# Inflation or deflation?



## BradK (30 August 2009)

The printing presses are running hot in the UK and the USA. 

http://business.timesonline.co.uk/tol/business/columnists/article6814358.ece

Are we in for inflation or deflation? Orthodoxy would have it that we are in for massive inflation, and people always point to the 1923 German hyper-inflation as proof. Printing money to pay off the Versailles settlement and other foreign debt after the French occupied the Ruhr. 

Are we going to get deflation, following by inflation? 
Or just deflation? 

What is the real threat here?


----------



## pacestick (30 August 2009)

This arguement has been going on for some time now .Those who believe in inflation use the arguement of the weimar republic and continually state  that it is  high school economics that inflation must follow in so doing they they imply Ben Bernake  does not know what he is doing. This ignores the fact that his scholastic qualifications  are in that exact area the inflation of the Weimar republic .He is more highly qualified than most if not all of his critics in this area .This raises the question  why has he done it. He addressed this issue in a speech in London to the London school of economics 
http://www.businessspectator.com.au/bs.nsf/Article/Bens-Weimar-defence-$pd20090114-N9RRM?OpenDocument&src=srch

Basically he believes that the answer is to wind down the printing as the economy recovers that is why governments around the world have printed money but have put limits on it. The issue will become whether short term political gain will cause governments to keep printing rather than cut back and withdraw money from the system as it recovers

http://www.businessspectator.com.au/bs.nsf/Article/Bens-Weimar-defence-$pd20090114-N9RRM?OpenDocument&src=srch


----------



## BradK (30 August 2009)

Thanks for that Pacestick. Explains it clearly.


----------



## So_Cynical (30 August 2009)

pacestick said:


> Basically he believes that the answer is to wind down the printing as the economy recovers that is why governments around the world have printed money but have put limits on it.




Yeh but its not like the money that's been printed has a use by or expiry date, the money is out there washing through the economy and the only way they can manage the impact of that is via inflation....plus inflation will help drive asset prices up which helps debt driven economy's roll on.


----------



## knocker (30 August 2009)

Looks like oil is the new worthless currency nowdays:

http://www.thebull.com.au/articles_detail.php?id=5661


----------



## Smurf1976 (30 August 2009)

knocker said:


> Looks like oil is the new worthless currency nowdays:
> 
> http://www.thebull.com.au/articles_detail.php?id=5661



Oil: Increasingly scarce commodity with long term rising demand and inherent utility.

USD and other fiat currencies: Increasingly abundant commodity with no inherent utility other than as toilet paper and, possibly, insulation.


----------



## knocker (30 August 2009)

Smurf1976 said:


> Oil: Increasingly scarce commodity with long term rising demand and inherent utility.
> 
> USD and other fiat currencies: Increasingly abundant commodity with no inherent utility other than as toilet paper and, possibly, insulation.




Well there's always steam :


----------



## dhukka (30 August 2009)

So_Cynical said:


> *Yeh but its not like the money that's been printed has a use by or expiry date, the money is out there washing through the economy* and the only way they can manage the impact of that is via inflation....plus inflation will help drive asset prices up which helps debt driven economy's roll on.




Actually it's the complete opposite, the money is NOT out there in the economy. Take a look at the loans on reserve at the Federal Reserve in the US. Bank lending has actually contracted, velocity of money has fallen like a stone. You can print as much money as you like but you can't force people to lend it out or borrow it.


----------



## pacestick (30 August 2009)

So_Cynical said:


> Yeh but its not like the money that's been printed has a use by or expiry date, the money is out there washing through the economy and the only way they can manage the impact of that is via inflation....plus inflation will help drive asset prices up which helps debt driven economy's roll on.




 Actually governments remove and add to money supply every day quite simply by not replacing the mutilated notes that are returned to the mint by the banks.
Also and this is a little more complicated by adjusting the amount the banks are allowed to loan through the fiat system


----------



## brty (31 August 2009)

According to the bank of England, looking at a little bit of history going back to 1694, there is a strong likelyhood of inflation given the increase in money supply.

Dhukka is also correct in that while there is little lending and a slower velocity of money then inflation is not happening. I contend however that as confidence returns to the system, the lending will increase which will give the inflation, though it may be several years away.

Document from B of E......

http://www.bankofengland.co.uk/publications/quarterlybulletin/qb940201.pdf

The last sentence being interesting.


> "There have, however, been almost no instances when inflation has NOT been associated with an increase in money supply"




brty


----------



## brty (31 August 2009)

This document is also good to read about the correlation between money supply growth and inflation. After such a huge amount of printing that has happened, it is hard to draw any conclusion other than inflation, even if there is a lag until we get it.

http://www.bankofengland.co.uk/publications/quarterlybulletin/qb050302.pdf


brty


----------



## Timmy (31 August 2009)

Good info thanks all.

Refresher/primer on money supply measures & velocity of money for those (like me) that need it:

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

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


----------



## bongcso (1 September 2009)

Glad to see this thread as this question has been keeping me up at night as well. I think getting this right is critical for investment decisions. If we see inflation, then we should buy assets (and leverage up e.g. take up investment loans) as asset prices will increase in future. If we see deflation, then we should sell assets (and deleverage by paying down our loans) and stay in cash as assets will be worth less in the future.

My initial view was inflation because of the increased money supply etc as mentioned by many before. But as Dhukka said "You can print as much money as you like but you can't force people to lend it out or borrow it." After the bursting of a major asset bubble where people got into trouble from over leverage, the natural reaction for people to deleverage and start saving as we have seen in the US. This tends to cause deflation rather than inflation, as frugality becomes the new normal.

