I've been hearing some deflation arguments that don't make sense to me. I'd separate the arguments into 2 types. The first is that the US government and Fed are going to start doing the right thing, cut spending and raise interest rates. The second type of arguments are more mathematical in nature. These arguments are the ones I'm talking about here.
One argument is that there will be trillions of dollars worth of loans going bad in the next few years. Robert Prechter and many others, have made this argument. While I don't doubt that this could happen I question it being deflationary. Prechter said that even if you REPLACE EVERY BAD LOAN WITH PRINTED MONEY you'd only be breaking even as far as inflation goes. That makes no sense to me. First off even if a loan going bad did cause some deflation it would only be temporary. So if the fed printed 1 trillion to replace bad loans eventually any deflationary effect from these bad loans will wear off and all that will be left is the inflation from the 1 trillion in new money. But I question whether a loan going bad even CAUSES deflation. Isn't the money still out there chasing goods and services? For example suppose a bank gives me a signature loan for $10,000. I decide to keep the money and not pay the bank back. The fed prints $10,000 and gives it to the bank to replace the bad loan. Now the bank has 10,000 chasing goods and I have 10,0000 chasing goods. How is this deflationary? My point is this: How does a bad loan cause deflation? The money didn't disappear.
Another argument is that private deleveraging causes deflation. Again, even if this is somehow deflationary, it's only TEMPORARY. After the deflationary effect wears off all that will be left is the inflation from the money printing. Even here I'm not sure how people paying off their debt is deflationary.
Here's a debate with Peter Schiff concerning this:
http://finance.yahoo.com/tech-ticker/inflation-vs.-deflation-peter-schiff-and-gary-shilling-discuss-debate-and-argue-535689.html?tickers=gld,gdx,slv,%5Etnx,tlt,tbt,%5Egspc
Overall my point is that quantitative easing (money printing) is the real cause of permanent, irreversible price increases. In my opinion money printing will overpower any temporary deflationary effects from bad loans or deleveraging or any other deflationary forces.