A Flood of Money

Should we expect deflation first? Then inflation? Then hyperinflation?

Can anyone clear a question up for me? 

I can see how the printing presses might run even faster  if no one is willing to lend money to a particular government at a rate they are prepared to pay for it. But what happens if private and institutional lenders around the world are willing to lend to a government that is seeking to borrow? Does this mean they avoid the need to print/create new money?

yes--but 11 of the 13 bullets above are just guarantess of deposits....if they "SAVE" the banking system...they never have to print anything......they just made a promise they can't keep.

However, the EU interbank lending and US debt will demand enough printing out of thin air to tumble the world economy anyway...

I wrote following to an earlier post where I quote below but decided to post my comments here since it is up to ourselves to ask the serious questions and take action:

I don't necessarily disagree with the merits of owning precious metals but can you point out how many fiat currencies that have failed that were replaced by precious metals versus how many failed fiat currencies were replaced by a new fiat currency? 

In either case at the time of the failed fiat currency the rules governing the relationship between creditors and debtors have to be rewritten leading to a range of "winners" and "losers" (a hard reset or jubilee that Chris has mentioned).  If you are currently a creditor with wealth to protect one strategy is to buy precious metals as a store of wealth and, regardless of whether they are used as a new currency, if you can continue to own them after the rules are reset, then they could hold their value.  Currently some regions of the world do look at precious metals as a store of wealth and should we see a fiat currency collapse, such as the US dollar, the value ascribed to precious metals will simply be that much higher.

After a "hard reset"  there isn't anything wrong with starting again with a new fiat currency.  We just need to look around us at the efficiency of using fiat currency; conducting transactions electronically is the only viable method of conducting a modern world.  However I think that Chris has pointed out, with brilliance, that currency created out of debt that must grow isn't compatible with a world with physical limits - and humanity is now reaching the limits of this physical world.  Chris has briefly mentioned a cash based transaction system - perhaps something like this will be compatible with the physical world - however I expect that this will be a new fiat currency. 

Chris has suggested that the debt based money system is currently running into the constraints of our physical world.  He may be right.  However our current monetary system has accumulated imbalances that was balanced precariously like a house of cards and this was solid as long as we believed it was solid.  However as the imbalances continued to accumulate it took a trigger (US subprime) to force the system to begin to reevaluate itself - and now the system is moving backwards (deflation) unwinding these imbalances - taking with it a lot of innocent parties with it.  

Now we obviously can't store our wealth in a future fiat currency that hasn't been created yet.  In our current deflationary environment money does become more valuable - but needs to be watched vigilantly because its value would depreciate rapidly in a hyperinflationary environment and which seems likely since US is not placing limits on how much borrowing (and debt monetization) that it is willing to do.  Also, not all fiat currencies are equally valuable.

So I agree that precious metals are probably the simplest approach - but cash (but likely not US cash) in a deflationary environment might be the most profitable there are other considerations. 

Paying off debt is Chris' number one suggestion.  Why?  So that you don't lose the underlying asset in a foreclosure.  Another reason to pay off debt is because if cash is becoming more valuable, at say 10% per year, then paying off debt gives you the same return on the money plus the rate of interest.

Cutting expenses is Chris' second suggestion.  Just buying and consuming less is the obvious way of doing this but if you consider all possibilities there are a variety of avenues.  Should you move from a suburban to a rural area if you can telecommute or if you are retired or if you can create employment for yourself in a rural area?  The price of rural real estate may be underpriced compared to its true value as we head towards a world constrained by physical limitations. Why rural?  Not only would you be putting yourself closer to your source of food but it may also be easier to develop a network of relationships when everyone in a community knows each other and therefore there is more accountability for one's actions.

Regardless of whether you move or not you can then consider having your home evaluated for energy efficiency and use your money to implement the changes - more energy efficient windows, better insulation, a geothermal heating/cooling system, woodstove, photovolatics, more energy efficient appliances, more fuel efficient car, etc., etc.  How about having a cold cellar built so that you can store food when it is abundant locally so that you have it when it would otherwise be more expensive.  All of these items lead to sustainability in a hyperinflationary environment, the savings are tax free, protect yourself from your deflation (where creditors fall like dominoes and you are at the end of the chain), allow labour in the economy to be unlocked as your money pays others to do this work and helps reduce the impact of the economic slowdown, and protect yourself from all of the other factors that Chris has identified that are down the road (demographics, peak oil, natural resource limitations).

I'd suggest that readers use Chris' link to Amazon and pick up a copy of Deep Economy by Bill McKibben.  His ideas are great and have a look at his section on complementary currencies.

All the best,
James

And what is the potential range in the timeline for deflation and inflation?  days, months, a year or two? 

I think the plan is to print up a ton of Treasuries and Gilts to finance the borrowing for this.

Surely with a flood of new sovereign securities the market is going to become quickly saturated, leading to higher interest rates?

So what is the magnitude of the world central banks printing 64 Trillion Dollars worth of currency? Granted more printed currency depreciates its value, resulting in inflation. But is this resulting inflation likely to be absorbed into the world economies in a matter of a few months? 50 years? Never?

Sure, let's ask the question "Where's this money coming from?"... So... various governments print it. So what? We understand the theory that financial trouble can result. But based on what we know and what we can best project, what are those results? What do honest 2 year / 5 year / 20 year / 100 year scenarios look like?

Giving us a sense of magnitude for various likely outcomes would be much appreciated. Granted this is new territory. And prognosticating, versus reading and disseminating historic facts, is more difficult and dangerous - at least to one's credibility -  but we must be able to suggest some realistic scenarios...

IF there is no run on the banks, there's no money printed to guarantee someone's deposits that they aren't taking out... IF there's no bank failure, there is no money printed to guarantee interbank loans. The gov'ts have put things in place to bolster confidence and the money that the gov't wants to get down into the public's hands is being held up by the banks so the interbank loans are there to ensure each bank that the other bank won't go bankrupt but there is NO money supply creation if these overnight promises don't get called upon. Confidence has momentum, you've seen it rise and especially fall recently... if these moves stop the fall of confidence, then the days and months ahead where there are no bank failures will grow confidence and hopefully, just hopefully we can all see liquidity come back to the markets... who cares if the markets go up, I'm just hoping liquidity comes back. If we do see more bank failures or country currencies going through an increase in volatility, then I'd definitely change my way of thinking but for now, this move is a good move, take it for what it is... re-evaluate, re-hypothesize, observe... Has there been an increase to financial failure over the past few months? Yes. So there's nothing wrong to prepare for the worst but don't let it affect your ability to see what's before you today.

My sincere view is that we fundamentally have a crisis of solvency, not liquidity.

That is, most of the world's banks are insolvent and many should be bankrupt.

Thus, a guarantee of deposits is the same as a guarantee of the bank's solvency.  That is, the 'cost' of the deposit guarantee will equal, more or less, the amount by which any given bank is insolvent.

Conclusion: A guarantee of deposits is the same as printing to the extent that the banking system is insolvent.

As we 'delverage' from 40 or 50 to 1 back to, say 12 to 1, my estimate of the degree of insolvency is in the trillions of dollars.

points well taken....and lets be honest--we WILL see dozens and dozens of bank failures in the coming 15 months even if their plan does "work" this will require these guarantees to pay out ( I.e.--Print money )