The most recent evidence for deflation, is Japan since their asset bubble burst in 1989. If you look at chart of the Nikkei index, you will see it has been in a downtrend since 1989. According to Wikipedia, their property prices never came back and the average price of residential property is only a tenth of what it was at the peak and this happened despite many rounds of government stimulus/spending. Their most recent forecast for CPI is still a negative number and is expected to remain negative for the next few years.

However, this is the case for countries where an asset bubble has burst and may not apply yet to Australia. From what I have seen in the past few months, our property bubble is still intact as property prices have gone back to and even exceeded the pre-GFC levels in some areas in Melbourne. For Australia, maybe it will be inflation for a little while longer as we escaped a recession. That's my 2 cents worth.

SMSF Investment Strategies


----------



## Buckeroo (1 September 2009)

bongcso said:


> Glad to see this thread as this question has been keeping me up at night as well. I think getting this right is critical for investment decisions. If we see inflation, then we should buy assets (and leverage up e.g. take up investment loans) as asset prices will increase in future. If we see deflation, then we should sell assets (and deleverage by paying down our loans) and stay in cash as assets will be worth less in the future.
> 
> My initial view was inflation because of the increased money supply etc as mentioned by many before. But as Dhukka said "You can print as much money as you like but you can't force people to lend it out or borrow it." After the bursting of a major asset bubble where people got into trouble from over leverage, the natural reaction for people to deleverage and start saving as we have seen in the US. This tends to cause deflation rather than inflation, as frugality becomes the new normal.
> 
> ...




Good points

Maybe with all the stimulus money that's been pumped into economies across the world, initially inflation takes hold & rises over the next 6 - 12 months. 

Once interest rates get to a certain & critical level, there could easily be another serious round of defaults, not only in the housing market, but in a number of other areas such as businesses, margin loans, credit cards etc.

This will again put pressure on our financial systems, spiraling us into a new GFC. Then deflation occurs, this time for a prolonged period until such time as the leverage in economies is wound back to a sustainable level

Cheers


----------



## joeyr46 (1 September 2009)

when we talk about money supply we should also use or add total credit because it is really money (for want of a better term) and regardless of the printing presses the money supply and total credit around the world is actually contracting. So yes we will probably get deflation (more goods chasing less money) before any possibility of inflation. 
Gold will signal inflation long before it arrives and it is not saying we're in for inflation yet even in AUD still around levels seen some time  ago and only twice (roughly) what it was in 1980 (aud) and not much above 1980 in USD


----------



## ducati916 (2 September 2009)

dhukka said:


> Actually it's the complete opposite, the money is NOT out there in the economy. Take a look at the loans on reserve at the Federal Reserve in the US. Bank lending has actually contracted, velocity of money has fallen like a stone. You can print as much money as you like but you can't force people to lend it out or borrow it.




Incorrect.

The government via increasing deficits, is replacing the private sector debt with public sector debt [via increased debt issuance and QE printing]

This is pure Keynesianism. It is highly inflationary. Consider the following data and argue a deflation.


----------



## jet328 (2 September 2009)

ducati916 said:


> Consider the following data and argue a deflation.




http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html


----------



## Timmy (2 September 2009)

ducati916 said:


> Consider the following data and argue a deflation.




Inflation falling rapidly in the US, as per dhukka's argument.

Source: http://www.shadowstats.com/


----------



## dhukka (2 September 2009)

ducati916 said:


> Incorrect.
> 
> The government via increasing deficits, is replacing the private sector debt with public sector debt [via increased debt issuance and QE printing]
> 
> This is pure Keynesianism. It is highly inflationary. Consider the following data and argue a deflation.




There is nothing incorrect with what I said, velocity has fallen off a cliff, no velocity, no inflation. When banks take those excess reserves, start to increase lending, stop tightening lending standards and businesses and households start to borrow more you'll get inflation.


----------



## dhukka (2 September 2009)

jet328 said:


> http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html




Good article jet, that summarizes why a rapidly expanding Fed balance sheet is not necessarily inflationary.


----------



## ducati916 (3 September 2009)

Timmy said:


> Inflation falling rapidly in the US, as per dhukka's argument.
> 
> Source: http://www.shadowstats.com/




Timmy.


----------



## ducati916 (3 September 2009)

dhukka said:


> There is nothing incorrect with what I said, velocity has fallen off a cliff, no velocity, no inflation. When banks take those excess reserves, start to increase lending, stop tightening lending standards and businesses and households start to borrow more you'll get inflation.




Incorrect.

Velocity has fallen off a cliff. That represents the demand for currency, as credit has contracted, which, I agree is deflationary.

However, the contraction in bank credit, is being offset by an expansion in government credit via deficit spending. The result are the data points in the first set of charts.


Currently deflation is a non-event.


----------



## ducati916 (3 September 2009)

jet328 said:


> http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html




jet,

That article is dated December 11 2008. As such, it is already out of date. Monetary and Fiscal Policy has moved a long way [inflationary] forward since then.

If you're looking at the banks, you're looking in the wrong direction currently.

jog on
duc


----------



## Timmy (3 September 2009)

Inflation is negative in the US:

Data updated to 14 August '09

Data source, US Bureau of Labor Statistics (unadjusted figures)

The negative inflation numbers are probably at an extreme, though, and will move back into positive in coming months.


