The Real Revolution is Fighting Asset Inflation

Asset Inflation Can Cause Starvation.

Update: Very radical economists like Scott Sumner from Bentley College want peddle-to-the-metal low interest rates long term, in order to juice the economy. I believe this will result in even more asset inflation. I wrote about Sumner on Business Insider with the link featured below. He does not fear very expensive oil, which means your prices at the pump could soar for gasoline. If they don't, you know that the nominal folks have not caught the ear of the Fed, and that assets could lose their artificially inflated luster.


Update: The Beige Book is out and CNBC says that corporations are not able to push prices through to retail or the consumers. Here is the deal: Steve Liesman says they are going to try to push these price increases through again. Don't bite folks. Stay the course. Don't accept the increases. Shop down to Sam's Club which is seriously lowering prices. Costco is over charging. Protect yourselves and shop at Sam's until Costco comes around.

Update: We know that asset inflation drove prices up in food in 2007, causing some in West Africa to starve to death. We know Goldman and others engage in that churning of contracts that ultimately gives birth to higher prices when underlying demand is not increasing. But many do not know that the Fed has a lot to do with this and works in easing interest rates to hurt consumers everywhere, especially in poor countries, as they are unable to cope with asset inflation.


The discussion below has become one of unintended consequences. The effort to cause the dollar decline in the face of Euro weakness is failing. There is a chance of a double dip and even of a depression. The G20 leaders are split. Europe is afraid no one will buy European bonds. So Europe, being afraid of inflation because of history, will cut budgets and shrink growth. The US, which fears deflation because of history, wants to continue to prime the pump. However, it is likely that the voters will rebel. If Summers and Geithner get their way, it is possible that the dollar will decline versus the Euro. However, it remains to be seen if this decline will be massive and uncontrolled. The reason we don't know is because we don't know how much Europe will shrink, how much they will keep to their budget controls, etc. If the dollar weakens and the world deflates, we could have asset inflation and a major recession at the same time.

President Obama gave an ominous speech to theG20 in June 2010. He said that America can no longer be the purchaser of the world's goods. Well, maybe the citizens should have been bailed out instead of the banks, Mr Obama. I have been harping on this subject for a long time. You kill the golden goose of world prosperity, the US consumer, and you kill the world economy. There will be no consumers to take their place.



Of course this Larry Summers led insanity of a weak dollar is messing with world recovery.Why? Well, because we have a carry trade that is inflating the value of assets everywhere. I repeat, our weak dollar is inflating the value assets everywhere. This must stop. I repeat, Larry Summers, this must stop.

This is a valuable lesson in unintended consequences of messing with the free markets. While the free markets need to be regulated they do not need to be manipulated in such a way as to put the world economy in danger. Americans need to be made aware that as assets inflate, wages are deflating in a world competition for cheap labor. This is a major crunch and attack on the standard of living of mainstreet.

The US is just going to have to face facts. We are Japan. We have zombie banks. We need a strong dollar both for the world economy and our own citizens. It is the only raise our citizens can get, in order to avoid skyrocketing overpriced gasoline, houses, etc. Wake up Larry. Hello Larry. Are you listening?

It was reported today that the FHA is considering tighter underwriting standards for housing. Well, that is important because it will help the dollar, and slow the housing bubble that the FHA is creating. Economic forces are powerful. We have to have better underwriting because no one will buy the mortgages except for the Federal Reserve private bank if we don't up the standards.

Update: The Fed will have to choose between the middle class and the banks.

There is a choice coming. I don't know if it will be this year or next. But clearly the private Federal Reserve Rip Off Bank will have to make a choice between the banks and the consumer. The consumer needs a strong dollar, and needs higher interest rates to put a stop on the dollar slide. Yet they cannot raise interest rates with the massive real estate issue dragging on the economy. Actually, real estate prices will decline further than they already will decline if interest rates are raised! This will cause fewer loans to be paid back to the banks. While the banks want inflation on one hand to lower the value of the loans, the accompanying interest rate rise will hurt the bottom lines of the banks!

While banks are borrowing from the Fed at ridiculously low rates, they are investing in treasury bonds, keeping the bond market going. They are not making the money they need to be making by lending to customers. They would make much more that way. Their return on investment is dismal, as the charts show at the above link. As I argue below, the consumer cannot afford exploding asset values, and gas can't go to 5-6 dollar a gallon. But the Fed is going to have to choose between massive asset inflation and bank solvency. They are going to have to raise rates and that bodes ill for the biggest banks, ie, Wells Fargo, JP Morgan, Citibank, and Bank of America.But I don't see them raising rates when the alternative is an easy money attack upon mainstreet.

