Inflation or Deflation?

Shelby wrote:Stathis wrote, "The second rule of thumb is to avoid any rhetoric from those who have agendas, such as that found from those who sell securities or gold."

Stathis again bashes gold, even though he got it wrong in 2009:

http://www.marketoracle.co.uk/Article19888.html#comment91123

Stathis's basic misunderstanding is he doesn't understand the concept of real interest rates. He should search and read my article, "How Deflation Is Inflation".

Depression is not monetary deflation. Monetary deflation means the value of the currency is rising. From 1929 to 1933, there was deflation, because Americans who still had a job were eating more butter, more chicken, etc, because everything went down in price. Thus 1929 to 1933 was not a depression, contrary to what you have read from others. Yes 1/5 of the population lost their jobs, but the other 4/5 were buying more with their wages.

The reason that the value of money rose from 1929 to 1933 was because the dollar was gold. But in 1934, FDR confiscated the gold and made it illegal for Americans to get gold for dollars, and thus the Great Depression began in 1934. After 1934, prices rose and people could buy less, even though FDR created many jobs with New Deal govt work programs. Hey why use shovels, when by using spoons you can create more jobs! But you don't create more production, and thus prices go up! By WW2, Americans could not even eat butter nor chicken. Everything was rationed (prices were skyhigh in the black market).

Stathis apparently does not understand that while the prices of houses has fallen, the cost of living continues to rise (check ShadowStats.com for the truth on that).

The cost of living is rising faster than the interest rates that can be earned on bonds.

Thus there is no incentive to hold bonds over gold, because gold pays no interest, but interest rates are lower than inflation. Thus gold goes up in price. And this will continue until the world's fiat system is good as gold again.

We are in the death march for the fiat system. I explained how the interest rates can keep falling forever and never hit 0%:

http://www.marketoracle.co.uk/Article22482.html#comment94490

While Nadeem explained why inflation won't stop:

http://www.marketoracle.co.uk/Article22462.html

Shelby wrote:There is nothing short of war that can stop the perpetually declining interest rates, because each halving of interest rate (which will never reach the asymptote of 0%) allows deficits to double without increasing debt service costs:

http://www.marketoracle.co.uk/Article22482.html#comment94490

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-420.htm#3507

We have +10% SGS CPI now, coupled with asset price deflation, so we already have a form of hyper-inflation:

http://www.marketoracle.co.uk/Article16212.html

Shelby Moore wrote:As I wrote in prior comment, the world is locked into perpetual halving of the interest rates. This is both inflationary and deflationary. It causes the public sector to cannibalize the private sector (insiders borrow at ever lower interest rates and thus can force the private sector out-of-business on a return on capital basis, see also my other reasons in my writings). It can't actually lead to hyper-inflation in the traditional sense, because the private sector will be selling assets to pay for basic necessities which are rising in price.

I have covered this extensively in my writings. I have even debated both Mish and Denninger and most of the major writers.

Read my writings before you go any further.

Shelby Moore wrote:Starting about 14 minutes into the interview, I strongly agree with Erik and Mish that the typical hyper-inflation that Lira experienced in Chile, is not possible, because we are in period where retiring westerners will need to sell assets, as the jobs have all been outsourced and they are retiring any way. Yet we have simultaneously price inflation in basic necessities which will exacerbate because of the perpetual declining interest rates of deficits in the west. There won't be some moment where westerners suddenly abandon the dollar and rush into commodities, because they don't have any cash. They are just trying to stay above water, by selling off things step-by-step to keep up with all the inflation (or drop in real wages which is the same thing).

What Mish fails to grasp is this duality of deflation and inflation and what is causing it.

I have written extensively about this, especially focusing the issues well in the past few weeks of my writings.

1) Public debt is increasing offsetting the drop in private debt. The public sector and insiders are cannibalizing the private sector. Thus we will get increasing inflation as the private sector supply craters. Low capacity utilization is a symptom of this, as the private sector simply can't get sufficient return on capital. Mish misinterprets this as meaning we have an oversupply. SGS price inflation metrics (and similars ones in UK, etc) prove this is not the case. We have oversupply in unnecessary things such as housing, manufactured goods, but not in basic necessities such as food, energy, commodities.