----------



## Timmy (3 September 2009)

Duc, curious why the inflation chart you show from the Atlanta Fed shows a kick-up in inflation on the right-hand extreme whereas all other charts of US inflation are showing continued falls.  Is the right-hand extreme on the Fed charts a projection?


----------



## lasty (3 September 2009)

Timmy said:


> Duc, curious why the inflation chart you show from the Atlanta Fed shows a kick-up in inflation on the right-hand extreme whereas all other charts of US inflation are showing continued falls.  Is the right-hand extreme on the Fed charts a projection?




Forget about the graphs.... You only have to look at your utlility bills,supermarket shopping and day to day expenses  to see if we are sitting in an inflationary or deflationary scenario (talking about here in Australia)


----------



## dhukka (3 September 2009)

ducati916 said:


> Incorrect.
> 
> Velocity has fallen off a cliff. That represents the demand for currency, as credit has contracted, which, I agree is deflationary.
> 
> ...




Again, nothing incorrect in what I said, currently inflation is the non-event. We shall see in the coming years if that remains the case.


----------



## gooner (3 September 2009)

lasty said:


> Forget about the graphs.... You only have to look at your utlility bills,supermarket shopping and day to day expenses  to see if we are sitting in an inflationary or deflationary scenario (talking about here in Australia)




Plasma TV's - price down
Apple Mac - price down
Cars - price down

Inflation for the year to June was 1.5% (WWW.RBA.GOV.AU), so overall modest inflation, but decelerated very rapidly. Doubt we will go to deflation though - probably very low inflation for a while


----------



## white_goodman (3 September 2009)

STAGFLATION!


----------



## lasty (3 September 2009)

gooner said:


> Plasma TV's - price down
> Apple Mac - price down
> Cars - price down
> 
> Inflation for the year to June was 1.5% (WWW.RBA.GOV.AU), so overall modest inflation, but decelerated very rapidly. Doubt we will go to deflation though - probably very low inflation for a while




If you look at the breakdown
The big falls are in financial services ie home loans and transportation.

The others are up food eg 4.8%
Check your electricity bill.

You will be surprised on how much the household budget spends on food.
over 30%


----------



## So_Cynical (3 September 2009)

gooner said:


> Plasma TV's - price down
> Apple Mac - price down
> Cars - price down




Food - price up
Insurance - price up
My Rent - price up :frown:


----------



## white_goodman (3 September 2009)

So_Cynical said:


> My Rent - price up :frown:




land tax related, good work NSW govt


----------



## gooner (3 September 2009)

So_Cynical said:


> Food - price up
> Insurance - price up
> My Rent - price up :frown:




And you may notice all those are non-tradeable goods (insurance can be depending on type of insurance) i.e. no or limited import competition. Tradeable goods have been under downward price pressure for years due to the impact of China and India which is why our standard of living has gone up so much.

And wages up because our exports get so much more in terms of trade.


----------



## ducati916 (4 September 2009)

dhukka said:


> Again, nothing incorrect in what I said, currently inflation is the non-event. We shall see in the coming years if that remains the case.




Apart from your opinion, do you actually have any data that supports your assertion?

You know I'm sure the old adage - _opinions are like assholes, everyone has one_


----------



## ducati916 (4 September 2009)

Timmy said:


> Duc, curious why the inflation chart you show from the Atlanta Fed shows a kick-up in inflation on the right-hand extreme whereas all other charts of US inflation are showing continued falls.  Is the right-hand extreme on the Fed charts a projection?




Timmy,

The chart that you are displaying from _shadowstats_ is simply a %change chart. Here is the Fed version. The first chart [posted previously] illustrates Fed policy, viz *inflate* the second simply shows by how much.

Thus the policy is inflate. Everyone else now has the same policy. The result has been to mute the deflationary credit event from last year and currently. Once started _inflation_ it's almost impossible to stop without crashing the economy, thus what we'll see into the future is inflation.


----------



## dhukka (4 September 2009)

ducati916 said:


> Apart from your opinion, do you actually have any data that supports your assertion?
> 
> You know I'm sure the old adage - _opinions are like assholes, everyone has one_




As we all know duc, given your track record of opinions, yours is worth less than an asshole, but lets indulge your latest fantasy for a bit. 

My opinion doesn't differ a whole lot. Yes the Fed and every other central bank have adopted an inflationary stance, clearly represented by the ballooning balance sheet of the Fed in the case of the US. This is undoubtedly inflationary as that excess liquidity makes it's way into the economy. However it is the last point that is not happening. Excess reserves held at the Fed have grown proportionately with the growth in the Fed's balance sheet. Also, the velocity of money in the economy has dried up.

On the deflationary side you have a deleveraging household sector which has shed approximately *$14* trillion in net worth, is reducing debt and increasing savings.  The corporate sector also continues to deleverage. 

So we have a deflationary household and corporate sector and an inflationary Fed coupled with a dose of fiscal recklessness on the part of the congress. I can easily see how that translates into inflation 3-4 years out, but it is currently not evident.


----------



## ducati916 (5 September 2009)

dhukka said:


> As we all know duc, given your track record of opinions, yours is worth less than an asshole, but lets indulge your latest fantasy for a bit.
> 
> My opinion doesn't differ a whole lot. Yes the Fed and every other central bank have adopted an inflationary stance, clearly represented by the ballooning balance sheet of the Fed in the case of the US. This is undoubtedly inflationary as that excess liquidity makes it's way into the economy. However it is the last point that is not happening. Excess reserves held at the Fed have grown proportionately with the growth in the Fed's balance sheet. Also, the velocity of money in the economy has dried up.
> 
> ...




