Economics Questions

Re: Is the case for deflation sound?

ClutchDynamite — Tue, 04 Oct 2011 15:54:59 GMT

That may be true, but the uncertainty in the inflation senario still appears to be a lot greater than you would think if you just listen to Murphy, Schiff, or North.

Don't get me wrong, I love all of those guys, and I appreciate thier work, but all of the senarios you laid out seem fairly unlikely, and I'm left wondering why inflation never occurred during the great depression or more recently in Japan. You may be right about the end game, but that end game may not come in our lifetimes.

-C.D.

Re: Is the case for deflation sound?

cubfan296 — Tue, 04 Oct 2011 15:06:48 GMT

Hyper-inflation is the end game for the dollar and gold is an insurance policy against that major tail wind. How that inflation comes about? I don't know, too many variables at play. Politicians could force banks to lend, Debt relief, the fed could find alternative ways to inject money into the system i.e. LSAP's, the bond bubble could burst, China could start dumping U.S. t-bills. Anything could happen with the asshats that run our political and monetary systems.

Even if the pols and banksters don't make things worse, eventually the global economy will de-lever and the banks will start lending. Then we have South American style inflation(10-20% yoy) to look forward to. Plus the loss of reserve currency status, and the eventual death spiral of hyper-inflation.

The inflationists are eventually going to be right, it just isn't going to happen anytime soon unless something changes .

Re: Is the case for deflation sound?

ClutchDynamite — Tue, 04 Oct 2011 14:21:26 GMT

cubfan,

You say "The more people fear the end of fiat money the more gold prices will rise." This has been my thesis in buying gold to this point. However, I also expected that fear to be a direct result of severe inflation.

If you are correct in your earlier statement that "M2 isn't money until it is lent", but banks cannot lend because the American is sick on the massive amount of debt it already holds, what will drive a fear of a fiat money collapse? It's difficult to invision an inflation senario if new money can not be created due to this lack of demand.

So doesn't deflation become more likely due to the severe accross the board reduction of debt driven spending? If so, how will a fear of the death of currency develop when that very currency can buy more and more goods as time goes by?

Bye the way, I found this recent article interesting in that it makes the point that money creation during the great depression was also wholly unsucessful in creating inflation. And infact, the period was marked by deflation.

-C.D.

Re: Is the case for deflation sound?

onebornfree — Tue, 04 Oct 2011 13:52:19 GMT

The case for deflation, however defined, is no more or less sound than the case for any other broad, future economic scenario being predicted by anyone, anywhere [e.g. inflation, hyper inflation, disinflation etc.].

The fact of the matter is that no-one can consistently predict future economic events. Financial Safety Rule #1 says: " despite many claims to the contrary, no one, not even your favorite economist or investment advisor, can reliably, and consistently, predict future economic events."

Regards, onebornfree.

Re: Is the case for deflation sound?

cubfan296 — Tue, 04 Oct 2011 11:48:58 GMT

In the strictest of Austrian definitions of inflation, then yes, Mish is wrong. But he is right within his definition of inflation. Fiat credit money is widely misunderstood. We won't experience any real inflation until banks lend, and banks can't lend for two very important reasons. One they are insolvent and two the public is insolvent. M2 isn't money until it is lent, that is how the system works and unless banks are forced to lend via congressional oversight those calling for hyper-inflation are going to look foolish.

IMO we are actually experiencing bi-flation, but make no mistake we experiencing a serious debt deflation at the end of a massive credit wave triggered by a nasty business cycle. He is correct, the markets are going through a massive de-leveraging, a massive deflation is about to occur across a broad spectrum of asset classes. Just look at the markets and tell me that deflation is not occurring.

Is there inflationary pressure on certain items, namely consumer goods, food, and energy prices? Yes, and it is because the banks aren't able or willing to lend out their reserves in the form of consumer loans, but they are willing to gamble a percentage of the newly created money in the commodity and equity markets driving prices through speculation. We are essentially experiencing inflation in all the wrong places.

As for gold, the case can be made that gold is better deflationary hedge than inflationary hedge. Inflation/deflation doesn't really matter for gold. What matters most is investors view of the current monetary regime. The more people fear the end of fiat money the more gold prices will rise. Gold is a hedge against the death of money because it is the markets true money.

Re: Is the case for deflation sound?

ClutchDynamite — Mon, 03 Oct 2011 23:55:28 GMT

Thanks for the great links. I think that sometimes there is a tendency to simply overthink the obvious, and that this is the trap that so many deflationists have fallen into.

Re: Is the case for deflation sound?

DanielMuff — Mon, 03 Oct 2011 23:02:17 GMT

Mish: "Deflation is a net decrease in money supply and credit, with credit marked-to-market."

M2 has been going up.

\thread

Re: Is the case for deflation sound?

John James — Mon, 03 Oct 2011 22:45:34 GMT

MIsh Shedlock sure seems to think so.

And actual economists don't.

Mish Should Ditch His Deflation Fears

Has Mish Deflated the "Inflationistas"?

Is Deflation in the United States Possible?

Inflation or Deflation?

Is the case for deflation sound?

ClutchDynamite — Mon, 03 Oct 2011 18:49:08 GMT

Mish Shedlock sure seems to think so. If he's right, and we're in the begining stages of a deflationary depression a la Japan, does that change the thesis for Gold as an investment?