Inflation? Deflation? or Biflation?

Regarding the (interminable!) inflation versus deflation debate — sometimes called The Great ‘Flations Debate: Easily the most likely outcome in the U.S. is BIFLATION, a mixture of inflation and deflation*; inflation in some sectors, and simultaneous deflation in others. Per Wikipedia (below), biflation is “a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).”

Herewith, a few clippings on the subject:

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From the old LATOC forum (doomers.us):

alan2102
Hero Member
Posts: 1507
Re: Gold price will surge to $5,000 in two years
« Reply #32 on: Feb 14, 2010 at 11:16:31 AM »

Quote from: Madnsassy on February 13, 2010, 12:29:13 PM
> Necessities for most people such as food, fuel, health
> insurance, etc., have been inflationary whereas housing and
> some luxury items have been deflationary.

What is coming, as some wag said, is deflation in all the
things you WANT, and inflation in all those that you NEED.

Deflation:
 -- tony urban real estate, condos, etc.; possibly ALL
    real estate
 -- fancy cars
 -- fancy consumer hard goods, e.g. big-screen tvs
 -- stocks and bonds, mutual fund shares
 -- vacations, hotels, cruises
 -- most or all services (massage, bookkeeping, you
    name it)
 -- medical services except for clear essentials

Inflation:
 -- food
 -- fuel
 -- clothing
 -- sundries, consumables
 -- essential medicines, all medicines
 -- tools of all kinds,
 -- manufactured items of all kinds, if they have
    practical utility
 -- money with intrinsic value (coins of gold, silver,
    platinum, nickel, copper) [this would include
    currently-issued U.S. nickels, of 75% copper and
    25% nickel, and pre-1981 pennies, of 100% copper]

Special category:
 -- money with little or no intrinsic value, like FRNs, 
    and clad pennies, dimes & quarters (largely zinc;
    might hold their own, might not; see Antal Fekete's
    articles)

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http://en.wikipedia.org/wiki/Biflation

Biflation is a state of the economy where the processes of inflation and deflation occur simultaneously.[1] The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group.[2] During Biflation, there’s a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).

The price of all assets are based on the demand for them versus the volume of money in circulation to buy them.

With Biflation on the one hand, the economy is fueled by an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing, precious metals) remain in high demand, the price for them rises due to the increased volume of money chasing them. The increasing costs to purchase these essential assets is the price-inflationary arm of Biflation.[3]

With Biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, high-end automobiles, stocks and bonds) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of Biflation.

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http://www.gold-eagle.com/editorials_08/willie070109.html
WALLS TO BLOCK US DEFLATION
Jim Willie July 1, 2009

Many are the obstructions to the so-called (mislabeled) deflation threat within the USEconomy. To begin with, falling asset prices does not constitute deflation. One of the primary objectives of the banking elite in firm control of the USGovt and USCongress is to confuse the public and investment community on the entire topic of inflation, what it is, how it is measured, and its risks. The same goes for deflation. All debate as to whether the Untied States will suffer from inflation or deflation is a horrible misdirected distraction that manifests the confusion. The US will suffer both higher monetary inflation and worse economic deterioration, not one or the other, but BOTH, and with steadily increasing intensity. Imagine a massive tornado building force, inflicting damage, and being fed to grow even more powerful by current policy. To argue on whether the high pressure or low pressure will prevail misses the entire storm, built upon the grand and growing differential in pressure. The storm is born of opposing pressures, each growing more intense. Human response to economic distress and banking woes ensure evermore pressures to be exerted on each side. The grand growing monetary expansion continues to collide with grand worsening asset price decline, while the Deflation Knuckleheads spout more nonsense. They miss the storm itself, how it is formed, and the dual nature of its tempest.

A very important point must be made, something few if any analysts or pundits or anchors are mentioning. In fact, the staggering direction of monetary aid for rescues of dead banks, for nationalization of dead corporations, and for stimulus to an insolvent nation guarantee more damage. The huge monetary growth guarantees that the asset prices will continue to fall, and that the great tempest will grow in magnitude and danger. Why? Because bad money drives out good money, because phony money undermines legitimate assets, because easy money encourages more bubbles. It acts like a cancer, one that has essentially destroyed the fundamental foundation of the nation. This extremely important point will lead to the ultimate downfall of the Untied States, as their inflation will destroy too much capital in determined yet mindless application.