Obviously touched a raw nerve there judging from your rather aggressive reply.

You accept that Central Banks worldwide have adopted an inflationary policy response. You also accept that in the future, unless this policy stance is reversed, that inflation will be the result.

Thus all that remains is the current timeframe.

You state that $14 trillion of net wort has been lost through asset price collapse. Agreed.

You state that the consumer is reducing debt. 
Incorrect, look at the data. Consumer debt has only reduced by some 2% I'll post the exact numbers when I get back to my computer.

The Corporate sector is deleveraging via liquidation. This is not deflationary, this is inflationary. As capital is liquidated and stages of production curtailed, production is reduced.

Reduced production reduces supply. Reduced supply, in the face of stable demand, think necessities, food, power, etc, results in higher prices.

Demand is stable because the government is increasing government spending via deficits. These deficits are being expended within Welfare, Shovel ready, bailouts, etc.

The government borrowing and printing [via QE] is replacing consumer borrowing, thus, again the inflationary pressure is obvious in the data [refer to earlier charts]

The banks are simply not the correct place to be looking for the inflationary entry point. They were the credit creators in the last inflationary cycle, not this one however.

Thus I am not actually providing an "opinion" at all, rather simply elucidating the data for you.


----------



## GumbyLearner (5 September 2009)

Oh the **** I already have, has diminished SO MUCH in value.

The FOOD I eat is SO MUCH cheaper.

My COST OF LIVING EXPENSES are SO MUCH lower.

Wait, I just need to go to the men's and have a toss!

What a load of ****


----------



## dhukka (5 September 2009)

ducati916 said:


> Obviously touched a raw nerve there judging from your rather aggressive reply.
> 
> You accept that Central Banks worldwide have adopted an inflationary policy response. You also accept that in the future, unless this policy stance is reversed, that inflation will be the result.
> 
> ...





Thanks for your attempts at elucidation duc, but at the end of the day you are, like everybody else, just pushing a point of view. Unfortunately it is just not very convincing.


----------



## ducati916 (5 September 2009)

dhukka said:


> Thanks for your attempts at elucidation duc, but at the end of the day you are, like everybody else, just pushing a point of view. Unfortunately it is just not very convincing.




Pushing a point of view. True enough.

However it's a point of view supported by the data, and underlined by deductive logical reasoning.

What's your point of view supported by?

If you find it unconvincing, again, rather than just stating an opinion, back it up with the data, or theory that refutes my argument or interpretation thereof.


----------



## dhukka (5 September 2009)

ducati916 said:


> Pushing a point of view. True enough.
> 
> However it's a point of view supported by the data, and underlined by deductive logical reasoning.
> 
> ...




We have all seen the results of your deductive logical reasoning in the past Duc, so I'd be more convinced if you just took a wild guess. 

I probably agree with you mo more points in this debate than disagree. I recognize the potential for inflation but I fail to see the transmission mechanism to the real economy in the short to medium term based on a lot of the same data you use. 

Note I am not, and have never in this thread claimed that what we are in is a period of deflation. I see opposing forces at work that are currently and will continue to approximately offset each other in the medium term.


----------



## ducati916 (5 September 2009)

dhukka said:


> We have all seen the results of your deductive logical reasoning in the past Duc, so I'd be more convinced if you just took a wild guess.
> 
> I probably agree with you mo more points in this debate than disagree. I recognize the potential for inflation but I fail to see the transmission mechanism to the real economy in the short to medium term based on a lot of the same data you use.
> 
> Note I am not, and have never in this thread claimed that what we are in is a period of deflation. I see opposing forces at work that are currently and will continue to approximately offset each other in the medium term.




Since you obviously consider my analysis somewhat below your own, I would have thought that you might present an argument somewhat more substantive than your current effort then.

The transmission mechanism is the government running record deficits that are set to expand even further. The government is borrowing as the consumer either can't or won't.

Really.

So what's the *opposing force* to inflation? Perchance deflation? Or, if not - what exactly?


----------



## dhukka (6 September 2009)

ducati916 said:


> Since you obviously consider my analysis somewhat below your own, I would have thought that you might present an argument somewhat more substantive than your current effort then.
> 
> The transmission mechanism is the government running record deficits that are set to expand even further. The government is borrowing as the consumer either can't or won't.
> 
> ...




I have no crystal ball and admit I might well be wrong by underestimating the current inflation threat, time will tell. I'll take the evidence as it comes in.

Basically I see an inflationary Fed and Congress offset by a deleveraging or deflationary household and corporate sector. The Fed under Bernanke is committed to creating inflation, I just doubt they can generate any substantial inflation in the next 12 - 18 months.


----------



## Timmy (2 February 2010)

The kick up in the velocity of money in the US has happened:

_Graph below, from: http://research.stlouisfed.org/publi.../mt/page12.pdf
(Red oval mine)_







So, higher inflation on the way now in the US?  Hard to think that is likely given the still very weak economy (though improving) and very poor employment situation, but with the monster growth of money supply and the QE, and now the increase of velocity ... I think so.

Move up in the Fed Funds target ... when?  A lot are saying not in 2010, but this is more likely now given the velocity change.  

Any thoughts?


----------



## Temjin (2 February 2010)

dhukka said:


> I have no crystal ball and admit I might well be wrong by underestimating the current inflation threat, time will tell. I'll take the evidence as it comes in.
> 
> Basically I see an inflationary Fed and Congress offset by a deleveraging or deflationary household and corporate sector. The Fed under Bernanke is committed to creating inflation, I just doubt they can generate any substantial inflation in the next 12 - 18 months.




