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Rethinking the Inflation vs Deflation Debate
The inflation vs deflation debate is one fraught with biases, misnomers, and rigid positions. What I've noticed is that both inflationists and deflationists selectively handpick data to support their respective positions. This is fine and dandy if your goal is to win an argument; but if you want to win as an investor, you must unemotionally interpret data.
If I had to, I could make a convincing argument in either direction since we are seeing both inflationary and deflationary forces. I don't believe there is much debate on this point. However, the successful investor doesn't tell you what is happening right now. The successful investor is constantly trying to foresee future events using a Bayesian approach to investing, incorporating data on an ongoing basis to adjust forecasts if necessary
Interest Rates
At the very core of the inflation vs deflation debate are interest rates. Unfortunately, most people misunderstand the relationship between interest rates and inflation.
Interest rates are driven primarily by inflation expectations and default risk. This implies that interest rates can both rise and fall with good reason in both inflationary and deflationary environments. In other words, the relationship between interest rates and inflation isn't so simple as to say lower interest rates equals higher inflation or vice versa.
Inflationists will tell you that low interest rates are inherently inflationary. At the very core of this argument is the fact that low interest rates will induce borrowing, and by extension, speculation. To support their argument, they will show you a negatively correlated inflation and interest rate chart like this:
Deflationists will tell you low interest rates not only evidence deflation, but muted inflation expectations. To support their argument, they will show you a positively correlated chart like this:
As you can see, both deflationists and inflationist can point to statistically and historically valid data to support their respective arguments. Unfortunately, both sides are guilty of showing just a snippet of the overall picture. The inflation vs deflation debate is far more complex and goes well beyond just interest rates.
Money Supply and Inflation
Let me preface the following statement by saying I lean heavily towards the Austrian camp. However, there isn't a strong correlation between money supply and inflation in the short-term. This is key to understanding why a hyperinflationary collapse didn't materialize last year when money supply went through the roof.
In the early stages of inflation, money supply often outpaces inflation by many multiples. This was the situation in the Weimar Republic before their hyperinflationary collapse. The following charts taken from Constantino Bresciani-Turronis seminal text about the Weimar hyperinflation, "The Economics of Inflation", makes this relationship clear.
Notice that in the early stages of inflation, money supply outpaced domestic prices, import prices, and the dollar exchange rate. However, the situation in the Weimar Republic quickly deteriorated to the point where money supply, domestic prices, import prices, and the dollar exchange rate had a near perfect correlation. The public lost confidence in their currency and prices essentially "caught up" to money supply.
In 2009, Ben Bernanke cranked up the printing presses and the money supply expanded at an unprecedented clip, yet there was no hyperinflation. Inflationary forces were certainly concentrated in certain sectors, such as stocks, but on a broad scale, inflation was muted.
Recently the trend in money supply has reversed. According to John Williams at shadowstats.com, M3 is contracting at the fastest rate on record. This is an apparent victory for the deflationists, right?
Not so fast.
Dollar Exchange Rate
I believe the number one driving force of inflation moving forward will be the dollar exchange rate; and I believe the the loss of confidence in the monetary system as currently structured will lead the dollar down. History shows that the truly monster currency moves are driven by public confidence.
Remember, it was only a year ago that the Euro was the safe haven currency of choice for investors. The recent collapse in the Euro is correctly blamed on the debt crisis in the PIIG nations. However, the debt problems in the Eurozone were well known for years. The only thing that changed was perception.
Perception is the only thing propping up the U.S. dollar. Europeans thought they could waddle through their debt problems unscathed until, well, they couldn't. Americans are similarly inflicted with the head-in-the-sand disease that ignores large-scale funding problems similar to those seen in Greece. The dollar will continue to profit from safe haven capital flows until, well, it doesn't.
Swings in the dollar, and by extension inflation, will be sudden and dramatic, mirroring the confidence of investors. It will therefore benefit people in both the inflation and deflation camps to rethink their respective false assumptions. The fundamentals for dollar weakness have been in place for some time; it is now time for the market to recognize it.