2) As interest rates half, deficits can double, and debt service doesn't increase (and fails as a % of total debt!). This means that westerners can continue to write themselves a blank check indefinitely at the federal level to fund the promises. Of course, this is highly inflationary for basic necessities and deflationary for business.

3) I could go on and on, but just go read my writings. We are in a death debt trap spiral for western civilization. There is no way to get off the hamster wheel. It will end in massive rationing, fascism, death, war, etc.

4) I urge you to read Peter Thiel's article (founder of Paypal), which is linked on my site. It has amazing insight into the battle over good globalization versus the NWO top-down scenario that we seem to be headed.

Folks this is real bad. Much worse than Mish and Erik realize.

This is not deflation and it is not hyper-inflation.

I also made 2 comments on the Lira interview which explain much more about my logic:

http://globaledge.podbean.com/2010/09/10/the-trigger-for-a-hyperinflationary-shock/#comment-418391
http://globaledge.podbean.com/2010/09/10/the-trigger-for-a-hyperinflationary-shock/#comment-418613

SRSrocco wrote:Shelby and Fekete have stated that the US TREASURY rate can keep halving forever before it hits zero. This is like telling a person to take a step toward a line, but only doing so by cutting each step half the distance to the line. Theoretically, you can keep halving your step and never hit the line. But who on earth would keep halving their step forever. Your typical Joe-Bag-of-doughnuts will do it for about 5 minutes, then say, "THE HELL WITH IT", cross the line and say, "HEY...LET's GO GET A BEER."...

SRSrocco wrote:John Williams Sees The Onset Of Hyperinflation In As Little As 6 To 9 Months As Fed "Tap Dances On A Land Mine"

John Williams has been following the markets for decades. His shadowstats website is the only one that reports REAL ECONOMIC STATS that the US GOVT puts out. He has been correct on many forecasts. Again....2 years ago he stated that HYPERINFLATION would hit within the decade. Last year he moved it up to within 2-3 years. Now he says 6-9 months. You can read the post at ZERO HEDGE HERE:

http://www.zerohedge.com/article/john-williams-sees-onset-hyperinflation-little-6-9-months-fed-tap-dances-land-mine

This goes right inline with what GONZALO LIRA states about hyperinflation from a crack in the US TREASURY MARKET. Looking at Shelby and Fekete's assessment on the TREASURY MARKET, I find it works in a mathematical mind, but not in a public who lives by psychology.

Shelby enjoys filling his posts with detailed mathematics to prove his points. I believe math has a certain use in the world, but it fails to forecast the psychological mind.

John Williams wrote:Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt.

shelby wrote:It is about the interest rates. The lower rates is what is causing the interest expense to level off or decline.

...but this is not stopping the parabolic ascent in the deficit, which ultimately is what causes the crack-up and/ or implosion.

shelby wrote:Do you mean that bond investors are not profiting significantly off of lower rates?

Unleveraged bond owners profit little on the halving of rates when rates are so low. When the rate on our checking account dropped in half, from .1% to .05%, as a joke I felt like telling my wife "You've got to spend less; our interest income was just cut in half!" But if my wife checked she would have seen that the actual interest was only a few dollars a month anyway, and in fact we changed to an interest free account just to simplify things.

Leveraged players are profiting, but not without risk. There have been big whipsaws. I suppose if these players and are in on the rigging and can print money to cover margin calls, like we saw with silver, the risk is less.

While I agree that it's not in anyone's interest to cause a flight out of Treasuries or US dollars, the the nature of parabolas is that they are very unstable and sudden changes can occur at any time, as they relentlessly approach the inevitable.

Shelby wrote:It is getting extremely exhausting to correct all the analysts who have real interest rate myopia. I think I am going to give up.