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http://sitekreator.com/Optimist/deflation.html

the Optimist thinks delation and inflation may coexist for a brief time:

Some readers may think that the Optimist wears blinders which limit his vision to seeing only increasing inflation ahead. They may be surprised to learn that he actually guesses that deflation and inflation will coexist and partially offset each other over the next few years. The surprise candidates for deflation are the luxuries which have been acquired in great abundance by the accumulation of high levels of consumer debt. The biggest single category of over priced luxury items is residential real estate. Although having a roof over one’s head is a necessity, it is not essential for every person in the nation to immerse himself in debt to purchase the house attached to that roof. Many people in previous generations found that they could live within their means by renting, and that they could build up savings instead of compounding debts in the process. The Optimist guesses that many of the current buyers of overpriced real estate will rediscover the joys of renting as unemployment cascades higher, and that house prices in the most over priced areas will suffer as a result. Similarly, the Optimist guesses that big ticket items of conspicuous consumption will also have less buying pressure during the coming rise in unemployment. Examples of items which would feel deflationary forces could include 48 inch plasma TVs and extra large SUVs (which are also extra heavy and get comparably terrible fuel mileage). In an atmosphere saturated with excessive consumer debt and depressed by increasing unemployment, purchases of expensive luxuries will be reduced and the resulting decline in prices of luxury items will look like a taste of deflation for a few years ahead.

The Optimist is confident, however, that the prices of necessities will move incessantly higher. First on the list of necessary purchases is fuel. Escalating world wide demand for crude oil and liquid natural gas will continue to push those prices higher without respite. Since all of the other necessities of modern urban life require energy to produce and transport, the prices of those necessities can only increase even as consumers with excessive debt try to cut down on purchasing luxuries. Two other areas of persistently rising prices of necessities will also become evident in the months ahead. First, even as excessively high house prices revert to the mean, the costs of rent will push ever higher. Secondly, consumers will increase the time between trading up to a new car, and the prices of used cars will begin to firm. The Optimist expects rising profit margins for used car parts and repair businesses. As highly indebted consumers are squeezed into a lower standard of living, there will be a brief transition time in which we could see mild deflation in luxury items (including over priced real estate) and simultaneous rising inflation in the full spectrum of necessities. After that transition, the Optimist expects only inflation to be seen everywhere, and to be rising at an ever more rapid pace. If that view is correct, then the next few short years may be the final opportunity for consumers to escape the jaws of the vise by paying down debt and simplifying their lifestyle so they can save funds which they can use to purchase precious metals while they are still relatively affordable. After that window slams shut, the twin jaws of inflation on one side and high interest rates on the other will mercilessly squeeze anyone with debts in the vise of rising unemployment.

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* Note:

I recognize that others may have their own (atypical) definitions of “inflation” and “deflation”, but in this post I am using “inflation” to mean what dictionaries and other common reference works say it means, and what almost everyone understands it to mean: higher prices. (While its mirror-opposite, “deflation”, means lower prices.)

Vis:

http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.

en.wikipedia.org/wiki/Inflation — In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

http://www.investorwords.com/2452/?inflation.html — Definition of inflation: The overall general upward price movement of goods and services in an economy.



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How Much Gold Does China Have?

China’s gold holding is highly significant because it will determine when China might be able to advance a partially gold-backed renminbi as a credible new reserve currency, to supplant (or compete with) the dollar. The usual figure given, for official Chinese holding, is about 1,000 tons. The analysis below suggests that the real official holding is in excess of 1500 tons, with total holding, nation-wide, of about 7,000 tons. Note also that gold production within China is now approaching 400 tons per year. At that rate, a large reserve can be developed in not too many years.

I suspect, but cannot prove, that China’s official holding is much larger that 1500 tons. It is the kind of thing that they would want to lie about, in order to appear weak — until the moment of truth, which is probably not far away.

The link is to a pdf file; snippets are below.

………………………….

http://www.perthmintbullion.com/us/blog/blog/12-09-19/How_Much_Gold_Does_China_Have.aspx

How Much Gold Does China Have?