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Running on Empty
You have forgotten the sixth, Vengeance!
can you not foresee the categorization of your employment will be evaluated by a government salary review board and your earnings set?
if you can't see this happening, than you are not using your imagination to visualize what government will be able to do with massive real time databases in a world where people are hungry and other people have too much to eat.
At least that is who is emerging politically on a global basis and who are the "bankers" to argue that policy (from which they will be widely exempt--not visibly of course) when nobody is really going to start a war and kill people. What an ineffective and costly means to enlarge one's sphere of influence. Not to mention the uncertainty of it all.
That's not the way domination is going to be accomplished from now on.
Oh well, nothing lasts forever.
poorold
Nope I can't see any employment board.
Unions are too powerful. No way they are giving up their narrow job descriptions and astronomical benefits.
Even Republicans won't nip it in the bud because many are NRA Christians.
unions are too powerful...well maybe...but then they were way way way too powerful in the 50s and 60s and 70s because they were way more union employees then and they got their workers, including many low skill, only HS educated employees a lot more money back then...Unions are at their weakest level 70 years....because they are weaker and fewer now than decades ago, by your logic our economy should be relatively better off than the 60s...don't see it.
If if you see some trend that seems a sure fire system to trade on, you should back test it by applying to historical markets. If you think less unions will lead to more prosperity, you should look at history and see if more or less unions made more or less prosperity, or in current time compare other countries that have more or less unions. UK has less labor protections than Germany, US had less than France, is US and UK economically in better place than France or Germany? I don't think so...sure Euro is under attack, but pound and dollar is no more solid, as US and UK debt no better...
Things that we have too much of, like debt, are becoming worth less (worthless). This debt is what makes the financial world go 'round and those in power will not allow a proper restructuring, or deflation, of this debt. Therefore, they are creating more debt (money, FRNs) and changing accounting rules to hide this deflation which creates even more debt of which we already had too much. This will continue until people begin to realize what is going on. Then this deflation of debt will become unavoidable. Since FRNs are part of this debt and everything is measured in FRNs, and we have too many FRNs, FRNs will deflate which means everything but FRNs and debt will inflate.
I predict massively.
I agree. Many people who read this website seem to make their living by putting a "dollar" to work. A dollar is not an asset that should ordinarily enable one to double it or lose it in a short period of time--except in a casino environment that the "capital markets" have become.
I expect a lot of folks are going to wish they had used their dollars to own something that PRODUCES something others are willing to trade something of value for.
Before, like you said, those dollars become worth less and less.
and most of the posters who read zero hedge ,, read zero about whats happining .. gold backed curriencys coming ..
the race to the bottom of all fiat based paper
the dollar is going down its just look like up as it is in a index of many currencies ,,it is just going down slower
and the problems in the usa are far greater than the pigs ,,
some how its a failure of heads to cease bouncing off wood
poorold
Asian hookers.
I'm moving to Reno.
HOOKERS BITCHES!
the tools exist and are being implemented that will enable a very high degree of control over income and spending--on a global basis.
yes, there will be an underground economy, but most people will not participate in it.
worldwide central bank coordination and backroom geo-political negotiation is already occurring, though not yet overtly formalized--over the next couple of years, the policy will be evident to even a casual observer. Right now, it is a common need among the westerrn powers that is causing this coordination. The power that results will enable a new form of imperialism to prosper.
Expect that governments will massively tighten financial information and tie it directly into the IRS and other tax collecting authorities. Right now, they want to implement 1099's for payments over $600. In my opinion, that is a public manifestation of what is going on in development.
Clearly, there are agencies and groups working to monitor all financial transactions for "propriety" and "reportability."
After all, if you wanted to really control your environment, wouldn't you be working on those things right now?
Unfortunately, I think it is going to be a bit of a cluster****, because although they are embarking on this path, they really haven't solved the problems they know they will encounter. Nonetheless, it is this path they have chosen or admit the current system is not working and then what???
