Fwd: [bangla-vision] The nation's greatest student of economics exposes the mechanism behind the devouring economic crisis that others are hiding from you.

---------- Forwarded message ----------
From: Dick Eastman <oldickeastman@q.com>
Date: Sun, Oct 3, 2010 at 2:27 AM
Subject: [bangla-vision] The nation's greatest student of economics exposes the mechanism behind the devouring economic crisis that others are hiding from you.
To: joel@dailyreckoning.com

 

"This letter lays out the big picture of the economic crisis that is devouring America."

From:  Dick Eastman

To: Joel Bowman

 

 

Joel,

 

Bill Bonner and Addison Widdin's The Daily Reckoning have presented an article by Puru Saxena, owner of a  Hong Kong -based "wealth management" firm, the article  entitled"  "Deflation: Reality or Urban Myth" in which Saxena concludes that deflation is an urban myth and that hyperinflation is all that must be feared for the dollar.

 

The truth of the matter is that there are two loops of money and credit circulation -- I will call the endo-loop and exo-loop.  The endo-loop or domestic economy loop is the loop that is suffering chronic deflation.  The exo-loop is the loop that includes all economies outside of the united states plus the American financial sector above the commercial banks and credit unions that interact only within the endogenous domestic economy loop.  This loop is where American's receive their paychecks, where they purchase domestic products, where they pay their debts to the financial sector which exists in both loops and tends -- and this is very important -- tends to remove purchasing power from the endogenous loop and send it to the exo-loop -- as investment in China and other countries which have an absolute advantage in cheap intelligent labor and international-coproration-friendly regulatory policies.

 

It is important to understand the two loops because everything predicted about deflation is occuring in the  domestic loop and everything that is predicted about high inflation concerns the dollars deposited or invested or otherwise circulating in the outside loop.

 

Let me restate that:  The domestic economy has been kept in a deflationary state in the domestic economy.  This gives foreigners with the dollars abroad the power to come in and buy up the resources and wealth of the  United States -- foreigners with lots of dollars can buy up land and businesses and public utilities that are privatized because individuals and state and local goverments cannot pay their bonds etc.

 

You yourself have written elsewhere:

 

"One of my mates recently bought a property over in the States...somewhere cold, I think, maybe Michigan. Anyway, as you know, the Aussie dollar has rallied pretty strongly against the greenback of late and, with prices having held up relatively well here so far [compared to those in the United States], many Aussies are seeing opportunities to scoop up good deals over there."

You view this as the Australian dollar "holding up" -- we all tend to view things "own-currency-centrically" if I may coin a phrase.  Actually what is happening is that dollars and dollar denominated credit  are filling up the planet outside the US while the the domestic economy is starved for them.  To those in countries outside the US it looks like their own currency has muscled ahead due to some virtue of good financial management -- when in fact it the supply of dollars entering the currency markets due to the American financial sector (which includes free foreign lending and investing and depositing of dollars)  draining the endo-loop and flooding the exo-loop.   The American Citizen is kept in a credit and M1 money starved ghetto -- while the favored international markets where the multi-national corporations run and play are flush with cash.

 

For foreigners in the exo-loop the fear is hyperinflation  -- that others in the foreign loop with get more of those Bernanke inflation dollars -- which are helicopering money only to the exo-loop --  and I should add that all of the bailout money has also only gone to the exo-loop  -- that fear being that others will crowd in on picking the bones of the corpse of America which has died of deflation.