Mish you quote Hussman, and at the link your provided, Hussman's thesis is that the dollar will have quick devaluation in order to offset the lower relative rate of interest paid on dollar versus foreign bonds. However, Hussman seems to forget that in China (and other developing countries) where higher interest rates are paid, the inflation rate is also much higher, thus the real interest rates may in many cases not be that much higher than for the dollar. And his analysis seems to ignore the Yuan peg, which requires dollars to find their way back to dollar bonds.

Mish I appreciated you recent revelations about China and I also agree with you that hyper-inflation is not possible in traditional sense, however I continue to not agree that we have a simple deflationary macro-economics:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-435.htm#3570

Also Nadeem if you are not going to allow me to respond to nonsense and slander, then let's just make this my final contribution to your site:

http://www.marketoracle.co.uk/Article22571.html#comment94711

You know very well that gold is NOT my favored pet investment:

http://www.marketoracle.co.uk/Article20327.html

Please allow this last statement. Thank you for everything and good luck.

The big financial myth-buster of the week is that the alleged deleveraging of the US consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have only pared down their debts by an annual rate of 0.8% since mid-2008.

The Journal writes (emphasis added):

Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.

That means consumers managed to shave off only $22 billion in debt... In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

Whether this is because Americans are stuck on a “buy ‘til you’re bust” mania, or if it’s simply because the cost of living in the US today is so high relative to incomes and other expenses that most folks can’t get by without using credit is up for debate.

Personally I think it’s a bit of both, with some folks obsessively buying the new iPad while skipping on mortgage payments while others are simply using credit cards to try and get by after being unemployed or underemployed.

"hyperinflationary situation there is a shortage of money"

"deflation, ...velocity of money is ultra-slow and falling...mistake ...that deflation is the same as...collapse of the money supply...there is a superabundance of money due to...central bank and the government to pump up the price level. In spite of this, prices may keep falling..."

Time Line?

Between now and anytime in 2011.

At the latest, 2012.

Warren Buffett wrote:"It doesn't depend on calling it the stimulus bill to be stimulating. I mean, if the government is spending $3 for every $2 it takes in, that is, that is fiscal stimulus," Buffett said.

Shelby aka Jocelyn wrote:> recruit the work force of countries with a “surplus” of workers.
> How to get the people who work for us in 30 years to accept our currency?

Gold has the highest stocks-to-flows ratio, thus has highest marginal utility of any commodity on earth. Next is silver. Platinum, Pd, Cu, etc have very low stocks-to-flows ratio and are not suitable for store-of-value function.

Problem is the nation-state doesn’t like capital flight, and is “cooperating” with G20 to shut out tax havens. In USA at least, gold is taxed on capital gains, yet gold’s function is only to remain level with the per-capita production, i.e. purchasing power. Thus gold can lose purchasing power parity value after taxes.

Flows means periodic mining production and industrial draw-down. Stocks means readily available above ground supply. For example, silver's above ground supply is very high (≈20 billion troy oz), but it is mostly in jewelry, silverware, electronics, etc where the recovery cost is higher than (or significant portion of) the value of the metal.

The best strategy is to invest in productive assets that have pricing power in inflation and deflation. Buffett wrote about this criteria.

The best investment is in knowledge. It is portable, doesn’t suffer from inflation, and can not be taxed.

Also knowledge can not be stolen. Most often a thief wouldn't even know what to do with it.

> the only possible outcomes, long-term, are hyperinflation and sovereign default

Hyperinflation requires the fiat issuer to continually supply more fiat to the masses, i.e. any stampede to commodities is inherently limited and will reverse when there are no more buyers. Hyperinflation destroys the creditors, so it won't happen if ever, until the power broker banks who own the political class, have dumped their ownership of loans on the public.

The more likely outcome is that budget deficits will increase for years to come, because each halving of the interest rate (e.g. 1%, 0.5%, 0.25%, 0.125%, etc) halves the cost of the debt service. This destroys the private sector while increasing the size of the public sector, i.e. the marginal utility-of-debt went negative in USA in 2008. Companies hire up to 10 developing world workers for the price of 1 westerner, to fight against this deflation squeeze, which then increases the demand for basic commodities by up to 10 times, causing simultaneous inflation in "things we use" driving real wages of westerners lower, exacerbating deficits in a feedback spiral.