And deficit monetization is going to be HUGE.
poorold
"yes, there will be an underground economy, but most people will not participate in it."
I disagree. More and more people will turn to underground trading of everything from health care to entertainment. You have whole generations where the underground economy is more acceptable.
Boomers starting buying dope. Their grandkids go to raves. They download free music/movies/ whatever they want. Many pay for the privilege of safe private access.
Trannies hit illegal cut shops, weekend athletes but steroids, and of course hookers.
TPTB can try to control the means of purchase however they choose. In the end someone will be trading Emperor Norton dollars in a backalley, hell in some club bathroom.
this reminds me of politicians who believe they can legislate away drugs in society or even poverty. plenty of both around
Hey jd, I was just thinking bout how friends of mine in Northern Cali are having trouble moving their crops. There is one more straw on the camels back.....
well lennon im moving to central cali (i know, of all places, right?) in less than 60 days. People back here in ohio are paying $50 for an eighth row seat still if ya know what i'm saying so maybe i can take some of these worthless FRN's and devise some sort of tri party repo ;)
Just kidding, I've already served my time and trafficking across state lines is not something I'd like to be apprehended for
This will be a deflationary event as people and company's will continue to sell
off assets to be able to service their debt. The problem wil come when there's
no assets left to sell then the SWHTF for them. Cash will be King for a while at which
pointhard assets will take over should the fan break from all the shit hitting it. Gold is a
big question mark as it's an antiquated commodity without any usefull purpose. If I
could store Gasoline and Food I think in a Mad Max world I'd be king, short of waking up
in a parallel universe that ain't happening.
Gold is an "antiquated commodity without any usefull [sic] purpose."
That has to be the stupidest comment I have ever seen on ZeroHedge, bar none.
No, I take it back. That is the stupidest comment I have ever seen, on any blog, anywhere, ever. Bar none.
You have picked the perfect name, Running On Empty. Your cranium is the exemplar thereof.
Gold is a
big question mark as it's an antiquated commodity without any usefull purpose. // balony with capital B.
go tell that to the nations prepared to back their currencies with gold ..
go read the willie article on the value of gold
you live in some cave ,, do you see whats going on. or does blinders come with ass backward ideas
RoE, Gold and silver and platinum are VERY serviceable as commodities. Technology? Not without them metals!
Exactly. Open up any electronics gadget, any computer, and figure out how much PMs are inside it - quite a bit.
And start adding rare-earth elements to the must-have list. Like the ones which are mainly mined and processed in China. No need for concern I'm sure.
you seem to forget the caveat. Ben Bernanke's mandate is to prevent deflation.
Gas and food are not as marketable as gold.
just drop the L and refer to it as god. seems like what it is to you
doesnt matter what bens mandate is. he can't prevent deflation in the long run any more than you or I can squeeze blood from a turnip.
j.d. so what do you say about the european currencies .. along with china russia planning on a gold backed currency.
or are you thinking that as all currencies sinking .. relative to gold. adds luster to the mix..
what drives the hyper inflation is the trust in government ,, a monetary event that can spring up overnight ,, as the value of fiat is lowered in proportion to the asset that has a fixed and rising cost to produce,
I understand your argument dumpster.
The reality is that too many balance sheets require funding in USD to ignore the fact that credit is contracting and the debt is no longer serviceable. Assets are liquidated. Eventually the assets run out. Anytime before then is a good time to buy hard assets.
Factor this in with lack of cheap oil and unfortunately we are faced with a "permanent" recession unless we find magic or a tremendous amount of cheap oil right under our noses.
If Ben Bernanke cannot possible stop "deflation" due to contracting credit, then how was it oh-so-successfully stopped in many Latin American nations, Weimar Germany, and Zimbabwe, in all of which credit was also contracting just prior to and during their hyperinflation?