 

Now let me explain a paradox.  Look at this graph which Sexena includes in his article:

 

 

The graph indicates nothing about where this credit is going, when the fact is that it is all going "exo" where it does not help the deflation and consequent purchasing power and debt-paying power "kleptastrophe"  (that means an intentionally engineered catastrophe that prospers the "upper loop" elites at the expense of the American people in general and the non-elite masses of every nation.)  You will note too the grey zone indicating a "recession" which, according to the graph,  began in 2008 and ended in mid 2009.  In the New York Times and the Wall Street Journal and Barrons magazine and on all the news networks  -- all these owned by "upper-loop globalists like Ruppert Murdoch, Newhouse, Cox, Zuckerman etc.)  -- they all talk about a recession that is past and the "possibility" of a "double dip recession."  This is "elite talk"  -- the definition of recession is loaded to hide the fact that all the blood of all the people in a room can be sucked dry by the man eating spider from hell which is also in the room  and the total amount of blood in the room will not change (except slowly as the spider digests it into something else.)  So it is with GDP, which is discriminatum by which the occurrence of recession is measured by the economics profession.  The secret is that the composition of Gross Domestic Product can change without the change showing at all in the statistic.  First we saw the industrial sector which contributed to GDP disapper.  We were told we had a great service economy now.  Then we say middle class jobs dry up and disappear  -- either outsourced or otherwise.  We saw firms go under and we saw corporations outsource or just plain expatriate to China and elsewhere.  That was the draining of blood.  But where is the Spider from Hell who ate America?  Where is he hiding in the GDP statistic.  Simple.  GDP from the service sector includes not only hamburger flippers and video store clerks and telemarketing boiler room workers -- but it also contrain "financial services"  and financial services are the ones who get all of the money drained as interest  -- the creditors have their agents foreclose on us and that is counted as a service, brokers commissions, agents who sell assets to foreigners, etc.  Those  "services" which do not produce anything that the typical American household will buy (except a loan  -- and your NSF check fee is measured in GDP as "product" in the service sector -- mean for the elite loop  that things are not that bad  -- there was a recession -- that actually meant that the lower loop fell more than the elite loop rose,   but now everything is OK, the bailouts did their job, and we just hope there will not be another one.

 

I thought there was a small chance you would like to know what is really happening, but more likely you are more concerned about continuing to sell your articles to upper loop elite readers  -- even if you dare not publish what you have learned.

 

I of course cannot reach Puru Sexena or Bonner or Widden -- it is always the apologists for the Money Power who hide their addresses from the great lower-loop unwashed  --  but I did find your address and I would appreciate it if you would forward this letter to those three "exoists."  Tell them it is from an "endoist" in Yakima Washington, and "endoist" who is also a good enough economist to see the economy form a perspective that sees the interrelation between the exo-loop and the endo-loop -- which is the only perspective from which one can accurately analyse the simultaneous existence of both "inflation" and "deflation" for the same currency in a country that is supposed to be "free-trade" with interconnecting self-equilibrating markets.  (What I am saying is that I am a better economist than "deflation-seers"  Krugman, Roubinni,  Rosenberg and Gross as well as "inflation seers"  Schiff, Paulson and Faber -- and an even better friend of the American people and all peoples stuck in lower loops managed by criminal financial elites in every nation on the earth.

 

If you see the light -- may I also direct to you the solution  --  that will end the crooked game of "milk the lower loop" and set the world free of usury and credit manipulation.     My version of  Social Credit -- which is explained here:  http://www.citizensamericaparty.org/socialcredit.htm  (the website is not my own -- but I agree with the analysis and aims presented.)

 

Hoping to hear from you, I am

 

Yours Sincerely

 

     

 

Richard Eastman

Yakima, Washington

Latitude 46.602N. Longitude is -120.504W. 

 

Visit the Washington State Fair in Yakima  -- going on now. 

 

(Post-graduate degree in economics from Texas A & M with two years towards the doctorate  -- but I have given up my old neo-classical and monetarist analysis for a new model that allows for conspiracy (unilateral class warfare and the problems created by permanent disequilibrium due to the Douglas "A + B" problem which I have refined to my own satisfaction if on one else's.)

 

=====================================

 

Here is the article that prompted the letter above:

The Daily Reckoning Weekend Edition
Saturday, October 02, 2010
Buenos Aires, Argentina

Deflation: Reality or Urban Myth?
By Puru Saxena
Hong Kong, China

The inflation/deflation debate is now the 'topic du jour' and although we have discussed this issue in the past, we want to throw more light on this very important subject.