There doesn't have to be any default until the people who suffer from it, run away from such a broken system, but what can they run to? Gold? There is no mathematical way to make the net-worth of even 10% of the people whole in gold-- moving to gold would bankrupt the massive dead-weight in the global economy.

Unfortunately, inexorable creep towards world war is all I can see at the end game. Please tell me it isn't so?

Good basic video on money creation and the problems that it has created today. He believes in deflation and that OIL will be at 10 bucks a barrel.
25 minutes

http://www.silverbearcafe.com/private/09.10/schooling.html

Thompson wrote:There are many many parameters that need to be considered before drawing a chart, before announcing you have a major market “all figured out”. To give power to a bull continuation head and shoulders, rule number one is that it must be continuing a major trend.

Shelby wrote:...C. Let us understand the nature of this deflation. What is happening is that the indebted western countries are creating govt debt to sustain the lifestyle of the unproductive sectors of the economy. This is of course strangling the western private sector, so the private sector is transferring as much possible capital (and jobs) to the developing world. However, China is capturing a large chunk of this capital by central control of the exchange rate which keeps its labor priced lower internationally than is the actual purchasing power parity internally. Thus instead of Chinese businesses investing in other developing countries, they to a large extent are forced to invest domestically and so there is an oversupply of factories and it driving profit margins to 0 or even negative. It is not that China doesn't need more investment to create employment for the recent huge workforce bulge in their demographics, but rather that the investment is being forced into exports focus (and speculation in real estate and stock market) rather than being focused on imports by investing in other developing countries that actually have a lower purchasing power parity cost structure. This is why China is approaching the point where they can not grow any more without massive inflation, because they are not allowing the global free market to anneal.

Thus I conclude that Maloney is correct about the threat. The process of exporting the USA capital can not continue until China's peg is broken. Thus China will break into a depression, which will drag the rest of the world down. The western nations QE is just a mechanism for exporting the capital of the west in a politically palatable way.

The question is when does the Yuan peg paradigm reach exhaustion? And the fiat controllers could still decide to go to hyper-inflation as the end game instead...

Shelby wrote:I am trying to understand the mechanisms that keep capital within China from escaping to greener pastures, thus causing bubbles in real estate and for-export factories.

1. China's central bank controls all foreign exchange of Yuan.
2. While citizens are free to travel abroad, most countries where they would find undervalued investment opportunities, will either not give visas to non-wealthy Chinese (e.g. USA and Europe), or do not allow foreign business and land ownership (e.g. Philippines, Thailand, India, etc). Vancouver and Hong Kong have so many Chinese immigrants and real estate bubbles because they encouraged Chinese immigration.
3. Although Chinese can buy gold domestically, the price over spot is excessive and there are probably restrictions or taxes to be paid if it is exported.

So when the western countries say they want the Yuan peg to end, they are lying because if they really wanted it, they could just encourage Chinese visitor visas for tourism and investment purposes (no need to give politically sensitive immigrant visas).

However, this presents an enormous business opportunity to those market makers who want to provide a way for Chinese exporters to get paid in local Yuan that wants to get exported. The foreign importers then provide the exported foreign exchange. This could be run on the internet. However, you could expect the world's govts to shutdown any such thing.

Shelby wrote:

James Quin wrote:"The Federal Reserve does not want a 20 year recession like Japan. They will not get it. They’ll get a hyperinflationary collapse instead. Japan entered their 20 years of stagnation with a population that saved 18% of their income and huge trade surpluses. The Japanese government could count on the Japanese population to buy every bond they issued to pay for worthless stimulus projects. The US has entered this Depression with a population that saved 2% of their income and a trade deficit of $500 billion."

The world saves in US dollars (and Euros), e.g via the Yuan peg, so there is no danger of a run away from bonds any time soon, rather I have described the likely path forward and the end game (too much to repeat here, refer to follow links):

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-435.htm#3703

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-435.htm#3675

Doug Casey wrote:DC: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the U.S. dollar. That it could blow up in their hands. They also see the problems they're creating for themselves by creating trillions of new renminbi. So I think that they're encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn't left too destitute and too angry. At least he'll have some gold coins. I think they're being quite intelligent about encouraging their people to buy gold.

