Inflationists vs. Deflationists

[ninakat]

I recently completed a little research project for myself, and thought I'd share it here. The results are posted in the Economics sub-forum, but I thought I'd just post a heads-up here since most of us spend our time in General Discussion.

INFLATIONISTS vs. DEFLATIONISTS
a compendium in progress
http://www.rigorousintuition.ca/board/v ... p?p=243145

[JackRiddler]

.

Remember this one?
http://rigorousintuition.ca/board/viewt ... rinflation

Thanks for the compilation.

The quasi official line on Bloomberg and NPR is that deflation is underway. So as these things go, that probably means hyperinflation is certain!

I've noticed there's little distinction made about these terms. Anything pointing prices down - drop in demand and thus commodity prices, drop in asset prices, rise in the dollar against the euro - is called deflation, even though these are different phenomena of differing durations with causes that vary; and it's always considered much worse than inflation, with no acknowledgement that overall insolvency, bankruptcy and currency meltdown are possible, even likely. And the money supply rarely gets talked about in the mass-media coverage, though it's basically the most important factor. Also, there's no acknowledgment that by the same token, the bubble until now was a near hyperinflation in asset prices...

.

[smiths]

deflation is happening temporarily now,

but it certainly will be inflation when they open the gate on all that 'money' theyve been conjuring and holding

[ninakat]

Jack, that was interesting going back a few months and re-reading that thread you started on this very topic. You're right about the terms having little distinction. Deflation seems to be the one people argue about when it comes to how they define it.

Apparently the elites gain from inflation, not deflation. Somebody else could probably explain it better than I, but in simple terms I think it essentially means they have more control over the economy, and of course are charging interest on all that money they print out of thin air. How can they lose in such a scheme, I mean scam?

The money supply is really how I believe inflation and deflation should be defined. I think. heh

And yeah, might as well call the recent bubble in housing and commodities "hyperinflation" too -- excellent point.

[ninakat]

deflation is happening temporarily now,

but it certainly will be inflation when they open the gate on all that 'money' theyve been conjuring and holding

That does seem inevitable to me as well. But, certain economists like Mike Shedlock (Mish) seem hell-bent on dissing inflation and especially hyperinflation. I suppose the same holds true for people on the opposite side of the argument as well, like Peter Schiff.

My bias has been on the side of the inflationists, long term. They just seem to make more sense. And if you believe that the elites are still in control, then inflation or even hyperinflation seem inevitable.

[barracuda]

Money is not created by printing, only through debt, and ain't nobody loaning. There's no printing our way out to hyperinflation in this morass. The 700 billion of the first half of the TARP or even an entire trillion is a drop in the bucket here compared to the sheer enormity of money disappearing through default. That's why the banks keep needing more. The derivatives outstanding are at present on the order of 60 trillion dollars. Some 6 - 8 trillion dollars have disappeared from the stock market since the high of just over a year ago. The money lost just this weekend via the drop in UK bank share prices due to the travesty of the Royal Bank of Scotland nearly exceeds the entire TARP fund. Deflation continues, and it's effects are readily seen as unemployment causes huge swaths of individuals to simply have less money, the prices of real estate and other asset classes continue to plummet, and the coupon available to investors in .gov debt sinks to below zero. I have serious doubts that anyone is in control at this point, particularly after this weekend's debacle.

In other words, I'm with Denninger and Mish and most of all with Nick the Greek, whose advise to gamblers is to always bet with the trend. When you're winning, bet more, when you're losing, drop out. And I feel we could see another 30% down in housing and the major indexes.

Remember though, the strategy if you are in the hyperinflation camp is to spend your money while it still has value on real assets like property and gold.

Thanks ninakat for the excellent resources.

[smiths]

i have gradually cooled on mish shedlock over the last three months or so and that is one of the reasons

[ninakat]

i have gradually cooled on mish shedlock over the last three months or so and that is one of the reasons

I have to say, and this might seem petty, but I've seen Mish voice his anti-conspiracy bias on more than occasion. I don't have links handy, but what I recall is that he just doesn't buy any notion that there are backroom dealings of any kind regarding the steering of this economic ship. That just seems too naive, so he lost a lot of points with me for that stance.

ON EDIT:

Here are a couple of pieces by Mish on this topic:

Currency Intervention And Other Conspiracies
http://globaleconomicanalysis.blogspot. ... ology.html

Conspiracy Theory Psychology
http://globaleconomicanalysis.blogspot. ... ology.html

[ninakat]

barracuda, you're welcome.

Do you know if Denninger and/or Mish foresee any chance of inflation or hyperinflation AFTER the continuing "deflation"? Or do they just see this as chronic deflation for a very long time?

Regarding the creation of money, what about Puru Saxena's view?