In the long run, banks could actually make money if assets were not so inflated. They would loan money if assets were fairly priced.

The Real American Revolution Is ON NOW!

Be sure to take the frugality poll down the page. I want to know over time how people are thinking about thrift and spending.

Americans must use their brains in order to defeat the banksters who have attacked that average American with upside down Class Warfare. Don't let CNBC and their minions, Cramer, Kudlow, Burnett, or any other commentator tell you that Class Warfare is being waged from the bottom up. I watch them daily and have heard this over and over from them. It is not! It is being waged from the top down. I would suggest to you that there are only two ways to fight this class warfare. I have commented extensively about the first way, that is, to refuse to do business with the international bankers, ie, JP Morgan, Wells Fargo, Citibank, Goldman Sachs and Bank of America.

I have stated elsewhere on Hubpages that these banks have waged a war of toxic loans and usurious credit card and commercial loans against the average American. I have stated how to fight this bank abuse and there will be many links below to further guide you into a public and/or private protest of these banks.

But the central bank of these major banks, the privately owned Federal Reserve Bank, has embarked on a weak dollar policy. We must fight this policy with budgetary restraint in household spending. The investors see the Fed putting the US into debt by an additional 12 Trillion dollars, bringing the total from 11 Trillion to 23 Trillion almost overnight. I have railed about the thieving nature of our Federal Reserve bank and Treasury Secretaries Paulson and Geithner in other Hubpages. However, I have not spoken about the result of this pumping of money into the system, asset inflation.

Asset inflation is robbery of the average American. Prices explode at the pump. There is no really sincere effort to free the United States from foreign oil, and oil in general. It is not the oil companies that have pushed up the price of oil and gasoline. It is the investors like those who invest through Goldman Sachs that have driven up the prices of commodities, resulting in asset inflation. Asset inflation is theft pure and simple. Asset inflation has been brought on by massive shorting of the US dollar or the borrowing against the dollar. This shorting profit is then used to buy commodities, driving up the costs of everything for the man on the street.This casino scam is called the carry trade. The Federal Reserve facilitates this carry trade by buying debt. The casino that drove the markets off the cliff is working overtime to do the same thing again, and with leverage! Nouriel Roubini has said that the carry trade will unwind violently.

But there is a way for Americans to fight asset inflation. Don't buy what you don't need. That is the way to fight asset inflation which will make your standard of living unbearable. If we buy houses and bid against one another the houses become too expensive. We saw what happened the last time that happened. And the powers that be, ie the Fed, wants this bubble to happen all over again. Don't buy houses or gasoline, except when absolutely necessary. Rent, and drive less. If you buy houses in this environment, copper, and the building materials will also continue to be driven up.

You can make the dollar stronger and you can revolt against the powers that be by simply being frugal. Americans are destroying their own financial health by not being frugal. Savings are being punished, as the dollar falls in value. Don't spend, and accumulate your dollars. There may be forces on the way that will make those dollars more valuable, especially if the banks are forced to raise their capital requirements to account for all the crappy and toxic loans that remain on their books.

Just remember, if this were an ordinary recession, these banks would be coming out of this funk by now. But they aren't. They are struggling. Please folks, give yourselves a raise by being frugal. Don't play into the hands of the thieves and robbers who want you to pay more for gasoline and other commodities.

Americans can, above all other peoples, stamp out this inflation threat and asset inflation out. We can do so because our economy is 3 times larger than China, and we have the power to change the values of assets if we spend less on them en masse. We must do this because it is the patriotic thing to do. And it is the prudent thing to do in the face of dangers that remain to the economic recovery. The recovery has been based upon reflation of assets and will hit us hard in the wallet if we don't put the breaks on the excesses of Wall Street and the Federal Reserve Bank.

This revolt is not a call to arms, but rather is a call to sanity and to the values of frugality and thrift that builds real growth of economies over time. Please listen and take what I have said here to heart.

I believe in the end the Fed will be forced by the Bank of International Settlements to raise bank capital requirements, and establish other deflationary or at least disinflationary practices. But we can help this process along with frugality!

Frugality Poll

Will You Change to a More Frugal Lifestyle Permanently?

  • Yes, the right thing to do is to create wealth through frugality.
  • No, the government wants us to spend and spend and go into more debt, so I will.
See results without voting

What Is an Asset Bubble?

