Bill Stockwell has come up with this chart showing a 'ripe' ascending wedge in interest rates on the ten year note. His interpretation is a jump in inflation, which could be, although it could just as well be deflation...all we know is interest rates are ready to jump, as these formations 'pop' rather fast...
7 comments:
Wouldn't you think the rise in the dollar and the decline in gold (lower portions of chart) would portend deflation?
Hi Gail,
Yes, I do really, I think deflation is the most likely...but I have to give a nod to the other side occasionally, in case I'm wrong...It's an inexact science...
The real unknown is if/when the 'bond vigilantes' as they're known, decide to withdraw all support from the U.S. bond market..That would probably throw the U.S. into default...similar to Greece...There's no way to know when that might happen.. That 'could' run against the deflationary tide...
Many crosscurrents here, never seen before..
Best Regards,
Mark Lytle
Thanks Mark. Have a great Easter!!
Mark - I've been thinking about something today that I had never considered before. We've all been hearing about the possibility of hyperinflation sometime in the future because of all the money printing. It seems that US (and maybe even global) hyperinflation would be impossible as long as the US dollar is the reserve currency. For example, if oil were to go up to a very high price again, wouldn't it simply go back down as it did in 2008 because everyone in the world would cut back on using it again? Maybe hyperinflation can only happen to small individual countries that use their own currency. Just some thoughts and wondering what you think.
Gail,
The way I visualize a future possible hyperinflation scenario, should it happen, is related to the way the credit crisis of 2007 unfolded. In a nutshell, the banks of the West finally ended up with so many non-performing loans, that commerce, expecially between countries, essentially ceased. If you look it up on the internet, the Baltic dry index, you can see what happened. It collapsed. No trade between nations for a while.
Example:
A company in country 'A' (hereafter called company 'A') buys 100000 widgets from a company in country 'B'(Hereafter called company 'B').
Company B' then manufactures the widgets and sends them by ship to the port in country 'A'. The captain of the ship, sitting in the harbor of country 'A' then waits for a representative of the bank holding the money for company 'A' to produce a 'Letter of Credit (LOC), to authorize unloading...With the banks all wobbly, the ship captains stopped accepting LOC's for a while, afraid that the LOC's were essentially empty, and fraudulent, as the banks issuing them were effectively bankrupt.
The governments of the world fixed the credit problem temporarily by buying the bad assets of the banks, and guaranteeing the LOC's...
Now with all of the nations of the west full of these toxic assets, we are now coming to the point where countries are taking the place of banks as institutions not to be trusted, and the effect is that the bond ratings go down and the currency becomes discredited, then even if demand for, say, oil goes down, the price doesn't go down in dollars because people think the dollar has little or no value. This can completely reverse a deflationary spiral. Put another way, the price in Gold for a barrel of oil can go down (deflation) but the price in dollars, reserve currency or not, can go up because the dollar becomes viewed as an inferior, wobbly and bankrupt currency of an inferior and dying economic system.
Think what happened to the Mexican Peso many years ago, it was devalued to the point where it almost wouldn't buy anything. Even during deflation, a country with bad currency and debt problems can find it can take 3 or 5 or 20 times as much as their currency to buy anything because simply, because no one much believes in it..And a drop in demand for commodities like oil won't fix it either, because the currency is considered to be garbage, and who wants garbage in payment for a debt owed?
Hope that helps,
Mark L.
Gail,
It occurred to me just now, to add, that if the governments had stayed out of the banking system, as they did after the 1929 crash, you would have just plain jane deflation. But because the governments of the West didn't let the banks fail, and insanely decided to absorb the all of the mega-bank's huge debt loads, that's what will probably down the road lead to the destruction of the currencies of the West, and effectively Hyperinflation for it's inhabitants. I still think deflation probably wins for the intermediate term,
but only until the debt crisis goes full bloom, then all of the currencies of the West, including the dollar, starts into a death spiral, and we all have better moved to precious metals by then...Hopefully, that's at least a couple of years down the road...
Regards,
Mark L.
Thanks, Mark. Some interesting thoughts - it was really nice of you to take the time to write these replies.
I hope you and your family had a great Easter.
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