Inflation or deflation?

[BradK]

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]

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]

Thanks for that Pacestick. Explains it clearly.

 

[So_Cynical]

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]

Looks like oil is the new worthless currency nowdays:

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

 

[Smurf1976]

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]

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]

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]

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]

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]

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]

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]

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]

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

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]

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]

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]

Consider the following data and argue a deflation.

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

 

[Timmy]

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]

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]

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.