CPI and Inflation in a Bubble Economy.

CPI is core inflation, according to the Federal Reserve Bank. CPI is based upon rents, and is based upon wage inflation. Of course rents are declining and wage inflation is diminishing. So on the surface inflation looks in check. That is what the media will tell you as well.

However, in a bubble economy,( and don't be fooled, another bubble is forming in lots of areas), the CPI does not capture the true rise in the cost of living. Assets are not weighed properly. What we really have are declining wages and increasing prices for gasoline, and agriculture commodities. Commodities tied to Chinese economic growth have been the fastest growing. This hurts the consumer and is inflationary. We really, as a people who have not had increases in real wages for a decade, need the dollar to be stronger. We need a deflationary push to give the United States consumer real purchasing power.

That deflationary push will only come if people make a serious effort, as a society, to break the cycle of credit and asset inflation. Otherwise we will have difficulty paying for basic necessities. Oil is marching up to 100 dollar a barrel and materials push up the costs of cars, houses and large consumer items.

Stock Market Behavior and the Value of the Dollar

You would think that the stock market would rejoice at a stronger dollar. With a stronger dollar, the consumer has more purchasing power, and the consumer is able to contribute a greater punch toward economic growth. Yet the stock market could care less, apparently, about the American consumer. The US stock market investors have apparently taken the view that the foreign consumer and foreign economic growth is more important. However, it is very clear that the United States consumer is still king and can still determine the rise and fall of the entire world economy.

That is why, of course, that if any bailout were to have any effect, it would have been established to have helped the balance sheets of the average American families. Of course that did not happen, and the big and greedy banks were bailed out in spite of their bad behavior rather than the strapped American consumer.

But the American consumer is crucial to world growth. If there is no money to bail him out then the government must give him more purchasing power. Deflation is the only way that purchasing power can be manifested. Continual inflation of assets is robbing the purchasing power of the golden goose of world prosperity.

In the past, America could inflate without harm to the consumer. The dollar was very strong, and the consumer had little debt and an abundance of savings. That was what happened in the 70's and it resulted in a recession in the early 80's. But America cannot do that to her citizens now, because there is little savings, and way too much personal debt. The consumer needs a strong dollar no matter what the stock market says!

The original American revolution was for independence from the Rothchild owned Bank of England. If we are to maintain this revolution we can, by frugality, kill the credit bubbles and make the Federal Reserve Bank irrelevant.

Bubbles Are Happening Frequently, a Dangerous Sign for World Economies.

What is the Prognosis for This Sick American Economy?

It is likely that inflation will be abruptly stopped in its tracks, and interest rates will rise, but for a reason that is related to other returns in other countries. Australia's central bank raised interest rates. As others do so, capital will flow to those countries to take advantage of rates that are better than US rates. It will be necessary for the Fed to raise rates, which is deflationary, and is going to be a major drag upon the stock market and on the housing market, that is already reeling with massive option arm and prime foreclosures. These are hitting now with increasing force.

As interest rates rise, and the economy slows again, the stock market will lose value. How much? No one knows, but the loss could be large. If you have capital, preserve it! However, understand this, another housing bubble will come if rates are not raised sufficiently, and this is an aim of the central bank.

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Comments 33 comments

Tom Whitworth profile image

Tom Whitworth 7 years ago from Moundsville, WV

Gary,

Bernanke has tipped his hand he is now going to at least give the appearance of fighting inflation. He warned aginst increasing deficits which are allready built in to the ongoing federal budget.

I believe in saving but I'm not sure it's possible in dollar denominated securities or equities, and particularly not cash.

If Bernanke starts raising interest rates the peak in gold will swoon. The best way to maximize value may be to pay off low interest loans slower. Pay back with inflated dollars which are worth less in the future than they are now.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

But Tom, if everyone made a conscious effort to be frugal, then the dollar would be stronger. I don't say save in the big gambling banks, who use deposites to play their overleveraged casino games. What I am saying is that people can save in credit unions, at home, and just turn over dollars less quickly. That will give a strong boost to the dollar in the face of the Fed and government's efforts to cause the dollar to decline.

I personally think that we are running out of bubbles. What if the housing bubble created on the low end crashes again? This will be very deflationary. Also, frugality is deflationary. It is like giving people a raise!


