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Inflation vs Deflation

In a free economy, the course of events in an economic downturn is somewhat predictable. Deflation would bring about the end of many institutions resulting in the freeing of capital. A necessary deleveraging would occur. Wise institutions with cash on hand would buy capital at bargain prices. New institutions would be the "green shoots" of smarter economic growth from a lower starting point.

In our hyper-regulated economy, things are much more difficult to predict. Deflation is a bad word today. Every hint of this necessary rearranging of relationships and institutions is met with bailouts, easy monetary police, money from helicopters, etc. So what does the future hold?

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Deflationist: The fundamental problem with the world is too much debt, and the governments of the world are trying to pay off that debt with even more debt. The final result, however long it takes, has to be default, even if that default is a world-wide default. That is, by definition, deflation. The super-duper final end-all resolution will be a massive deflation.

Inflationist: Deflation? Have you seen the last 70 years of history? The dollar has devalued by 97%. When exactly do you expect this deflation to happen and how? In the fiat currency era, governments can simply print money. It has never shown much control in how much it prints, so hyperinflation is our future.

Deflationist: Sure, inflation has been the norm for the last 70 years. But the ultimate contrarian is the one who believes that even the longest of trends fail eventually. That 70 years of inflation is a property of the current worldwide banking/fiat currency system, and that system is what will fail eventually.

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So what is the prudent investor to do? Invest in gold for the coming hyperinflation, or raise cash for the coming deflation? Heck if I know.

I see inflation as a monetary phenomenon but hyperinflation as a psychological phenomenon when people lose faith in the currency. Can deflation co-exist with hyperinflation? Will one follow the other? Which will happen first? Can one part of the world undergo hyperinflation while another undergoes deflation?

The way I will play this is as at time like the present, i.e., at what I believe to be the end of cyclical bulls, prepare for deflation. Raise cash, sell commodities. When panic sets in at what I believe to be the end of cyclical bears, lower cash, buy commodities. Either cycle could amplify into massive deflation or hyperinflation.


Small Business Ideas

If you had some money set aside and wanted to start a small business, what kind of business would you start, and why?


Sprawlanta

I recently came across this video:

Like Atlanta, other cities such as Charlotte and Phoenix that have no natural boundaries like rivers or oceans tend to grow horizontally. Manhattan, an island, grew vertically.


How to bankrupt a continent

Up is down, bad is good, and 500 billion euros are taken from the productive economy to bail out failing institutions in order to prevent a continent from going bankrupt. Prevent. Not Cause.

Our economics is turned upside-down, popularized by witch doctors, implemented by incompetents.


Screw Saint Patrick's Day, This Is America

Suppose we were living in a culture rife with anti-Irish sentiment (as American culture once was not so long ago). Further suppose New York recently passed an ordinance making it much more difficult for Irish to enter the country (legally or illegally), harder for those who look Irish to find work, and easier for police to harass those who look Irish.

Along comes Saint Patrick's Day, and instead of wearing the traditional green and shamrock, or choosing not to celebrate at all, some people who don't normally display such symbols decide to wear t-shirts and bandannas emblazoned with American flags, in an obvious attempt to respond negatively to the wearing of green and shamrock.

Would Eugene Volokh agree with the following?

Even if the students wore American flag garb only on Saint Patrick's Day, I take it that the message was “you want to stress your Irish heritage, and we want to stress our American heritage” or at most “we don’t entirely approve of your stressing your ethnic heritage, since we should all think of ourselves as Americans.” This might convey some disagreement, but it hardly strikes me as discourteous; and to the extent that it’s a “rebuke,” it’s the sort of message that people are entitled — not just as a matter of law, but also of good manners — to send. Courtesy doesn’t require absence of disagreement. It requires that the disagreement not be framed in a rude way, and I don’t think there’s anything rude in the messages that I infer the clothes were trying to send.

Is it good manners for your wardrobe to scream "AMERICA, FUCK YEAH!" on Saint Patrick's Day? Or do we tend to view people who make these kind of fashion choices as juvenile, ignorant, and rude?

Another ethnic group, which immigrated to America and experienced discrimination, has a word for this kind of behavior: Chutzpah.


The Mortar of Assimilation (1889) - Only the Irish immigrant is causing trouble.


Land of the Free

Make sure you visit Balko's place and watch the SWAT team video.


What a Day

Back in October 2008 when the worldwide markets were crashing, I wrote daily posts to capture my thoughts on what I believed to be a once in a lifetime occurrence. Yet, today's action was in some ways even more amazing.

All sorts of feel-good explanations are being given for the slide--someone accidentally use "b" for billion instead of "m" for million, high frequency trading was triggered as sell orders when the markets crossed beneath their 200=day moving averages, smart market makers took out a bunch of stop orders under the market, etc--all intended to put a positive spin on the damage. I don't buy it.

If it was just a slip-up, why was there no liquidity in the market? Why were bid-ask spreads on options nearly 100% of the exchange price? Why was the market down 3%+ even before the sharp, sudden slide? I get the feeling that the modern complexities of equities markets make them more vulnerable to crashes, not less.

We're once again entering a period of increasing volatility which will culminate in another bear market low. It may not be the final collapse that wipes out the economic system as we know it, but it will cause major pain and suffering.

Notice that though commodities were down across the board, gold rallied to a new all-time high. Gold is on its way to regaining its rightful place in the world as meaningful money.


Five For One

Unless one believes there is a categorical moral duty to allow healthy patients to live, something that to my knowledge only a few people believe, one must consider all the costs and benefits when deciding whether or not hospitals should kill healthy patients in order to harvest their organs for transplantation to unhealthy patients.

Update: The friend who tipped me off to the Volokh post responds:

Even if your post wasn't a joke, the cost of killing a healthy patient would far outweigh any benefit.

I ask, how can you be so sure? Five lives saved is greater than one life lost, no?

A good utilitarian can point to the social costs associated with patients refusing to go to the hospital out of fear that they will be killed for their organs. But then, a good utilitarian isn't a nationalist bigot, and doesn't ignore or discount the utility to the immigrants themselves of immigration. When we take the immigrants' own utility into account, the cost of keeping immigrants out far outweighs any benefit.


DJIA lost almost 1000 points in one hour, today.

According to CNN that is the biggest one-day point decline on an intraday basis. Is it to early to break out the clapboard signs that read The end is nigh!? Probably. Even though the Senate fiddles while Rome burns.

I wonder if the Plunge Protection Team had anything to do with the 600 point recovery...