"The main reason why I do not foresee deflation (decrease in the supply of money) is due to the fact that the contraction in credit arising from deleveraging is being more than compensated by the money-pumping actions of the various governments. In the past year alone, the Federal Reserve has expanded its balance-sheet by a whopping US$1.2 trillion! Moreover, thanks to Mr. Bernanke’s cash injections (quantitative easing), reserve balances have sky-rocketed from roughly US$5 billion to almost US$600 billion in roughly 3 months... Now, you may be wondering why there is so much talk about deflation these days when inflation (expansion in the money-supply) is the real issue at hand. There are two reasons for this: First and foremost, you must remember that banks are in the business of lending and the central banks’ prime objective is to manage inflationary expectations. So, Mr. Bernanke and his comrades are paid to keep a lid on the public’s inflationary fears. Accordingly, a ‘deflation scare’ is engineered ever so often, so that they can continue with their long-term stealth inflation agenda without raising too many eyebrows. Secondly, the establishment needs to advertise a ‘deflation scare’ so that the central banks can slash interest rates. If inflation rather than deflation was perceived as the legitimate threat, then the Federal Reserve would not get away with near zero interest-rates."

[barracuda]

Denniger and Mish both predict a Japan-style, decade long recession featuring an L-shaped recovery graph barring any real action on the part of the US .gov. Real action, meaning all parties interested in bailout money must expose their balance sheets publicly in order to allow honest appraisal of solvency. Without that, there can be no trust, no lending, no nada. This is a highly simplified synopsis, and obviously, this solution is not going to happen, rather, every available opportunity is being taken to insure that this never happens, and as a result the L-shaped recovery will grudgingly proceed, along with continued protracted failures of various financial institutions and sundries.

Regarding Mr. Saxena's view, I would simply point out that the "whopping" 1.2 trillion he is so excited about scarcely begins to cover one fifth of the stock market losses of the last year alone, let alone the real estate defaults, which are huge. Beyond that, the derivatives written on the real estate, and the uninsurable credit default waps and, and, and... You see where I am going here. If that isn't a massive decrease in the money supply, I'll eat my tin-foil hat.

[ninakat]

Good points barracuda, you're almost convincing me to switch sides to the deflation camp. Honestly, I'm not that glued to either side -- there are good arguments on both sides, which is why I spent the time compiling the list. Not that it really clears anything up though!

Maybe the only question is: Does the Fed have control or not? If not, we get deflation. If so, we get inflation. I know it's way more complex than that, but I also know that Bernanke is going to do everything in his power to prevent deflation. Either that, or he's a liar. Oh, wait a minute.... LOL

[Canadian_watcher]

If inflation rather than deflation was perceived as the legitimate threat, then the Federal Reserve would not get away with near zero interest-rates."

this is certainly true. if credit is so scarce, and the law of supply and demand is really a LAW, well then why the fire sale on rates?

It is deflationary right now, that is certain. The actual inflation rate in the US for the past year was something like .1%.. with most of that due to commodities and real estate, n'est-ce pas? They really should sub-categorize inflation / deflation, as was already mentioned, since the prices of other necessities have not come down, and I don't see how they WILL come down, being that the supply-side is faltering.

The only thing that baffles me is the credit rate. Why so low? Just to keep up the charade?[/code]

[smiths]

well with regards to that the perceived threat is rarely the actual threat so that is immaterial, even if every central bank in the world says its fighting deflation it doesnt mean it is,

these guys lie from the moment they wake up to the moment they sleep,

if they say inflation isnt a problem then it means it certainly bloody well is,



The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.

http://blogs.reuters.com/great-debate/2 ... -disaster/

[smiths]

Interest rates still aren't low enough to stimulate the U.S. economy. Washington needs to engender more inflation so "real" rates turn substantially negative. Can an interest rate of zero be too high? Unfortunately, yes.

Ordinarily when the economy slows, the Federal Reserve can juice it up by cutting short-term interest rates to below the rate of inflation, meaning that in inflation-adjusted terms, rates are actually negative.

Right now, zero is about right for interest rates. But the economy is continuing to soften, so it will soon be too high, according to Goldman.

Trouble is, the Federal Reserve can't cut interest rates below the rate of inflation if inflation falls to zero, which many economists expect to happen soon.

The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank. That way today's zero interest rates would be negative in inflation-adjusted terms and the economy would get the boost it needs.

http://www.businessweek.com/bwdaily/dnf ... =rss_daily

[smiths]

Soros said the United States needed "radical and unorthodox policy measures" to prevent a repeat of the Great Depression of the early 20th century that include recapitalizing banks and writing down the country's accumulated debt.

Also, he said, it should create more money to offset the collapse of credit and then rapidly pull that cash out of the system when inflation emerges. The government would have to be very nimble in the timing of such moves, he said. "If they are successful...the deflationary pressures will be replaced by the specter of inflation and the authorities will have to drain the excess money from the economy almost as quickly as they pumped it in. Of the two operations the second one is going to be, politically, even more difficult than the first," he said.

http://www.reuters.com/article/ousiv/id ... XZ20090119