I agree with dhukka in that I certainly do not see any immediate threat of inflation in the short term. In the longer term, perhaps, but the deflationary forces including the commercial property sector, massive bad debt, unwillingness for both the banks to lend and consumers/businesses to borrow, high unemployment, plus dhukka's points, would easily outweigh any inflationary force. 

Until the central banks start dropping REAL cash from REAL helicopters, and/or the economy start to grow rapidly with all bad debt magically eliminated without hurting the banks' balance sheets and all businesses/consumers start borrowing and consuming again, then no, no inflation.

Current economic data strongly correlate with the deflation theory right now.

In a way, you can have a printing press in your backyard and print trillion of dollars, but they are worthless until you can actually spend it or lend it out. The money isn't spent right now because of the weak demand and aren't lend out because of the need to maintain reserve ratio and as safeguard against further defaults (which are guaranteed 100% to happen). 

If anyone want to repute this by saying the massive reserve in the banks will eventually lead to inflation, then read this and disprove Mish's theory. 

http://globaleconomicanalysis.blogspot.com/2009/12/fictional-reserve-lending-and-myth-of.html

Of course, I'm not totally discounting the inflation scenario in the "longer" term. Politicians and central bankers could certainly get away and start their competitive currency depreciation game too fast. 

Until the banks start lending again in full force, and consumers start spending again, while all the bad debt has largely been eliminated, then no, I see there will be an extended period of mild deflation just like Japan's lost decades. 

I expect people to disagree with me of course, but regardless, being an armchair "observer" is pointless unless I can make money from being one. My investments are perfectly allocated to win in either the deflation or inflation scenario. (and can easily be changed at whim when new unexpected information arises)

But anyone who bets 100% on inflation, especially in the shorter term period, and decide to leverage into assets that benefit from it (i.e. precious metals, commodities), then I would say it is not a wise decision.


----------



## Temjin (2 February 2010)

Here is another empirical research on debt and deleveraging.

http://docs.google.com/viewer?url=h...eraging/debt_and_deleveraging_full_report.pdf

Some extracts from its executive summary 

- Leverage levels are still very high in some sectors of several countries - and this is a global problem, not just a US one.

- Empirically, a long period of deleveraging nearly always follows a major financial crisis.

- Historic deleveraging episodes have been painful, on average lasting six to seven years and reducing the ratio of debt to GDP by 25%. GDP typically contracts during the first several years and then recovers. 

- If history is a guide, we would expect many years of debt reduction in specific sectors of some of the world's largest economies, and this process will exert a significant drag on GDP growth. 


Please tell me we are not facing a financial crisis and that it is DIFFERENT this time.



A small extract from David Rosenberg's latest article.



> CREDIT STRAINS INTACT
> 
> First off, U.S. bank credit continued to contract last week (according to data released by the Federal Reserve) — by $0.5 billion for Commercial & Industrial (C&I) loans; $2.0 billion for real estate loans; and by $4.6 billion for consumer loans. This may be why the sustainability of a recovery being sustained without credit once the government stimulus is being questioned by Mr. Market. So far, the contraction in bank credit has amounted to $600 billion and is ongoing.
> 
> ...


----------



## ducati916 (3 February 2010)

*Tem*



> I agree with dhukka in that I certainly do not see any immediate threat of inflation in the short term. In the longer term, perhaps, but the deflationary forces including the commercial property sector, massive bad debt, unwillingness for both the banks to lend and consumers/businesses to borrow, high unemployment, plus dhukka's points, would easily outweigh any inflationary force.




Current Economic Indicators

February 01, 2010 (Close of Day) 


Inflation % 2.82 
GDP Growth % 5.62 
Unemployment % 10.00 
Gold $/oz 1,086.50 
Oil $/bbl 74.43 
Prime % 3.25 

Well CPI is 2.82% from the official figures. That figure is rising all the time. That the banks are not lending is true, they are still essentially bankrupt. But as pointed out previously, if you are looking at the banks, you are looking at the wrong data.

Government debt and deficits are where you need to be looking. They are growing very quickly. They are growing to counteract the banks losses. Hence the next crisis, as evidenced via Greece, is a sovereign default crisis.




> Current economic data strongly correlate with the deflation theory right now.




Simply incorrect. Observe the latest data. The data is still consistent with a wider and shallower structure of production, which, eventually, creates higher consumer prices. Consumer prices, as you can note, are already higher.

The interesting data point is the *Backlog of Orders *which has suddenly increased from seemingly nowhere. Of course, as stimulus spending from the government bouys demand, so the capital destruction that has already occurred, is now inadequate to provide supply, hence, prices rise, and prices are most definitely on the rise once again.

Also clear, is the effect of Fiscal Policy of deficit spending via Welfare and other social net programs. This of course flows directly to consumer demand, we all consume: food, shelter, clothing, etc.

The impaired capital structure, can now no longer provide supply to match demand, and prices rise.

jog on
duc


----------



## Temjin (3 February 2010)

ducati916 said:


> *Tem*
> 
> 
> 
> ...




I just don't see how "inflationary" the above is except you the sentence where you stated, "That figure is rising all the time". Which is actually untrue depending on how you MEASURE it. 

We all know price of housing was removed from official CPI measurement (for the US) since 1986 and only the housing cost in relation to rentals/mortgages are included. 