It might serve you to lift your head from your Keynesian textbooks once in a while --- there is a much larger world out there just full of surprises that do not fit into the false and discredited paradigms of one particular pro-statist, amateur, self-described English "economist".
I'll pass on defending myself from your misplaced straw man attack, akak.
Look, it doesn't matter what the currency is. Eventually, you run out. Check this out.
The system is unsustainable, always has been.One ounce of gold lent out at 3% compounded annually.
Year 1 - 1.03oz
Not bad
Year 20 - 1.81oz
Not bad
Year 50 - 4.38oz
still not bad
Year 100 - 19.22oz
still not bad
Year 200 - 369.36oz
still not bad
Year 500 - 2,621,877.23oz
problem will robinson
Year 750 - 4,245,399,152.55oz
holy shit
Year 1000 - 6,874,240,231,169.63oz
unforunately there is only 4.5b oz. that has been mined
Now imagine billions of stupid humans doing the same thing... basically 60-80 years if you are lucky or unlucky.
Posted by Darkest Days
I would also like to point out the possibility that maybe the hyperinflation already happened and was somehow contained and hidden in the derivatives markets?? This is way beyond my certainly limited grasp of things, however.
like you point....I actually think deflation, has been hidden...while things should be way cheaper due to automation etc...middle class or poor of the world see no real gains, but rich keep getting rich...how does that happen/
KING DOLLAR.
bugs_
THE ANDREWS SISTERS lyrics - Rum And Coca-Cola
(Words: Morey Amsterdam / Music: Jeri Sullavan, Paul Baron)
If you ever go down Trinidad
They make you feel so very glad
Calypso sing and make up rhyme
Guarantee you one real good fine time
Drinkin' rum and Coca-Cola
Go down Point Koomahnah
Both mother and daughter
Workin' for the Yankee dollar
Oh, beat it man, beat it
Since the Yankee come to Trinidad
They got the young girls all goin' mad
Young girls say they treat 'em nice
Make Trinidad like paradise
Drinkin' rum and Coca-Cola
Go down Point Koomahnah
Both mother and daughter
Workin' for the Yankee dollar
Oh, you vex me, you vex me
From Chicachicaree to Mona's Isle
Native girls all dance and smile
Help soldier celebrate his leave
Make every day like New Year's Eve
Drinkin' rum and Coca-Cola
Go down Point Koomahnah
Both mother and daughter
Workin' for the Yankee dollar
It's a fact, man, it's a fact
In old Trinidad, I also fear
The situation is mighty queer
Like the Yankee girl, the native swoon
When she hear der Bingo croon
Drinkin' rum and Coca-Cola
Go down Point Koomahnah
Both mother and daughter
Workin' for the Yankee dollar
Out on Manzanella Beach
G.I. romance with native peach
All night long, make tropic love
Next day, sit in hot sun and cool off
Drinkin' rum and Coca-Cola
Go down Point Koomahnah
Both mother and daughter
Workin' for the Yankee dollar
It's a fact, man, it's a fact
Rum and Coca-Cola
Rum and Coca-Cola
Workin' for the Yankee dollar
Inflation vs. Deflation, make sure you get this one right:
http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%200709.pdf
I take issue with your money supply charts which are taken without showing velocity of money. The former has stopped falling and is now rising. And the USD will continue to garner strength in the foreseeable future.
I'm with you Leo
Hopefully we will get a government that slashes spending and taxes
And does not support high wages
And reigns in speculation
Deflation destroys economies
Runaway Inflation destroys countries
Why you never hear of the 1920 depression
By the Mises Institute
http://www.youtube.com/watch?v=czcUmnsprQI
Umm, velocity is pretty weak the last time I checked, so I am not sure what you are looking at, but velocity tends to pick up around tax refund season anyhow so I imagine it will contract again shortly. The dollar will get much stronger because it is the reserve currency and Europe needs to settle debts, hence the swaps Ben put in place again, which is why the DXY has been cruising lately. I expect it to get even stronger as the liquidity issues strengthen and spread.