Today, many prominent economists (Nouriel Roubini, David Rosenberg and Paul Krugman) and fund managers (Bill Gross and Jeremy Grantham) are forecasting deflation and according to these folks, a deflationary contraction is now 'baked in the cake'. In fact, these deflationists are extremely worried about the ongoing private-sector debt- deleveraging in the developed world and they are also concerned about the lack of aggregate demand in the industrialised nations. Bearing in mind these two factors, these prominent people believe that deflation is now almost guaranteed and inflation is out of the question.

On the other end of the spectrum, and in stark contrast to the deflationist camp, many prominent market participants (Paul Tudor Jones, John Paulson, Jim Rogers, Marc Faber and Peter Schiff) are now warning about high inflation or even hyperinflation. According to these people, the large fiscal deficits and massive debt overhang almost guarantee runaway inflation.

It goes without saying that such conflicting views are extremely strange when you consider that all these highly experienced and successful people are reviewing the same economic data! Well, everyone is entitled to their opinion, but as far as we are concerned, deflation is an urban myth and the global economy will have to contend with very high inflation.

It is our conjecture that inflation is always a monetary phenomenon and willing policymakers have the ability to create inflation. Now, before we delve any further, we want to make it clear that inflation is an increase in the supply of money and debt. Conversely, deflation is a decrease in the supply of money and debt. Furthermore, it is critical to understand that an increase in the general price level is a consequence of inflation and a decrease in the general price level is a consequence of deflation. Most importantly, despite what you may hear elsewhere, you should keep in mind that a booming economy (operating at maximum capacity) is not a pre-requisite for inflation.

Now, if you reside in the deflation camp and believe that inflation cannot occur in a weak economic environment, you need to visit Zimbabwe and meet Mr. Mugabe who will explain how you can create hyper-inflation at a time when a nation is facing an economic depression! Whether you like it or not, Zimbabwe's hyper-inflationary saga clearly shows that despite a huge output gap, surging unemployment and a bankrupt economy, reckless policymakers can succeed in creating massive inflation.

Look. We do acknowledge the fact that the economies of the developed world are struggling and they will probably remain weak for several years. We also accept the fact that the aggregate demand in these troubled economies will stay well below the available capacity (output gap). However, contrary to the deflation camp, we totally respect the money-creation abilities of the central banks. Accordingly, we firmly believe that in order to avoid sovereign defaults in the near-term, the Federal Reserve and the European Central Bank will create unprecedented inflation.

Already, short-term interest-rates in the US and in Europe are at extremely low levels and real short-term interest-rates are negative. If such a loose monetary policy fails to create inflation, you can bet your bottom dollar that these central-banks will unleash even more rounds of 'Quantitative Easing'. Needless to say, such reckless monetary-inflation will dilute the existing money-stock even further and reduce the purchasing power of money. Okay, enough about the inflationary bias of the public-sector, let us now move on to the private-sector.

As far as the private-sector is concerned, you may recall that after the credit-bubble burst two years ago, commercial-bank credit in the US started to contract. After all, this debt repayment by the private- sector was a logical response to the crisis and for 17 months, commercial-bank credit declined by roughly US$700 billion. In fact, it was this private-sector debt contraction, which prompted many economists and investor to enter the deflation camp.

Whilst it is true that the private-sector in the US did experience deflation (contraction in debt) for a brief period of time, it is notable that this 'austerity' did not last very long! Figure 1 shows that US commercial-bank credit bottomed out earlier this year and since then, it has risen by roughly US$400 billion. So, it should be clear to all observers that the private-sector in the US is no longer de- leveraging and this is inflationary.



Furthermore, we would like to point out that even though commercial- bank credit in the US contracted between October 2008 and March 2010, during that period, America's federal debt went through the roof! Ironically, during the time-frame when American households and corporations were tightening their belts, the US-Treasury borrowed almost US$2 trillion; thereby stopping deflation in its track. The truth is that at no point during the recession did total debt (private- sector plus federal) in the US contract, so deflation did not occur. Now, it is conceivable that the private-sector in the US may abruptly start repaying its debt again. However, if such a debt-contraction occurs, Mr. Bernanke will create money like there is no tomorrow.