I don't think I need to explain what will happen to this official CPI figure if we used the "old" measurement again. 

You suggested to focus on government debt and deficits. How is it correlate with the CPI? More debt/deficits = higher inflation?

I certainly do not think a sovereign default crisis is anywhere inflationary. 

Again, refer to the empirical report I've posted earlier. The facts are clear. Most financial crisis since the 1930s were highly deflationary, EMPIRICALLY. There are, of course, exceptions where economies went into hyperinflation as their government manipulate their currency in an attempt to maintain status quote. But it's not always possible and certainly not always politically "practical". 

Another interest article to read is here.

http://globaleconomicanalysis.blogspot.com/2010/01/consumer-credit-drops-record-175.html



> While monetarist clowns focus on so-called excess reserves and the huge surge in inflation that is supposed to bring (See Fictional Reserve Lending And The Myth Of Excess Reserves) I am watching the biggest plunge in consumer credit since WWII.
> 
> Please consider Consumer Credit in U.S. Drops Record $17.5 Billion.
> 
> ...




I agree with Mike in that consumer attitude is the key to deflation. 

Of course, we could be debating forever since there is no universal acceptance on what exactly is "inflation".

Mike has another article on this.

http://globaleconomicanalysis.blogspot.com/2009/11/what-is-inflation-and-how-does-one.html

Different school of economists will see it differently. 

Populist views are obviously on inflation = rising prices. 

Austrian economists see it as inflation = money supply rises.

Mike's model, and amoung other popular economists/commenators such as David Rosenberg, Steve Keen, John Mauldin, all agree with his Fiat World Mathematical Model in that credit and credit marked to market dramatically effect the way the economy works.

Again, this discussion is more theoretically than I would really care. It's the practical action that counts. Like I said again, I am well prepared for the deflation and equally prepared if there is a run away inflation if politicians decide to go crazy.


----------



## Timmy (3 February 2010)

Thanks Temjin and duc, appreciate the views.  

Sorry to harp on, any thoughts on if the increase in velocity is of any consequence / is it a tirgger for inflation fears / a catalyst / irrelevant / etc.?


----------



## Tysonboss1 (3 February 2010)

Hi Guys,

Here is two video series that I watched some time ago, Both of these series help answer alot of questions I had always had about the money system in an entertaining cartoon way. the first series is mainly about what money is. the second series talks alot about inflation and deflation.

1st series, this is the first video there are 5 in total
http://www.youtube.com/watch?v=vVkFb26u9g8

2nd series, this is the first video there are 8 in total
http://www.youtube.com/watch?v=_doYllBk5No
I highly recommend these videos,


----------



## ducati916 (4 February 2010)

*Tyson*



> I just don't see how "inflationary" the above is except you the sentence where you stated, "That figure is rising all the time". Which is actually untrue depending on how you MEASURE it.




Simply look at the attached data. This chart will appear at the bottom of the page. Essentially unmitigated inflation since the 1940's, except for our little dip of 2008/2009.



> We all know price of housing was removed from official CPI measurement (for the US) since 1986 and only the housing cost in relation to rentals/mortgages are included.




As you seem to be citing Mish as your authority, Mish’s argument for deflation centres around the following assertion:



> believe housing belongs in the CPI. Regardless, the Fed could have and should have taken housing prices into consideration instead of following a fatally flawed OER as its measure of housing prices.




Let’s first define exactly what the CPI actually is.

CPI’s measure the cost of a basket goods and services purchased by the average household each month. The baskets composition and weighting are usually based on surveys of household or family expenditure habits.

Now whether you argue that CPI’s are useful or worthless, that at this juncture is simply irrelevant. What is relevant however is that it is monthly expenditures.

Here then the argument shifts to rent, or, mortgage payment. Any difference quantitatively or qualitatively? No, not really. On that basis I have no issues with either being included. There will of course be quantitative differences in the CPI for those who take variable rate mortgages as opposed to fixed rate mortgages, they will likely be more volatile – that however is not Mish’s point.

Mish wants house prices included in the CPI. This under the definition of the CPI is simply nonsense.

As in the case of any other good, the capital value of land is equal to the sum of its discounted future rents. The value of the land increases as the capitalization rate falls with interest rates. Thus when the Fed lowered rates, the present value of the implied future rents on land became more valuable.



> Ground land, then, is ‘capitalized’ just as are capital goods, shares in capital-owning firms, and durable consumers’ goods. _Rothbard_.




Why is land classified as a capital good? Essentially the answer is durability. Land, is for all intents and purposes, eternal and unchanging, as such, it is capitalised, because otherwise it’s value becomes infinite, and it could never be bought or sold for money.



> The raw land cost is generally 10 to 25 percent of a home. In 2001, the Bureau of Land Management (BLM) sold government-owned land to developers for $26,672 per acre in Las Vegas, Nevada. Four years later, BLM acreage was going for $270,000 per acre. So while land prices were increasing tenfold, the medium new-home price shot from $130,000 in December 2000 to $350,615 in early 2006.




I won’t actually look at the reasons why [inflation via fractional reserve bank lending] the price rose so dramatically, however the facts remain, placing housing in the CPI, when a significant component of the price is a capital cost, is simply untenable.

So while placing housing prices in the CPI helps make Mish’s argument for a CPI based deflation, it is actually highly inaccurate.



> You suggested to focus on government debt and deficits. How is it correlate with the CPI? More debt/deficits = higher inflation?