The charts make perfect sense when you think about it because the money is printed, but it takes time to hit the streets. This is what I have been talking about for a long time now, I was one of the letters Rosie got. Inflation is a lagging fat tail event that has an increasing shorter period of waiting before it shows up. I could not account for the 1990's lack of real inflation, we should have been paying much higher prices, until I realized we began to export it via treasuries to other central banks, problem solved! However, that problem will come full circle back home very soon, 3 years is my maximum time frame and it will be bad, very bad. You are looking at the mother of all fat tail events right in the face and very few people, besides us bugs, doomers or whatever we are being called seem to see it.
I bet you $100 that the Fed's balance sheet expands 100% by this time next year. The funny thing is you will only see inflation in strange places, imported goods and food. After that it goes downhill. Oh, the best part, wages stay stagnant, go figure. From there, well, let's just say it is not a pretty picture. This will all happen because of devaluation of the dollar through QE and Obama's need to double exports, they gave you the game plan just no one listened. They just don't realize they cannot control it when it starts. Capital has a mind of its own.
That was his point.
It is not simply a money supply issue.
He also indicated his belief that USD will benefit in the short-run.
Leo, once again your head is firmly up your ass. God, you are SUCH an idiot!
There is NO increase in the strength of the dollar, now or in the future, only a one-way trajectory in its value, which is downward. Disingenuously pointing to the rise in that artificial trader's tool of the Dollar Index does nothing toward bolstering your misleading and erroneous case --- the US Dollar Index does NOT measure the absolute value of the dollar (i.e, purchasing power within the domestic economy), but only measures the dollar's position relative to other, simultaneously depreciating fiat currencies. Just because their leaking boat starts sinking faster than ours does not mean that ours is therefore rising out of the water!
The US dollar, like every purely fiat currency, is always falling in value --- always. Trying to distort and confuse the situation by pointing to the temporary decrease in its relative rate of depreciation compared to other depreciating fiat currencies is clouding the issue, and disingenuously misleading.
Actually purchasing power has increased lately, both domestically and international, and by a lot I might add. I can buy more houses, oil, cars, clothes, vacations, machines for instance now than only a few years back. Gold on the other hand is a result of what I pointed out above (or below depending on how you configure your screen). You see there is no reason for anything to appreciate as long as capital utilization is at these levels. Any company can chose to price fix to maintain the hay day paydays but they run the risk of having their arses handed to them swiftly. And if you argue that this is only temporary, then I'll argue that it's going to occur for a long time, so there.
Only in your fantasies.
Vacations and manufacturing machines are not part of the average person's cost of living, clothes, vehicles and fuel have NOT fallen in price but only stabilized at best, and you conveniently forgot to mention food, fees, insurance, and taxes, ALL of which are rising. The average American is NOT seeing falling prices overall, but a RISING cost of living.
Are you that much of a liar, or just that stupid?
housing is one of the biggest expenses most people have and rents and house prices, and the price of money to buy houses (mortgage rates) are all way down, down from a few years ago (except interest rates only slightly down form 2005)
Meat prices are down, many food prices are down. Consumer goods are generally cheaper, gas prices are back down after spike at jubilence over supposed recovery. Walmart lower price of many staples. Service prices like contractors, childcare, are down, especially if you are okay with paying an unemployed person cash under the table.
Health insurance and education costs are up.
If shelter costs down 20 percent, healthcare up 10 precent, food and fuel down or nuetral...its still a net gain it purchasing power jsut cause housing is such a big percentage of costs.
I'm neither but I am trying to be your teacher. All those sectors you mentioned are either false (but I wont call you a liar), monopolized or lagging indicators. Have you noticed how many dollar menus there are these days? My taxes have dropped dramatically. If yours are rising, smack your accountant out or speak to your city council.
