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Deflation vs Inflation
Submitted by Shane Obata of Triggers
Deflation vs. Inflation
Some people are expecting deflation…
…Others are expecting inflation.
So who’s right?
Not Steve Liesman All of them.
Deflation
Investopedia defines deflation as “a general decline in prices, often caused by a reduction in the supply of money or credit.”
While that’s not occurring everywhere, it is taking place in parts of the world.
Credit growth in Europe
The global economy is dependent on credit; if it doesn’t grow then neither will economic output.
Chart 1 shows that, in Europe, loans to private sector have been trending down since mid-late 2011 and are now negative.
What this means is that exceptionally low interest rates are not having their intended effect – i.e. to increase lending.
Commodity prices
What’s more is that commodity prices are falling because global growth is decelerating.
Chart 2 displays that there’s a tight correlation between the emerging markets MSCI stock price index and the CRB raw industrials spot price index.
If the US dollar continues to rally then commodity prices and the emerging markets will suffer.
China’s housing market
China’s property market was on fire from mid-late 2009 until recently.
Chart 3 indicates that the national average house price is starting to fall.
If prices continue to decline then China’s economy could be in for a hard landing.
Global growth
World growth forecasts (lol) have been falling since Ben Bernanke first mentioned the taper.
Chart 4 demonstrates that developing EMEA and Latin America have seen the biggest negative revisions; presumably because they’re more vulnerable to a stronger US dollar.
The preceding evidence proves that deflationary pressures are weighing on the world.
That said, inflation is also a concern.
Inflation
Inflation is defined as “the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling”
Despite the media’s proclamations that “there’s no inflation”, it’s hard to deny that the average consumer is struggling. (h/t @rudyhavenstein)
The CPI
Artificially low interest rates and central bank balance sheet expansion were supposed to lead to Zimbabwe 2.0 inflation.
According to the Consumer Price Index, whose growth has been mostly steady since 2010, that hasn’t transpired.
But is the CPI really a good measure of the cost of living?
Purchasing power
Firstly, it’s important to note that inflation is cumulative.
Chart 5 reveals that, since Sep 1 ’84, the US dollar has lost ~55% of its purchasing power.
The dollar isn’t holding its value and that’s not good for the US consumer.
The costs of living
Secondly, many costs are rising faster than the CPI is.
Chart 6 exhibits that, from Jan 1 ’94 to the present, the prices of Tuition, other school fees, and childcare, energy, medical care, and homes have grown considerably more than it has.
Clearly, the consumer price index is not the best measure of the cost of living.
Asset prices
Thirdly, there’s been a lot of asset price inflation.
Chart 7 proves that, from Mar 9 ’09 to Oct 23 ’14, the S&P 500 and BOAML’s high yield index appreciated by 188.4% and 151.6%, respectively.
Why is that a bad thing? Because not everyone owns financial assets.
That’s all folks!
In conclusion, the world is facing both deflationary and inflationary forces.
On one hand, global growth is slowing down.
And on the other, the cost of living is rising.
That’s a bad combination, but we’ll make it.
While you’re waiting for QE4 to see how it all goes down, remember to hold on to your assets…
…if you have any.
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May you live in interesting times.
No inflation ever for gold.
Zero Hedge vs. Fox News
Inflations vs. Deflation.
Do we get it Yet.
polar vortex
Are PM's an asset?
<Oh....wait....there they are, under 'Misc Assets' along with my comic book collection.>
There will be a day when holding Gold and Silver will once again be considered 'smart'.
lol - you realize I know those aren't comics.
I read them for the articles dear, just the articles.
I can't afford any of that cheap gasoline because my food is so expensive and my cable bill is not paid.
Yeah gas supplies have been high since 2008... just a coincidence that as the Cold War with Russia & the BRICS breaks out that gas prices plunge? /Sarc
Yeah, my food prices are so low I gave up Steak, Pork & Chicken, don't eat out anymore in nice restaurants, oh and I had to buy a deep freezer to stash all my cheap food. /Sarc
I noticed that Raccoon Traps are up like $20 dollars locally since 2007. No sarcasm.
Does anyone have a good racoon stew recipe ? Please share. Thnx.
in the 'old days' it was called stagflation
I recently read a comment where the writer challenged the curious to "bing" or look up the term "Weimar Inflation", some of what I discovered was surprising. Germany had come out of the first World War with most of its industrial power intact, the speed at which inflation suddenly destroyed the currency dovetails with some of my thoughts on currency trading today.
It is possible that inflation "could stem from the lack of faith in a currency, or all currencies, rather then from a lack of available goods". It was amazing how quickly inflation took root in Germany during the 1920s, we must consider how fast it could happen now that we live in an age of instant communication. For a primer on inflation in Germany in the following WWI and some surprising facts about inflation see the article below.
http://brucewilds.blogspot.com/2013/01/surprising-facts-about-inflation....
Fuckthelittlepeopleflation.
That is what we have and what will get more of.
It's going to be so much easier to run this country when we've finally gotten rid of that awful middle class. The rich despise them, the poor despise them (each has their reasons). It's a wonder we didn't think of this sooner.