Government deficit spending is being spent on *economic stabilisers* or what is more commonly known as *Welfare* or the dole. This taxpayer funded largesse effects a redistribution of wealth. The central belief of Keynesians being, lower incomes, spend more of their disposable incomes on *consumption* which, when _supply_ is reduced via reduced investment of capital, raises prices due to steady or increasing _demand_



> I certainly do not think a sovereign default crisis is anywhere inflationary.




Money, due to it's high property of exchangability increases the _liquidity and marketability_ of goods and services. These are both forms of risk. Risk commands a premium. By reducing risk, viz. increasing both marketability & liquidity, money lowers prices.

If money, fiat money collapsed, initially, we may be forced back to direct exchange [barter] which would raise prices. You I suspect are basing your observation of a deflation on the banking crisis, which was not a crisis of money, rather, of financial system solvency, which meant, that everyone wanted to run to cash.

In a sovereign default, running to cash is a pointless exercise, as the state stands behind a fiat currency, nothing else.



> Again, refer to the empirical report I've posted earlier. The facts are clear. Most financial crisis since the 1930s were highly deflationary, EMPIRICALLY. There are, of course, exceptions where economies went into hyperinflation as their government manipulate their currency in an attempt to maintain status quote. But it's not always possible and certainly not always politically "practical".




Incorrect. The 1929-1934 crisis was deflationary. Every crisis since has been inflationary. If you disagree, name your crisis, cite your evidence and I shall refute it.



> I agree with Mike in that consumer attitude is the key to deflation.




Overly simplistic. While I agree that consumer attitudes are important, they most certainly are not primary. You will need to provide some argument as to why you feel they are important, if you want discussion on this point.



> Of course, we could be debating forever since there is no universal acceptance on what exactly is "inflation".




As you seem to adhere to Mish's dictums: Mike's model, and amoung other popular economists/commenators such as David Rosenberg, Steve Keen, John Mauldin, all agree with his Fiat World Mathematical Model in that credit and credit marked to market dramatically effect the way the economy works.





> The definition I adhere to is: Inflation is a net expansion of money supply and credit, where credit is marked to market. Deflation is the opposite: a net contraction of money supply and credit, where credit is marked to market.




I have no problems with this definition, in fact, I rather like it. So, based on Mish's definition:

State Government Total Outstanding
2006………….$389,540 million
2009………….$1,470637.0 million

US Corporations
2006…………$2,500,770.0 million
2009…………$6,273,973.0 million

Mortgage Debt
2005…………….$12,090,031.0 million
2009 Q2………..$14,483,202.0 million

US Government Debt
2005……………$8,100.0 billion
2009……………$11,985.0 billion

So based on those numbers, where exactly is the deflation? The current debt expansion due to government and corporations more than makes up for the rather minor contraction in consumer debt. From the numbers, it still looks like an inflation.

This of course does not include future liabilities: Social Security, Medicare, Medicaid, Welfare. These PV liabilities run into further Trillions of dollars. Where exactly are they going to come from?



> Again, this discussion is more theoretically than I would really care. It's the practical action that counts. Like I said again, I am well prepared for the deflation and equally prepared if there is a run away inflation if politicians decide to go crazy.




Theory is always the starting point. If you don't understand the problem correctly, how can you possibly solve the problem?

As to the charts posted by Mish, they're essentially nonsense. Consumer credit has, on his chart, contracted by what 3%'ish, Revolving Credit, look at the drop in the 1970's as compared to current figures, there's no comparison.

The contraction in *price inflation* is far more significant in the PPI data. This is actually far more important, as it indicates a contraction in investment in capital and capital goods + labour. This, is what will [and already is] constraining supply, which, in the face of steady demand, drives consumer prices higher [CPI]

jog on
duc


----------



## explod (21 April 2010)

Sual Eslake leads with an interesting take, in the Business Age today, on how hyperinflation is impossible in the current climate and particularly sighting the US, the link here:-  http://www.theage.com.au/business/hyperinflation-is-a-hollow-threat-20100420-srsy.html

So why is he so vehemment, got this littleole black duck (conspiracy theorist) thinking, Uh Huh and sure enought James Turk has an article out overnight saying just the opposite the link :-  http://www.fgmr.com/hyperinflation-looms-dollar-arrives-at-its-havenstein-moment.html

So most will know what I think but open to you Sisters and Brothers,


----------



## MRC & Co (22 April 2010)

Flattening of the curve seen recently, probably pricing in deflation.


----------



## Dona Ferentes (11 May 2020)

*THE GREAT MONETARY INFLATION*
_- Paul Tudor Jones_

COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally. The depth and magnitude of the economic drop-off took modern monetary theory—or the direct monetization of massive fiscal spending—from the theoretical to practice without any debate.

A. Debt Addiction
B. Money Printing is a Hard Habit to Kick
C. Seeking Refuge from the Great Monetary Inflation

_There is a host of assets that at one time or another have worked well in reflationary periods:_
_1. Gold – A 2,500 year store of value_
_2. The Yield Curve – Historically a great defense against stagflation or a central bank intent on inflating. For our purposes we use long 2-year notes and short 30-year bonds _
_3. NASDAQ100 – The events of the last decade have shown that quantitative easing can rapidly leak into equity markets4.Bitcoin–There is a lengthy discussion of this below _
_5. US cyclicals (long)/US defensive (short) – A pure goods’ inflation play historically_
_6. AUD-JPY – Long commodity exporter and short commodity importer_
_7. TIPS (Treasury Inflation-Protected Securities) – Indexed to CPI to protect against inflation_
_8. GSCI(Goldman Sachs Commodity Index) – A basket of 24 commodities that reflects underlying global economic growth_
_9. JPM Emerging Market Currency Index – Historically when global growth is high and inflationary pressures are building, emerging market currencies have done quite well_

https://www.docdroid.net/H1fuimX/the-great-monetary-inflation-pdf

(- big rap for Bitcoin as a store of value)


----------



## noirua (13 October 2020)

German Consumer Prices Fell in September, in Line With Forecasts -- Update
					

German Consumer Prices Fell in September, in Line With Forecasts -- Update



					uk.advfn.com
				




Consumer prices fell 0.2% on month and on year measured by national standards, Destatis said. Both readings were in line with the forecasts from economists polled by The Wall Street Journal.