PS I picked up a $600 dinner jacket for $60, brand spankess.
ozzie
pure unadulterrated crap ,
how can you be any ones teacher ,, in a vacumn of smarts between those ears ,
your taxes have dropped for what ,, and how dramatically ,
yep macdonalds serves a dollar hamburger 2.00 frys 2.00 bucks for a ten cent drink
prices are rising 9% a years based on shadow statisics by williams
not your idea of a living large on dollar menus ,
and
and a bright pick dinner jacket ,, bet it has set their for a year waiting for a sucker
Well my property taxes have dropped at the same rate of "apparent" RE depreciation (30% in 4 years). I'm lucky enough to live in a city with some level of honesty but it still stinks to own a house.
The $1 menu was just to illustrate the drive of food behemoths to meet market expectations. A few years back it was only Maccas, now it's BK, Wendy's, hell even Pizzahut have some great deals. Why would they do that if they didn't have to? They have no choice. Higher end joints and some Main St. chains are shutting down because they cannot respond to the deflation.
or even to 20% unemployed
mauve lol
come to seattle for a taste of inflation .
just raised the tax on candy, pop, water..
even the ferry ride has increased .. bus, services . yadda . where do you live .. i hear Detroit has dropped taxes on some houses traumatically.
and 3 for a dollar tacos .. vie the street vendors..
Governments like to raise taxes during deflationary periods because it's too difficult to tax the increase in purchasing power.
Exactly and if you think the rest of the US will fair any different to Michigan then you need to take some notes. The depression started in the industrial Mid West when it was widely excepted that an economy did not need manufacturing and export to survive but instead a Mastercard, some house flipping and deflation importation. What makes anyone in the US think their region will be the driving engine to recovery? We were sold a corporate bag of lies pushed through congress and now we are paying the price.
who the heck likes the color bright pink in a dinner jacket
It's Valentino and spectacular. And that's mauve BTW.
wait a minute, Dumpster, do you know ozzi?? How do you know he got a pink jacket?
I'm happy and not terribly surprised that you are managing to find bargains in the midst of this economic depression, but such anecdotal information is hardly evidence of meaningful or sustained consumer price deflation. If you believe that it is, my retired mother (who also lives in your area) would have a bone to pick with you.
I'm sorry about your mother so I wont make my response about her.
If cost of living is increasing for retirees then we have to at least put a few things into perspective.
- Did they rely on their 401K? That was an 80's style Ponzi scam to bring liquidity into the stock market when little to no interest existed in speculating your retirement in the wall street casino.
- Did they buy too much house or use it as an ATM?
- Did they buy too much car?
- Did their company pension plans implode?
- Are the utility companies (monopolies) gauging them?
- Do they insist on maintaining a credit based lifestyle rather than living within their means.
I've heard your arguments before and they are sensible, logical and well constructed so you do have to agree with my points above, right?Yes, if one could answer "yes" to all or most of the six points above, then fundamental inflation is most likely NOT the cause of one's financial hardship.
Aside from point #5 above, though (being gouged by utilities, over which a person has no say at all), I can emphatically answer "No" to all of those points for many if not most of the retirees whom I know. My mother, a couple of aunts and uncles, and several more distant relatives and family friends are all feeling the cost of living most definitely increase, no matter how much the media trumpets what is, for them, a phantom deflation. My mother, in particular, is a model of frugality and financial responsibility, having no net debt, a modest home and car, and foregoes any vacations, elaborate or otherwise. I am just glad that I convinced her to get out of the stock market altogether early in 2008! (As I did myself.)
But the points you raise, valid as they are, fundamentally do not have much to do with the rising cost of living, but with personal financial irresponsibility, which granted has been rampant in the last decade, and would only exacerbate the effects of the generally rising prices with which they have to deal.
The US dollar MAY garner strength in the foreseeable future, but more likely is a manipulated foreign exchange market within ranges we are currently experiencing while the central banks around the world attempt to maintain the status quo and coordinate their deficit monetization policies.
"Reality" will be maintained for as long as possible.
The only thing that is really clear is that the standard of living in developed nations is going to decline.