Shelby wrote:There can't be hyper-inflation unless the central banks drop money from helicopters directly to the masses, because the masses have negative net worth:

http://www.getmoneyenergy.com/2010/03/net-worth-of-whole-entire-world/

By hyper-inflation, I mean a sustained period of monthly double-digit price inflation.

What is more likely at the end game, is a quick devaluation (replacement of fiat system with something new), which leaves the masses impoverished. This will come after years of declining interest rates (1%, 0.5%, 0.25%, 0.125%, etc) wherein each halving of interest rates, also halves the interest payments on the fiscal public debts, thus enabling the public sector to take on orders-of-magnitude more debt between now and the end game time.

We will see inflation in commodities, because the declining interest rates and public sector debt crowding, is a deflation that forces companies to lower labor costs to stay alive. With 7 - 10 developing world workers hired for every outsourced westerner, demand for basic commodities increases.

We have deflation of the western hemisphere and inflation of the developing world. Mixed in with this is massive mis-allocation of capital due to centralized interference, e.g. Yuan peg is causing real estate and export infrastructure bubble because capital can't escape to greener pastures.

Thus the end game is implosion of the western hemisphere which will drag the developing world mis-allocations into their Great Depression (as what happened to USA in 1930s as Europe imploded).

This is why gold & silver are the most preservative, i.e. gold has the highest marginal utility of any commodity due to its highest stocks-to-flows ratio (copper etc have only 6 months supply above ground).

Shelby wrote:Lira's description is accurate, but it doesn't make a good case for hyper-inflation, because this is not getting into the hands of the masses as cash, because total debt is not increasing, rather public sector is merely displacing losses in private sector economy:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-435.htm#3684

And networth is negative:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-450.htm#3709

So unless the central banks start dropped cash from helicopters in amounts sufficient to increase total debt faster than the negative networth is increasing, then hyper-inflation can't happen.

Another point to remember about the stampede to commodities, this only works when it is one country, not th entire globe. If the entire globe tries to move to commodities, it is not a flight to safety, but a greater fool move to implode the global economy, with commodities crashing in price soon thereafter.

> Decades? I severely doubt it. We passed the event horizon in March, when Social Security went cash-flow negative

Shelby wrote:I will be submitting an article to explain this difference between Japan's deflation and the current global deflation, which ends up being inflationary as priced in every currency except for gold and silver.

Suffice it to say that the current deflation of financed "assets" is forcing companies to lower labor costs, and 7 to 10 developing world workers for every outsourced western worker, means more basic commodities consumed (but not 7 to 10 times more, because developing world people save more).

Also Japan internally financed much from their very high personal savings rates, which is opposite of the current situation.

Keep an eye out for my new article tomorrow. It is going to explain everything about inflation versus deflation succinctly.

Shelby in email wrote:Antal you are wrong about China

http://financialsense.com/contributors/antal-fekete/the-donkey-in-the-china-shop

The centralization of fitness is always a weakness. Maximum annealing to optimum fitness only occurs with a free market of individual trials. I am sure you understand why I say, this is why only gold is money.

Read my recent article for weakness of China's centralized economic and monetary policy:

http://financialsense.com/contributors/shelby-moore/perpetual-deflation-causes-inflation

Good article.

A pretty good description of what is to come and SOON.

http://www.businessinsider.com/how-hyperinflation-will-happen-in-america-2010-9

Stewart Thomson wrote:This is crash season for the stock market, and for you, and it extends from the start of August to the end of October, approximately. Today is October 5th. Not Oct 31. I’m enjoying my financial holiday from the market while the market achieves zero...

...Historically, the reason the stock market crashes has to do with farm crops

24. Here’s a look at the CRB General Commodity Index Chart. Note the massive consolidation in place. It’s a consolidation because prise has risen up into a sideways pattern, for time, from the lows. The Great Gold Revaluation is beginning to spread its wings into the general commodity asset class. Are You Prepared?