----------



## basilio (9 November 2020)

Governments around the world are pumping money  at mindboggling figures into the economy to prop up real estate, the share market and financial institutions. The consequences of this river of money ?  Historically it has been the collapse of economies whether it it was it Germany in 1922 or Zimbabwe inflation from 2007 onwards.

Ian Verrender explores what is happening.  If you own assets you are ok. If you have dollar savings or few assets you are in trouble. If the whole game blows up...









						There's no point sticking your savings in the bank because the game is rigged against you
					

Rain, hail or shine, the financial markets and property boom must go on. And to ensure that, central banks are fixing the game with a once-radical money-printing program that has only helped those with real estate and investment portfolios, writes Ian Verrender.




					www.abc.net.au


----------



## againsthegrain (9 November 2020)

basilio said:


> Governments around the world are pumping money  at mindboggling figures into the economy to prop up real estate, the share market and financial institutions. The consequences of this river of money ?  Historically it has been the collapse of economies whether it it was it Germany in 1922 or Zimbabwe inflation from 2007 onwards.
> 
> Ian Verrender explores what is happening.  If you own assets you are ok. If you have dollar savings or few assets you are in trouble. If the whole game blows up...
> 
> ...



If we are talking about a crash on that scale that the dollar and people's savings get wiped out I don't think having a few investment properties will save you.  Nobody will be paying rent and the bank will be knocking for the repayments, or perhaps the liquidators? Your assets will get sold off for 20c on the dollar and you will still owe the rest. 

I agree some assets may be good perhaps physical gold and silver can always ride it out burried in the ground.


----------



## wayneL (31 August 2021)

Just continuing with the thread necromancy here.

The general feeling among finance boffins Esther quantitative easing is inflationary, perhaps even hyperinflationary. And we  have certainly seen some inflation over the last do you quarters, particularly in the u.s.

Powell has been categorising this as "transitory".

One of the greats in the macro field is Lacy Hunt, who has stuck to his guns about the current situation being ultimately deflationary. Adding to the equation is Steve Van Meter who has always maintained that quantitative easing is actually deflationary and has been making a pretty compelling case recently that higher prices are being rejected.

Up to recently the futures price of lumber has been the most commonly quoted data point supporting the hyperinflationary argument... But in the last little while lumber has crashed back down to earth... Every bit as spectacularly as it's rise.

The explanations from Van Meter have been  particularly useful in helping me to understand that quantitative easing is not actually printing money, and I am gradually coming around to Lacey Hunt's thinking on this.

Both names easily searchable on YoooTooob etc.


----------



## divs4ever (31 August 2021)

well is see 'inflation' as  a reduction of buying   power of your dollar 

 so what is your definition of deflationary 

 i see 'shrinkflation ' as the same quality product  but a smaller quantity  for the same price ( of course inferior quality at the same price is possible  as well )

 now yes i see inflation as 'transitory '  .. inflation will gain traction quickly morph in hyper-inflation  , and not that long after the currency will collapse ( or 'reset ' )

 now we aren't talking seconds , but within 10 years  for the cycle is very possible  and 10 years in the lifetime of a nature is actually 'transitory '   , just maybe not the outcome you were hoping for 

 now your supposition  that higher prices will reduce consumption , is partially valid , but SOME products and services  will be hard to cut back on  ( let's see if the government reduces the GST for example ) ,  but sure SOME products will face reduced sales ( but the top quality stuff the very elite buy  will wander along  just fine )

 you can be sure nearly all the billionaires will sell their private jets and yachts ( sarcasm )

 now sure in some areas  reduced sales  , will mean reduced margins and that MIGHT cause prices to fall  ( many businesses rely on HIGH turnover to keep margins  healthy  , so reduced turnover means margins are contracting already  , maybe dangerously so )

 the problem is THIS time we have multiple bubbles  , and an addiction to cheap finance  .. how long until a credit-crunch ( or freeze ) assuming September 2019 wasn't that moment and we have been distracted ever since


----------



## JohnDe (22 May 2022)

An informative view on issues facing the US, and he world.

_"On episode XXIX of “In the Know,” ARK CEO/CIO, Cathie Wood, is joined by Nancy Lazar, Piper Sandler’s Chief Global Economist. Together, Wood and Lazar, weigh in on *inflation, deflation, interest rates, inventories, business confidence, bond yields, and more*. As always, they also discuss fiscal policy, monetary policy, market signals, economic indicators, and innovation."_









						May 20, 2022 — In The Know with Cathie Wood - Invest in Innovation with ARK Invest
					

On episode XXIX of "In the Know," (May 20, 2022) ARK CEO/CIO, Cathie Wood, is joined by Nancy Lazar, Piper Sandler's Chief Global Economist..




					ark-invest.com


----------