September 19 2012

Posted By Bron Suchecki

TREASURY VIEW

On the 24th of April 2009, China announced that it had increased its gold reserves 75% from 600 tonnes to 1,054 tonnes. What made the announcement unusual was the six year gap in reporting, given the previous two changes were in December 2002 (99.2 tonnes added) and December 2001 (105.7 tonnes added).

In addition, the World Gold Council’s (WGC) quarterly gold reserves reports notes that the purchase of the 454 tonnes took place over the January 2003 to April 2009 period, so it wasn’t a one-off purchase. It is clear China moved from a regular reporting schedule to a more strategic approach.

It has now been 3½ years without any indication from China as to the size of their gold reserves. With imports of gold into China, and gold production within China, having increased significantly over the past few years it raises the question of how much gold has China been accumulating since 2009?

To answer that question, in this Perth Mint Treasury paper we will look at China’s gold mining and importing activities and estimate how much of that is held by the government versus privately.

[chart: depicts mining production in China, from practically nothing in 1980 to nearly 400 tons/year, currently]

[snip]

[B]y 1980, when Chinese gold production began its rise, there
was little gold held in China. An estimate of Chinese gold stocks can then be made by adding accumulated gold production since 1980 of 5,255 tonnes to our net import estimate of 1,100 tonnes, giving 6,355 tonnes.

This figure is confirmed by the Sang Shang article, which states that “the total amount of gold held by both private citizens and the government reserves amounts to between 4000-5000 tons of gold.” This article was from 2007. Gold production and imports from 2008 onwards is 2,436 tonnes, giving a figure of between 6,436 to 7,436 tonnes.

For comparison, Indians are said to hold 18,000 tonnes2. With comparable populations, this means China’s per capita gold stocks are well below India’s: 0.1516 ounces per person versus 0.4782 ounces.

[snip]

[W]e…suggest that a reasonable estimation of China’s current [official] gold reserves would be 1,560 tonnes.

Implications of China’s Appetite for Gold

China’s appetite for gold is featured in this post found on the gold-eagle forum, and apparently not available anywhere else (I did some searching on bing and google to verify). This one is worth reading, IMO.

Money quote (pardon pun): China’s dire need to diversify its foreign reserves will propel the price of gold to unprecedented new all-time highs … regardless of what action the US Federal Reserve bank takes in cutting the Fed Funds rate.

Well all RIGHTY then!

It has been obvious for many years. The fundamentals are all in alignment, and grow stronger by the month. As admirably as gold and silver have performed over the last 10 years, the best is clearly yet to come.

—alan2102

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http://www.gold-eagle.com/cgi-bin/gn/get/forum.html

(Ho_Yen_Tsi) Sep 17, 17:28

Monumental ramifications of China’s necessity to buy gold to diversity foreign reserves

BEIJING — China should take steps to diversify its holdings of reserves out of low-yielding U.S. treasuries and into other currencies as well as long-term strategic assets, economists said in remarks published Friday.

As China’s foreign exchange reserves have grown well past $3 TRILLION, a vigorous debate has emerged among domestic economists on the appropriate management of the funds.

Qin Chijiang, a professor at the Central University of Finance and Economics in Beijing, said Beijing should use its foreign exchange to make long-term investments in industry and finance to achieve higher returns, according to the central bank-backed Financial News. He added China could also use foreign exchange reserves to boost its natural resource and technology stockpiles.

“All central banks are trying to diversify…we have had a very clear diversification plan for several years,” Chinese central bank Governor Zhou Xiaochuan said Thursday in Frankfurt, according to a Reuters report. Zhou said that the central bank is considering lots of instruments of diversification, according to the Reuters report.

The report sent the U.S. dollar sharply lower versus the euro in trading Thursday on concerns China would move out of dollar assets. Economists believe Chinese demand for U.S. debt has been a major factor in keeping U.S. interest rates low.

Peking University researcher Dou Erxiang, in the Financial News article, was cited as saying China needs to build a new management system for its foreign exchange reserves to independently manage the funds in a more market-oriented way.

Dou added China should diversify away from U.S. dollar assets and should moderately increase its holdings of euro and non-dollar assets.