Tom Whitworth profile image

Tom Whitworth 7 years ago from Moundsville, WV

But Gary, the government spending will overwhelm the frugality of all indiviuals. The government is on a spending spree and it's not going to slow down any time soon. Stimulus, bailouts, cash for clunkers, additional $250 per social security recipient, it's unstoppable. Transfer of wealth is the government goal.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

I actually don't agree Tom. Sure, if we buy into the government's spending spree for ourselves, we will end up with major asset inflation and they will have won. But if we are frugal, a credit based economy will change to a savings based economy, and we will win, thus avoiding the inflation tax against the average American.


Hxprof 7 years ago from Clearwater, Florida

Bgmall, I agree with Tom on this one-without stopping the government from printing and spending dollars anything that we do may not help the country as a whole.

I DO agree that now is the time to eliminate our personal debt,to be frugal and watchful. If we're in debt when the poop hits the fan (and IMO it will, big time) then we'll either become beholden to the government or live in the wild. May as well get the camping gear if one is going to continue spending.


TheMoneyGuy profile image

TheMoneyGuy 7 years ago from Pyote, TX

Bgamall,

I love your article, but I don't think the average Americans frugality will change the situation, and here is why.

And government spending is exactly why, it makes no difference what you or I do, if the government gives Haliburton a Trillion dollars there will be a Trillion more dollars in circulation which will be in the form of Salary, dividends, bonuses, and the spending on supplies and what not and the eventual trickle down, even worse you have the synergy effect each one of those dollars once deposited into a bank turns into 100 more dollars of debt due to the nature of our fractional reserve system.

It is not what we spend, but what we as workers get paid that will devalue the dollar, remember 55% of our population is directly employed by the government, and another 25 percent is employed by a prime contractor of the government. If we spend it or save it makes no matter, if we take it in the form of a paycheck the damage is done regardless.

TMG


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

You guys make good arguments, but it is still my view that this equation includes supply and demand. The government is working overtime to secure supply of loans. However, that apparently is not filtering down to the average Joe. And the demand part of the equation is something they have no power over. They cannot force people to borrow.

I am in the inevitable deflation camp. You guys are in the inevitable inflation camp. There are strong arguments justifying both positions. We will see.

It is my view that banks will be required to raise more capital, and we saw how that affected Japan. Add to that a continuing housing slump coupled with a foreclosure tsunami coming and there is a strong case for deflation. Thanks guys for taking time to read my Hubpage.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

As a continuation of my last comment, take a look at this article about Pimco's exit from Mortgage Backed Securities. This is highly deflationary: http://www.marketwatch.com/story/pimcos-gross-unwi...


eovery profile image

eovery 7 years ago from MIddle of the Boondocks of Iowa

IF I owe $10,000 and inflation takes off an cuts the value of money 1/2 does that mean I will really only owe the equivalent of $5,000?

Keep on Hubbing!


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

If your paycheck is then double the answer would be yes. However, this would take over 10 years. Also, the interest will likely go up on the balance.


Tom Whitworth profile image

Tom Whitworth 7 years ago from Moundsville, WV

Gary I currently have a $16,500 loan at 2.00% I see no need at the current time to be in a hurry to pay it off. I keep making minimum payment and investing the difference in a commodity such as silver. I also like Volker's suggestion.

http://247wallst.com/2009/10/21/the-idea-of-breaki...


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Oh I agree Tom. I am saying we can protest banks by doing business with lesser banks and by avoiding the biggest banks, iet JP Morgan, Goldman Sachs, Citibank, Bank of America, and Wells Fargo who scammed us. BTW that article is terrific. Here is my response about a temporary and prudent nationalization: http://www.dontpaycreditcards.com/BankNationalizat...


Home Girl 7 years ago

Just go to the forest, dig a big hole and sit/live in there: no electricity,no car,no TV or computer, no nice clothes(who needs it in the forest anyway), no fancy restaurants, no bank loans,let those bastards from the big banks starve!!! That's exactly how Revolution in 1917 in Russia started, just look at their economy now... no, better not to look too closely, might be too stressful. Just drink a very deluted tea in the morning and praise the World Frugality and your personal contribution to it.


Tom Whitworth profile image

Tom Whitworth 7 years ago from Moundsville, WV

Former Federal Reserve Chairman Paul Volker proposes beaking big banks up into functional entities. Separate investestment entity from savings and housing loan entities.

http://247wallst.com/2009/10/21/the-idea-of-breaki...