Today, America's total liabilities (including social security, Medicare and Medicaid) are around 800% of GDP and federal debt has climbed above 90% of GDP (Figure 2). Given the fact that deflation will increase the real value of this debt, you do not have to be a brain surgeon to figure out that before the US government declares bankruptcy, it will desperately try and inflate its way out of trouble. By unleashing another 'stimulus', Mr. Obama's administration will try and maintain nominal GDP growth, so that nominal incomes and tax receipts are sufficient to service the outstanding debt.



It is interesting to observe that in order to fund its spending binge, so far the US administration has succeeded in borrowing huge amounts of money at low interest-rates. It is notable that up until now, demand for US-Treasuries has been strong and the US administration has not had much trouble raising money. Perversely, in today's volatile economic environment, US government debt is still viewed as a safe haven. However, every good thing comes to an end and investors' perception could change at short-notice. When that happens and the bond market starts to focus on America's ballooning deficits, demand for government-debt will dive. At that point, the Federal Reserve will have no option but to create new money so that it can lend it to the US Treasury. In fact, the Federal Reserve has already announced that it will use the proceeds from the sale of its mortgage-backed securities to buy US Treasuries. In our view, this is only the beginning and outright asset-monetisation will intensify over the following years.

Throughout history, periods of massive money-creation have always been inflationary and this time should be no different. Over the following months, if the economies of the developed world take a turn for the worse, you can be sure that the respective policymakers will respond by creating copious amounts of paper money.

If you still believe that deflation will prevail, perhaps you should review the table below, which highlights the inflation rates in various countries. It is noteworthy that the inflation rate depicted here for each nation is in fact the Consumer Price Index (CPI), which significantly understates the price increases within an economy. Let there be no doubt that the majority of government agencies make seasonal and hedonistic adjustments to bring down the level of the CPI. Regardless, you can see that despite such 'feel good' adjustments to bring down the reported 'inflation' rate, every nation (except Japan) is currently experiencing 'inflation.'



Bearing in mind this compelling data, we are left wondering how anybody can get hoodwinked by the deflation hype!? Perhaps, the deflationists know something the rest of us do not, but at this point, hard data does not support the deflation thesis.

Given the inflationary environment we find ourselves in, we do not like cash or fixed-income securities. In our view, both cash and bonds will lose considerable real value over the following years and the ongoing strength in the government bond-market may turn out to be an exceptional selling opportunity. Conversely, we maintain our view that precious metals, energy and the stock markets of the fast growing developing markets in Asia will provide stellar returns in this inflationary environment.

Regards,

Puru Saxena,
for The Daily Reckoning

Joel's Note: Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here.

Puru is also the founder of Puru Saxena Wealth Management, his Hong Kong based firm, which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

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Joel Bowman, from Buenos Aires, Argentina writes:

With gold on a record-setting streak, and the battered ol' greenback plumbing new, multi-year lows, the debate over the "Battle of the 'flations" has returned with a vengeance.

We all know the government's CPI numbers are a junk stat...at best. For those of us living with the cost of food and energy, which the CPI reading conveniently excuses, the eroding purchasing power of the once- mighty US dollar is becoming an increasingly painful concern.

So, where to from here? Is the world's largest economy set to slump into a Japanese style, multi-decade period of low-to-no growth; the "lost" decades? Or, will the end to the Great Correction come much faster, in the form of a violent bout of inflation, even hyperinflation?

[In any case, is one preferable to the other? Is it really, as Neil Young sang in his classic "My My, Hey Hey (Out of the Blue)" "better to burn out than fade away"? Send your thoughts and/or predictions along here: joel@dailyreckoning.com]

In this weekend's special guest essay, Hong Kong-based investment manager, Puru Saxena, returns to offer his thoughts on the matter. Please enjoy...

Government spending gone wild! And the implications for your wallet,
Another installment in the great "Battle of the 'flations" debate,
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