Shelby wrote:amelia, the free market will always overrun socialism in time. I urge you to read the links I will provide below.

I agreed with everything Doug Casey wrote in this article, except as I have emailed his editor-in-chief David Galland last year and this year, and also his chief economist Bud Conrad this year, and explained why they are wrong about the end of the 3 decade bond bubble and interest rates sustaining rises any time too soon:

http://www.marketoracle.co.uk/Article23162.html
http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=5#comment-90474
http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=2#comment-90391
http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297#comment-90249
http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=3#comment-90396
http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=6#comment-90646

The basic problem with rising interest rates is that the world is bankrupt. The west masses have a negative net-worth, and the developing world has a huge liability of massive underemployment. If the interest rates rise, not only does the sovereign debt interest payments increase, but the tax receipts plummet, meaning the governments will default if they don't QE. The rising interest rate scenario is the end game, because it is the death of the dollar, and the death of the world economy.

We will restart from a much smaller world economy.

So yes it does come at the bitter end, but the world will resist it and wither into it instead, with increasing socialism and bringing the west down to the level of the developing world in a "share and share equally" mantra.

This current inflationary run, which is getting ready to accelerate, will also peak and implode into another liquidity crisis, because the masses and the debt load is unserviceable. Rather upon the liquidity crisis, the only thing to do is QE some more:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-450.htm#3755

This is the Perpetual Deflation Causes Inflation, that I wrote an article about as linked above.

Shelby wrote:Barry, are you saying that the Fed is funneling all the mortgage payments into Treasury bonds, from the mortgages it obtained during the crisis?

So are you saying it tries to renegotiate mortgages so people can keep paying, and it tries to re-inflate the housing market (even indirectly via the wealth effect of re-inflating stocks as the banks deposit Tbonds with the Fed and earn an interest and banks are earning a huge interest rate differential now to on deposits), so people can sell and pay off their mortgage?

Shelby wrote:Nadeem,

Excellent article and analysis. You may be the best trend technical analyst I have read. Your dollar projection for probable rally to 80 soon (and thus possible consolidation in gold dollar price), then a drop to 70 by mid-2011, is very well supported by the technical chart as you show, and is also supported by the macro-economic events I see on the horizon.

Specifically we are in the stage of the QE reflation from 2007/8 crisis (correlate elapsed time to the 2002/3 dot.com crisis where next crash started 2007), where it feeds through to a blow off move up in commodities that thus bankrupts the cash flow of westerners again, and coincides with a new peak in mortgage resets in USA by summer 2011:

http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=6#comment-90991 (see end of blog post)

So very likely we get a renewed liquidity crisis (or scare) by mid-2011, that gives us another rally in the dollar as you predict. After that, I see the wheels falling off the commercial real estate in USA by 2012, thus dollar plummets out of that wedge on your chart to new lows below 70, all in agreement with your forecast.

I also commend you on the refuting the perma-dollar bears and bulls, and rather pointing out that the NECESSARY re-balancing of the world is instead taking place by rising commodity prices and rising NOMINAL wages in developing world (REAL wages flat or declining, except rising for those who land outsourced jobs or lift themselves with education, but with PPP rising for all which is reflection of the overvalued dollar), with falling REAL wages (NOMINAL wages flat) and increasing unemployment (i.e. falling average wages if unemployed included) in the west.

However, the one critical error I find is in your analysis of the "debt as % of GDP", the possibility of end of the bond bubble, and hyperinflation in USA.

1. Private debt and total debt in USA has peaked and shrinking. Here is a chart from market-ticker.net:
   http://market-ticker.denninger.net/uploads/2010/Jun/debt-2000onward.png
   
   
2. Public debt in USA is increasing, but interest payments as a % of total deficits are shrinking, because interest payments are chopped in half for each halving of the interest rate, which has no mathematical end, e.g. 2%, 1%, 0.5%, 0.125%, 0.0625%, etc.. This means there is no mathmatical means by which the Fed must stop QE. The only way to stop it, is for oil producers to refuse to sell for dollars, but of course that is why our military is in the Middle East, and that is why we install socialist dictators in countries such as Venezuela (who ever agrees to keep the oil priced in dollars).
   