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Home girl, I am not advocating living like a monk. I am advocating cutting back and if enough people do it prices will come down. They tried charging 5 bucks a gallon for milk a few months ago and people quit buying. It is 3 bucks now.

Tom, separating investment banks and savings banks is crucial and was done in the Great Depression. It will cause less gambling with real people's money.


Tom Whitworth profile image

Tom Whitworth 7 years ago from Moundsville, WV

Amen


Sandyspider profile image

Sandyspider 7 years ago from Wisconsin, USA

I can't agree more on what your wrote on this Hub.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Yes Sandy, and oil is going to 80 bucks a barrel. I only hope it doesn't go over 100 dollars.


Hxprof 7 years ago from Clearwater, Florida

Bgamall, after reading more on deflation I'm much closer to your camp in terms of what we can expect in the near term. As you say there IS a case to be made for both inflation and deflation, but it appears to me that deflation is more likely-at least near term.

Thanks for your thought provoking articles on economics.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Thanks Prof. Strangely enough, Larry Kudlow, of whom I am not a fan, started talking one day about the money multiplier as a measure of bank lending and velocity of money. Not to say we don't risk inflation, but deflationary pressures abound. One possible tell tail sign of inflation will be massive asset inflation first. If that happens, and I don't think our average Joe can take it, then all bets are off regarding inflation and massive financial turmoil.

Bottom line, Prof, the Fed has to keep a lid on asset inflation and pop the bubble if it gets out of control. Oil is close to out of control, but not there yet.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

I do think some commodities are experiencing asset bubbles. Gold is one that comes to my mind right now. Gold and the US dollar are inversely related, and the current rise of Gold has not been matched with a similar decline in the US dollar. As soon as the Fed Reserve raises interest rates the carry trade will start to lose appeal to traders, and hopefully any raise in the Fed Interest Rate will provide a correction for commodities that are overpriced right now. You can hedge your exposure to rising gas prices, I have even written a hub detailing how a individual consumer can do so. Gold is a way to hedge against exposure to a increase of dollar inflation. A weak dollar right now is better cause its the only way that our trade balance can balance out and the only way our goods can compete with goods from China. A weak dollar makes our goods cheaper aboard, creating more demand for our goods, which is better for our factories and blue collar workers and overall will help us recover. Granted, I don't want to pay more for a commodity such as gas/oil but there are ways to reduce that exposure. I personally think that a non profit banking system would be the best thing to have - eliminates any need for future bailouts.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Forex, did you notice that our trade deficit increased last month? Hardly a vote of confidence for our goods and our strategy. It could backfire bigtime so that others don't by our goods and we can't afford them either!

That would be the Larry Summers disaster since this dangerous scheme is his idea.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

yes I did, but only because we imported more. The volume of U.S. trade, exports plus imports, picked up last quarter for the first time in a year. Based on third-quarter GDP data, exports increased at a 14.7% annual rate last quarter, the first advance in a year and evidence of stronger global demand. Imports rose at an even faster 16.3% clip, the first upturn in two years, reflecting the recovery in domestic demand. A shrinkage in the trade deficit is a key support under the dollar: The less the U.S. needs to borrow from abroad, the less downward pressure on the greenback. How can a weaker dollar not make others buy our goods? Yes, it can get to a point that we may not be able to afford to buy goods from other countries, but at least we'll stop importing/consuming so much. I think a weak dollar is how things are going to balance out.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

No Forex, you are assuming that the Chinese will buy. The American consumer is like a bird in the hand, and if he tanks the world tanks. You are assuming a decoupling that is not proven. You are, like Summers and Bernanke, gambling on world consumption. That could prove to be a big mistake.

I would say that it would be better to strengthen the US consumer with a strong dollar. He won't buy on credit but he will buy. This we know.

But if gas goes to 6 dollars a gallon, he will not buy.