Sounds like a stag party.
Deflation = wages+investments
inflation= food+goods
= we are all slaves,pick your order in the hierachy
case study in sydney
keep wages to a minimum,if you dont like it someone else will take your job.save money in bank and get a fuck all return.houses too expensive take out a massive mortgage or pay ridicolous rent.smoke cigarettes and drink alcohol costs a lot.pay a large shopping bill even though we are the least populated country in the world and land is abundant.get taxed for everything or get fined for everything.watch the news and be scared on what is happening around the world and australia,and then once in a while the news will remind us on how lucky we are to live in the best country in the world,just enough motivation to get back to work to earn our income and spend it on shit.cycle repeats
Check out "Bi-flation." Sounds like exactly what we've got.
Food prices lag behind energy prices because all of our food is made out of oil. No, not literally, but it might as well be.
Energy finally taking the deflationary hit. Food will follow, but not until we don't have enough money to buy it.
Tuition is in its own bubble called student loans. Whatever. A student loan will just be an excuse to round someone up and put them to work in a slave labor camp. How's that women's studies degree workin' out fer ya? Here's a shovel, bitch.
Medical care? That is also in a bubble. Whatever it is, it's nothing 200 grains of lead won't cure, you worthless eater!
No matter what the outcome is, the world is floating in excess Fiat liquidity.
If central banks attempt to tighten credit in any way, rates sovereign(bonds) will probably go lower, HY will spike along with all the other levered corporate debt.(bad for equity markets)
If central banks print, you'll get inflation through devaluation, but there's not enough demand to take-up the slack.(stagflation)
The Fed. is backed into a corner. It's not about available credit... It's about how demand was mis-targeted over the last (6+) years. This is why I like commodities. Even though you have repressed demand, there's stored value. ;-)
Stored value. I spell that H O A R D I N G.
Isn't the logical next step outright monetizing government debt combined with a massive spending program(s)?
Yes. No matter what you are trading stores of value i.e. commodities.
Colorado cops show off cannabis harassment tactics for CNBC crew, give tickets for cigarettes http://wtfrly.com/2014/11/10/colorado-cops-show-off-cannabis-harassment-...
I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....
I have pondered the possibility that what we have been going through is the "major deflationary period." More and more often we seen Central Bankers forced to pull rabbits out of their hats. When we stand on the abyss central bankers will be forced to print so much worthless paper the money it will act as a cushion to our fall but not change the reality.
Before you discount this possibility consider that hyperinflation paves an easier transition to a replacement currency and a reset of the system. This would include breaking many promises to the masses and those in power rewriting all the rules for the "general good" of the people. Currencies are about to be debased and how individuals fare will depend on how they are invested.
" I have pondered the possibility that what we have been going through is the "major deflationary period." "
We haven't seen the major deflationary period, yet. The global credit bubble is still growing. When it bursts, we will see the major deflationary period.
As for hyperinflation, as Martin Armstrong explained, Weimar had no debt market in 1923, as it had a revolutionary government after WW1. The U.S. has a debt market, so deflation is the outcome.
I would argue that the main reason inflation has not (yet) become a major political issue in the U.S. can be summed up in two words: food stamps.
Well my fellow well read ZH'ers, here is something that is going through the motions of social media. Everything is fine folks, everything is fine...
http://www.addictinginfo.org/2014/11/09/baffled-canadian-writes-to-u-s-v...
Is that the Onion ? or Sarcassm Press ?
wow
I had no idea such isolated cells existed in our fair land...they are deep into the MSM explanation of the data...good thing they don't vote.
"The global economy is dependent on credit; if it doesn’t grow then neither will economic output."
Thus deflation is not a price event, as Investopedia proclaims.
Investopedia is a crappy foundation upon which to base an economic argument or an article.
Simply put - both inflation or deflation can be defined as either a change in relative prices or a change in the aggregate money supply. When people try to get cute (not smart) and introduce specious linkages between the two distinct definitions they most often destroy their own arguments, because over the short/intermediate term general price levels and the money supply are not necessarily directly correlated. For example (the most common example in modern times - see any emerging market in a panic): capital flight can reduce the aggregate money supply (deflation) exactly when and sometimes because the general level of prices is rising (inflation)... so which is it? The (somewhat queer) economic illiterates then start making up words like "biflation".
Like I said... Investopedia
Here's a much better analysis of the Deflation vs Inflation debate...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
And, by the way, it's a bubble, it will pop, and here's what it looks like...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
On the one hand I hear that the world is at threat of imminent deflation and massive QE is absolutely required in order to ensure that inflation does not undershoot the target.
On the other hand everything I buy on a day to day basis seems to have gone up very substancially.
An inflation spike is round the corner in my view
Its not exactly hot news that inflationary and deflationary vectors usually coexist. But long term (decade+) is clear for all kinds of assets. And its up. And, beyond the rich and poor cliches, global population have enough fiat in their hands to corner all available basic goods in a question of weeks, given the psicological trigger. Maybe (hopefully) it will never happen. But the risks are clearly assimetrical and in my view the name of the biggest risk is not deflation.