   
3. Although the nominal GDP is shrinking faster than the total debt (i.e. marginal-utility-of-(new-)debt is negative since 2008), as long as rest of world can buy oil with dollars, they have no incentive to dump dollars but rather to beggar-thy-neighbor competitively devalue as you point out. The masses of the USA have no way to run from the dollar to commodities, because if they attempt to, they will find they have no cash flow and will turn around and sell in order to eat. You can't compare the "stampede event" of single nation-states to the stampede from the world's reserve currency. I explained this is more detail at following blog:
   http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=5#comment-90474
   

I respect your work very much, so you know my comments will remain respectful. If you can provide a compelling counter argument, I want to be swayed. Otherwise, perhaps my link above will sway you?

P.S. The current period is actually deflationary, but one must price everything in gold in order to see it. This is the end of the Bretton Woods system (and a move back to gold as money), which started in 1971 and now in its final end game (which will last on the order of a decade more), which will culminate in chaos (gold as money) and then a new global fiat system reconstituted with gold. As priced in fiat, this is an inflationary period.

P.S.S. The Yuan peg is a problem, because any centralized distortion (price fixing) _ALWAYS_ causes misallocation of capital. For example, it forces very smart people in China to work like slaves producing junk (and career experience) at near 0 profit margins, instead of developing and using their skills to invest abroad and employ less skilled people in other developing countries (producing goods that have more free market need, i.e. profit margin). This causes a waste of human capital, and they don't get the years back. Once China moves over its demographic peak in 2025, there won't be enough new youth to support their retirees, and they fall into similar trap as the west is in now. Misallocation of human lifespan time is very important factor that causes pain, impoverishment, and war. The (banksters and socialized masses of the) west are complicit and desire the Yuan peg:
http://www.marketoracle.co.uk/Article23142.html#comment95152

P.S.S.S The way the end game will play out, is basically a trap in the form of a decade of volatile withering of quality-of-life in USA (and much of the west), ending up at fascism and rationing (including rationing health care) at least in USA. The bond bubble won't end in any major western nation as this is the death spiral bubble for this global financial system, pension plans (retirees) will never be allowed to sell by the time it becomes clear they should (capital controls), besides the Fed can QE forever, as long the military backs the dollar for oil. It is the perverse nature of holding a bond, that its value increases as interest rates fall, so retirees stay vested until the bitter end. Eventually (10 years?) the commodity inflation will choke the developing world too, that is when the world heads into world war, gold as money, and out of that chaos will come the new world order system, with a new global currency "backed by gold" (but only those who pay their taxes can participate, all tax havens will be closed). Any one who wants a different outcome, has to compete with the banksters (and their military), to provide a better solution for feeding the billions of masses. Afaics, they've won already on the fate the masses. The only game remaining, is for the individual to save him/herself from this maturing global socialism heading into fascism.

Shelby wrote:Oh and here is more of the same nonsense:

http://www.kitco.com/ind/Summers/oct112010.html

#2: “There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years.”

This horrifying fact comes courtesy of Morgan Stanley analyst David Greenlaw. And it confirms what I’ve been saying since the end of 2009, that the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit.

And only $550 billion of the debt we’ve got to roll over has a maturity greater than 10 years!?!?

So we’re talking about TRILLIONS of old debt coming due in the next decade.

The Fed is going to QE. The more debt that has to be rolled over, the faster the average interest rate on the outstanding debt can drop.

People don't seem to understand that our money is made out-of-thin-air. It costs nothing to make as much as is needed.

The only thing that can stop that trend, is for the masses to walk away from the dollar. But they can't. They can't eat without dollars, because they have no capacity to survive outside the current financial system. They have no savings. They have huge debts.

You forget Steve, the borrower is slave to lender. The borrower can not escape this servitude to the banksters.