Nice chart too.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

Given that US exports increased by 14.7% last quarter because of a weaker dollar, I'm pretty confident that foreign consumers will purchase more US products cause they will be cheaper. As the dollar depreciates, the value of other currencies appreciate making their domestic goods more expensive. As Obama said in his speech yesterday, the Chinese need to become less reliant on exports to drive their economy and increase their consumer spending.If this would happen, you would see the trade deficit balance out, and the Chinese would not have to purchase US Debt as much. Yes, in the past when the US sneezed the world caught a cold, but I think that in the next decade we will see a change in which the US will have a diminished role in the world economy. Especially if our trade deficit and budget deficit continue to go unchecked as it is. The primary hurdle for our trade balancing out is that China needs to let its currency exchange at market prices just as the other major currencies. Its because of China's practice to artificially keep its currency low that has created this economic situation. One way to counter that is to have a weak dollar. Its also because of their practice, they are suffering as well because they have so many dollars in their reserve that are losing value as the dollar declines. The ironic part is that foreign investments into the US from china and other foreign countries have reached a 11 month high. The latest data shows China, Japan and UK increased their demand for long-term US financial assets and Treasury debt in Sep. Most of the huge overall inflow was in shorter-term assets such as stock swaps. The net inflow was Usd 133.5 bln, biggest in 11 months, following a revised larger Usd 25.3bln inflow last month(Usd 10.2bln). We can not be the worlds primary consumers forever, and a weak dollar will help curb that consumption. Sure, I would like a strong dollar so my money can have more purchasing power(who wouldn't), but at the same time looking on a long term basis, a weaker dollar is beneficial for us as a whole. I know you may not agree with that, but we enjoyed years of cheap goods which fueled our consumption and we are going to pay the price for it, either now or later. I think we already got a taste of it last summer when gas prices reached $4.50. The US government says it wants a strong dollar, but thats only lip service. The US government would rather pay .25% interest on its $12Trillion debt right now then 3% interest and one reason why I don't expect the Fed to raise rates any time soon, possibly not till the end of 2010.So we will continue to see the dollar weaken further and asset bubbles increase. If the US government wanted a strong dollar they can take measures to prop it up. However, if the US government allows the dollar to weaken beyond an acceptable level to other central banks the other Central Banks can intervene indirectly to prop up the dollar. We just saw a bit of that earlier today with comments from the ECB President. The only reason why the ECB is not concerned about a weak dollar yet is that it has not impacted European exports to any great extent.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Forex, you are so bound by crazy Geithner and Summers and Bernanke logic. I am astounded:) Look at it another way. The proven consumer is the US consumer. Deflate and he will buy. The unproven consumer is the Chinese consumer. I realize that Wall Street wants to capture him in debt, but I doubt if the Chinese government will let that happen. If it doesn't happen, the three stooges I just mentioned will look like fools.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

You make a good point about the chinese consumer being unproven, but only because they haven't had the chance to do so. Deflation in the US would actually benefit China more then the US consumer. Since the US gov. is borrowing more and the average US consumer is saving less. Deflation causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship if the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property. It also amplifies the sting of debt, since—after some period of significant deflation—the payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Consequently, deflation can be thought of as a phantom amplification of a loan's interest rate. If, deflation averages 10% per year, even a 0% loan is unattractive as it must be repaid with money worth 10% more each year.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

Well, if a person has no liquidity and push comes to shove, they should be punished for it, and cash always, always should be king. If you are going to be in an illiquid asset since when do you do it without cash? Only lately. Only because of the insanity.

I just want a strong dollar. If that gives us a little deflation then it is better than the tax of inflation.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

I agree, I myself would like a strong dollar so I don't have to pay high prices, but the feasibility of a strong dollar is near zero. Between the Fed's fiscal policy, our trade inbalance, and debt I don't know when we'll see a strong dollar. A weak dollar is the only way things are going to balance out from what I can tell, and we'll just have to pony up the extra cash for stuff.

If I was a homeowner, I would not want to be 'punished' by deflation. I would look at some way to hedge against a fall in my house value. Hmm, now I have something to research: how to lower your exposure to a possible decrease in your home value. If people could hedge their exposure to a decrease in their home value, think of all the people who wouldn't be upside in their mortgage because their portfolio would offset that loss. It'd pretty much be the same method of how a person can lower the exposure to rising gas prices.

It is pretty crazy out there, and people like Cramer don't make it better.


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

They can hedge with the Case Shiller index I think, Forex.


ForexCashBack profile image

ForexCashBack 7 years ago from Corvallis, Oregon

Yeah, when I did some research I came across that index. I think that if a person wanted to hedge against something, the means to do so probably exist! I was not expecting to find a way to hedge against falling home values. I decided to write a hub about it:

http://hubpages.com/money/Reduce-Your-Exposure-to-...


bgamall profile image

bgamall 7 years ago from Las Vegas, Nevada Author

BTW Forex, the banks will not loan when they know assets are too expensive. That is a big issue. Assets are inflated and if the banks loan they will get burned again. I speak to this here: http://hubpages.com/hub/If-I-Were-A-Bank

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