Breaking down the inflation/deflation debate
Tue, 01/05/2010 - 03:25
I find it rather intriguing that so many people argue their points for inflation/deflation solely on two points, credit contraction, or money printing. Few people have even mentioned supply of goods as a cause of inflation, and no one, at least that I have read over the last year and half, has ever mentioned # of market participants (i.e. money velocity) or type of government as factors or how they change the outcome of such events.
In this piece I thought I would bring to you my ideas, not of what I think will happen, or how things play out, but rather factors that have gone unnoticed.
1) Supply of goods is just as important as supply of money. If you reduce the amount of goods or service within a fixed amount of money that is in exchange, the end result is relative to that of expanding the money supply. This could explain the deflationary event we see before extreme forms of inflation. During a Deflationary period, production and services are cut in order to limit capital loss, and central banks print up money to paper over the deflationary cycle thus creating inflation in the process.
2) The most perplexing issue is how different types of government effect the outcome of money velocity. The expansion of the money supply or the contraction of the credit supply is effected differently by which form of government we have because the form of government we have is parallel to the type of economy we have. The centralization of wealth is the key issue here.
For instance, how would inflation effect a Oligarchy vs a Republic? Ultimately I think the end result is the same, however how it plays out or disseminates through the economy is different. Personally I believe more market participants creates less volatility and fewer market participants creates higher volatility in price evaluations etc. In a free market type society inflation would cause price increases across the board with some variation in price increases for different goods and services but the difference between the rate of inflation would be rather minimal. In an Oligarchy we should see extreme divergence between the inflation of prices to the point where some prices would be actually falling and other rising dramatically because the movement of money is in so few hands. What really bothers me is what happens when the government is the only market participant left?
Tue, 01/05/2010 - 16:45
#2
How could you possibly suppose a deflationary spiral when the issuence of new debt is at 0% interest? Further more when you refer to deflation, in what sense? Do you mean goods will be more expensive, or less. Because if you don't make a point as to what is deflating you could be talking about inflation, as deflation is just the inverse of inflation. Simply put if the price of something is deflating vs dollars then the value of dollars is inflating. But to say that deflation is coming but not what exactly is deflating it is hard to respond to your post being that I don't exactly know your position. My view is that things will deflate against hard currencies like gold or silver, not dollars, because as you pointed out... dollars are debt instruments and there are a lot more debt instruments out there now than there were a year ago.
Also as you pointed out it doesn't make much sense to back up the losses that are creating by the issuance of debt with more debt.
Thu, 01/28/2010 - 09:41
#3
what if the 0% rate is actually indicative of deflation? of course, we know that the Fed rate is artificially manipulated, but you could see an interest rate of 0% in a deflationary free market. and there is no doubt that prices of big ticket items are falling. that flies in the face of the rise in the market and gold though... hmm too much for my little brain
Fri, 03/12/2010 - 02:33
#4
0% interest rates can't be a sign of deflation because it means that money is being borrowed for free. How is free money ever deflationary? It would be like saying sand is precious while standing on a beach. 0% interest payments are free because their is no time component to it. It allows the individual to pay back the loan at any time meaning they don't pay for the risk associated with the time to hold onto the borrowed money, it allows for large institutions especially to be able to borrow large sums of money with almost no time constraint or condition for the loan.
I think you are confusing the market with a free market. In a free market increase in money supply spreads evenly meaning inflation happens in all markets evenly. In a command/control economy only particular markets become inflated because of their access to credit or through some form of a reduced tax on a purchase. And when their inflationary bubble bursts it is what experiences deflation, mean while other prices of goods change very little or some increase because the debt isn't liquidated then the bubble is simply refilled with real money for which even further leverage on borrowing can be applied. So for example imagine that the banks created 50:1 money supply through credit because each bank was leverged to give 50 dollars credit for every dollar they had in reality. Now imagine the credit bubble that this leverage creates bursts (could of been in anything), and each of the creditors is bankrupt and many people are becoming bankrupt. If you make those creditors whole then you essentially increase the real money supply put to the point that the banks had themselves leveraged to reflect the illusion of wealth the banks had created in the first place.
The amount of sure obscurity that is going on is also making it difficult for people to have a clear idea if inflation or deflation is happning because many different market indicators that when functioning under a free market system would be all going in the same direction aren't any more.
Sun, 02/07/2010 - 19:55
#5
this is actually a very interesting point. the key is oil. oil we all must buy and thus you have an inflationary bias in the US (since oil is in private hands and not a public monopoly--very gutsy if it was a policy choice). in other words the price of oil really only goes up with the 80's and 90's as great exceptions. and you can see what is meant by a "good inflation." oil companies are reporting massive declines in gasoline inventories ostensibly because "they don't make any money on it." this is a set up and the "deflationists" are staring at the ball and missing the linebacker that's about to deck 'em. by sucking the supply dry you and i are being set up for a surper spike in the price of gasoline. ever wonder why the price of diesel is more expensive than gasoline? the government does and it knows. the government does have a plan, tho--we'll see how events play out. with this weak a president can a war be far behind?
Mon, 03/08/2010 - 06:17
#6
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Initially deflation can result as inventories are liquidated to raise cash.
However, most of the macro analysis here revolves around the fact that our money is actually debt. Each time a dollar is created and put into the system, a debt of one dollar is created.
That debt needs to be paid, with interest.
When the debt gets too big, creating more debt excacerbates the problem, and you get a deflationary spiral.
You can't cure a junkie with more dope.
Unless you give him so much he overdoses.
Which is what they did, it's just taking a few years for him to die.