In recent months, Chinese State Television reported that the country’s foreign exchange reserves had past the $3.2 TRILLION mark. In fact China surpassed Japan LAST YEAR year as the world’s biggest holder of foreign exchange reserves.

********China’s dire need to diversify its foreign reserves will propel the price of gold to unprecedented new all-time highs…regardless of what action the US Federal Reserve Bank takes in cutting the Fed Funds rate. Whereas in the past the price of gold may have been a function of US interest rate levels and/or the dollars decline, going forward it will be forged mainly by China’s dire need to divest itself from ever growing US dollar reserves due to relentless trade surplus.********

In recent months much news has been aired about Beijing’s keen interest in diversifying its material FOREX risk, since most of it is in the US dollar. I believe the greenback comprises well more than 70 percent of its total foreign reserves.

But no one has really delineated the monumental ramifications of China’s necessity to buy gold to diversity foreign reserves. Consequently, one took a close look at the pertinent numbers. To appreciate the findings it is necessary to show the following basic data:

– China has $3.2 TRILLION in foreign reserves, which grow continuously by the hour (in numbers that is
$3,200,000,000,000). About 70% of these reserves are concentrated in the US Dollar (ie nearly $2 TRILLION).

– China’s gold as a percent of total foreign reserves is about 1%….and it is reported China plans to increase the gold percentage by an additional 4% to a 5% goal.

– There are approximately 34,000 troy oz in a tonne

– Total annual gold production in the entire world is a mere 2600 tonnes

To increase gold reserves by 4% China needs to buy $128 Billion in gold on the open market. THIS IS NOT POSSIBLE WITHOUT CAUSING THE PRICE OF GOLD TO SKY-ROCKET. However, for the sake of this illustration, let’s assume China could buy it all at a fixed price of $1800/oz. In this event China would acquire approximately 70,000,000 ozs, equivalent to about 2,100 tonnes.

Let’s put this into perspective. 2,100 tonnes represents 81% of the Total yearly gold production in the entire world (ie 2600 tonnes). Incredible but true, China must buy an entire year’s production in all the world to increase its gold reserves from 1% to 5%.

But as I previously mentioned THIS IS NOT POSSIBLE WITHOUT CAUSING THE PRICE OF GOLD TO SKY-ROCKET.

What is absolutely certain is that China must and is diversifying its foreign reserves out of the US Dollar and into other major world currencies, including gold. It is also well very certain China has for sometime been secretly buying gold…and most certainly will continue to accumulate gold until is reaches its conservative target of 5% of its total foreign reserves. However, we need to remember China’s US dollar reserves will continue to mount DAILY as long as the US Trade Deficit is a reality. To be sure, the ONLY way for the US Trade Deficit to reverse is to sharply devaluate the greenback, which would propel the PRICE OF GOLD into orbit….that much faster.

Summation of the Monumental ramifications of China’s necessity to buy gold:

– China’s gold purchases will continue unabated for years to come, during which in my opinion the POG may reach US$1900 to US$2000/oz. this year

– Furthermore, a gold price rising to $3,500/oz in 18-24 months is well within the realm of possibility vis-à-vis China’s necessity to diversify foreign reserves, and the US Fed monetizing the massive issuance of US Treasuries to finance (ie QE3), and President Obama’s programmed $17 Trillion deficit during the next few years – with the objective of stimulating the U.S.A. out of a spiraling depression. In light of the above, gold between $1,900-$2,000 this year and $3,000 in 2013 are feasible and logical price goals. However, the speed of how fast the U.S. dollar declines will help determine how fast the gold price will ascend.

– Any respite in the rising price of gold is an opportunity to buy more before the price surges even faster and higher.

TO BE SURE the present secular bull market in gold is today in its early infant stages.

Free Money! Whoopeeee!

QE To Infinity & High Inflation: Now Certain

About two years ago, a friend and I exchanged brief words about the likelihood of QE3. He thought it certain NOT to happen; I thought it certain to happen — sooner or later, and in some form or other. I did not argue the point far, since, well, why bother? It is all speculation until it actually happens. Nevertheless, in my view it was, and is, their ONLY option. They must inflate. It is a bad thing to do, but they have no choice.

