’s just the most efficient way to do it. If, however, commodities become available in other currencies – especially in one’s own – then US dollars become far less important and thus the US dollar will lose value. That also means that they will either not be accepted as payment for foreign exports/US-imports or they will simply be returned to the US and not used to buy US Treasury bonds. Up until now, it is said that the Fed’s QE programs have exported inflation to other countries which is one explanation of why Americans haven’t experienced much price inflation. That means that the US dollars/FRNs that are paid for imports (remember the US has a chronic trade deficit) are increasingly less valuable every month, so the foreign exporting countries are being paid in devalued dollars every month. If/when those dollars/FRNs come back to the US “we” will experience price inflation of everything. Ironically, that is one of the downsides and conundrums of the “strong dollar” because as other countries start to implode economically, and the carry trade investments start to unwind (e.g., the Emerging Markets and Shale oil) then the rise in domestic assets (e.g., equities, US government bonds, real estate, etc.) will -“eventually” – be understood to mean that it is the currency that is overvalued (i.e., way too plentiful) and not the assets. That is when a critical psychological and social shift can occur, which is basically what triggers hyper (price) inflation.

    Now, from US domestic perspective, the Fed’s ZIRP and QE programs have kept interest rates down and effectively removed non-performing loans from bank balance sheets. Although it is said that the QE bond purchases simply went to increase the reserves of the primary dealer banks and have not therefore increased the M2 monetary base, that is only partially true. QE 3 in particular funded the entire US government deficit and that money did enter the “real” economy and thus did increase the M2 monetary base. The original $85 billion dollar per month monetization schedule exactly matched the monthly deficit at that time. QE 3 was “tapered” as the Fed deficit decreased. All the while there was price inflation in every area of government largesse – education, healthcare, food, energy, and insurance (but more because of ZIRP than QE), but not as much in other areas (hence the confusion and relatively low “headline” inflation data). Now that QE has formally ended (except for the refinancing of existing bond holdings at maturity to maintain balance sheet levels) we are in a a kind of sweet spot but it will probably be transitory. Because of the economic slow down in other countries, investors are fleeing to the “safe haven” of US assets – equities, gov. bonds – but as the value of those assets continue to climb people will begin to realize that dollars aren’t as rare/valuable as they thought, because there are so damn many of them (the fact that they’re digital only makes it worse). At some point people are going to start thinking about”the greater fool” arrangement. When everybody starts wondering who the fools are they will begin realize that its themselves. That’s when that psychological shift occurs.

    I gotta go with fire on this one.

    • As we pointed out, it is difficult for a real monetary deflation to take hold in an era of central bank money printing.

      • Bruce C

        Well, yes, by definition: “money printing” implies a one-to-one increase in debt (balance sheet “liabilities” – the newly created currency – must equal “assets” – the bonds purchased.)

        However, where we may differ is in “price deflation”. I say it can result from a lack of demand or physical limitations of economic growth. Just because the existing monetary system requires a certain amount of economic growth doesn’t mean it is physically possible to fulfill. Math v. Reality. Just because excess cash/currency is created via CB “money printing” doesn’t mean it will be used. Examples are “excess bank reserves” that build up at the dealer banks that are not being “consumed” by bank lending (lack of consumer demand), and – another proximate measure – “money velocity” is low due to lack of demand and economic transactions, at least relative to the exponential rates demanded by the current monetary system’s model.