Tuesday, June 28, 2016

Mish mocks RBA about their inflation expectations.

Mish is out mocking the central bank of Australia (AKA RBA) for lamenting a deflationary trend.  Apparently, the supposed lock step between the value of the Aussie dollar and the cost of imported goods is not guaranteed.

I say, of course not.  Both have their own wave counts.  Oftentimes they overlap but their relationship is far from being something you can count on (or create derivatives on...).  Mish correctly predicts a housing collapse to befall Australia as well.  How people ever get deluded into thinking that their 2500 sq ft 3/2 house with 2 car garage is worth a million five I will never understand.  Of course it is only "worth" that as long as people can afford to pay for it.  And nobody has a million five cash so let's modify that statement to read "as long as people can afford the monthly mortgage payment".

Many things can make that statement turn false including rising interest rates and a collapse in jobs.  At the same time, I have not forgotten that 5 waves down will soon be complete in the velocity of the US M2 money stock.  When that begins to rise then we will likely begin to see real signs of inflation.  It will not signal that too much money is being printed but rather that the people have lost confidence in the issuing authority.

Inflation is the increase in money supply relative to goods and services, decrease is the reverse.
Hyperinflation has nothing to do with increases in the money supply.  Instead it reflects the fact that people have lost confidence in the con game of the paper money in question.  The confidence loss could be due to too many QE sessions but it could also occur for many other reasons.  Anything that can cause loss of confidence in the faith based economic system can cause people to try to get rid of the currency which is the symbol of that system.

Other things could be at play here as well.  For example, perhaps this chart represents saving/hoarding by boomers entering retirement.  When they die, their children will have sudden access to found money which can cause many people to go live it up since their existence is otherwise a miserable drudge.  Whatever the cause, the chart is telling those of us with jobs to enjoy deflation for as long as it might last because it never lasts forever.


Augustine said...

At least in this scale, it's hard for me to tell this pattern between a 5th down and a 3rd of a 3rd down. Not that it matters to the conclusion, but just to the timing, yes?

The Captain said...

You are right except for one thing. A 3rd of 3rd should be dramatic in terms of movement per unit time. The middle wave has this feature but the current wave is a controlled slide. We won't know which is right or wrong until the turn actually occurs but what I am counting as wave 3 is longer than wave 1 and what I am counting as wave 3 looks like a cliff dive.

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