Anyhoo, here we are, a couple years down the line, and… ba-bing! It’s here! QE3. And not just any QE, but an OPEN-ENDED QE. No limits! Hence, QE to infinity, eventually, to manage those impossible deficits, debts and unfunded liabilities, well in excess of $100 trillion. QE to infinity — just like Jim “Santa” Sinclair (jsmineset.com) promised, years ago. Many of us knew that this would happen, but we were waiting for it to be bluntly articulated by the good Chairman. And finally, it was. Today.

This event ends, of course,  the old argument about whether or not QE3 is to be announced.  It will also mark the end, or at least the beginning of the end, of that interminable (and occasionally infernal) “inflation vs. deflation” debate. It’s inflation, full-bore, from here on out. There is no longer any doubt. Of course, there will be defaults and deleveraging-type events along the way, just as there have been up to now — housing crash, big bank failures, etc. That’s inevitable. And the deflationists will point to them (with dwindling credibility) as evidence of onrushing deflation. But the defaults will be papered-over, just as they have been, only now with increased intensity. There will be no general deflation with significant and enduring broad gains in dollar strength. The dollar may gain strength relative to a few select things, like real estate or high-ticket luxury goods. But in the main, it will be downhill for the dollar, starting now.

This is big news, as big as the meltdown of 2008. This day marks the beginning of the dollar end-game. Will it go Weimar or Zimbabwe, with complete destruction of the currency? I don’t know. It might. Or, maybe the dollar will survive in some greatly diminished role. It might be 5 or even 10 more years before we know, before it all unravels. We’ll see. But mark well this day, and position yourself accordingly, if you have not done so already. Commodities and precious metals will go TO THE MOON AND BEYOND. Some of them, like silver, well beyond.

Regarding the metals, remember: PHYSICAL ONLY. No paper. The paper is all heading toward zero, and a lot of it will get there. Paper “wealth” in all its forms is at great risk, and much will be stolen or confiscated even before it is drastically devalued, or destroyed. But with physical, your investment is guaranteed. Actually it was guaranteed even 12 years ago, but now doubly so. It is The Ultimate No-Brainer Investment, guaranteed to appreciate — probably a LOT — by Dr. Bernanke and the U.S. Federal Reserve. You have a 100% chance of doing well with it. Those are pretty good odds, eh?

As the Mogambo Guru says: “Wheeeeeee! This investing stuff is easy!”

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Notes:

1. The Bernank’s Soliloquy:

To QE3 or not to QE3, that is the question;
whether it be nobler to suffer the slings and arrows
of outrageous deflation,
or to take arms against a sea of defaults and by
monetizing, end them….

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Links, if needed:

http://www.tfmetalsreport.com/comment/211949
QE To Infinity
Thursday, September 13, 2012 at 1:23 pm
Long-rumored and oft-discussed, QE to infinity is finally a reality. Here are the Bernank Fedlines from ZH:
*FED TO KEEP POLICY STIMULATIVE FOR `CONSIDERABLE TIME’
*FED WILL ADD TO PURCHASES IF LABOR MARKET DOESN’T IMPROVE
*FED DOES NOT SAY WHEN MBS PURCHASE PROGRAM TO END
*FED TO BUY $40B MBS MONTHLY, CONTINUE `OPERATION TWIST’
*FED TO BUY MBS, EXTENDS ZERO-RATE POLICY INTO 2015
Here’s the key take-way: This is it. This is open-ended, QE to infinity. Note the Fedline: FED WILL ADD TO PURCHASES IF (WHEN) LABOR MARKET DOESN’T IMPROVE

http://maxkeiser.com/2012/09/13/fed-decides-perpetually-bail-banks-new-qe-infinity/
Fed decides to perpetually bail out banks with new `QE to infinity.’  Posted on September 13, 2012

http://www.jsmineset.com/2012/09/13/hyperinflation-is-virtually-assured-john-williams/
Hyperinflation is Virtually Assured – John Williams
September 13, 2012, at 1:07 pm
Jim Sinclair’s Commentary
There could not a more important presentation to review
again today as QE is initiated. I assure you, to infinity now in USA and Euroland. I have taken a lot of heat on QE to infinity, but it was birthed today in the USA and a week ago in Euroland.