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    by Davos

    Sunday, August 23, 2009, 2:13 PM

I’ve done a tremendous amount of reading up on inflation and deflation. Specifically with respect to the history of the definitions for each. They have changed over the years. Inflation and deflation used to apply only to the amount of money in circulation.

Keynesian economist believe that inflation and deflation deal with asset prices.

Today, very smart bloggers and blog themselves are clearly divided into three camps. Inflation. Deflation. And then we have the deflation then inflation camp.

I think before pitching tent  any camp it is first wise to look in the mirror first and ask yourself: What school am I from, what do I believe is the definition of inflation and deflation?

Myself, I’m sticking with the Austrain’s definition. Why? Becuase it is simple. Simple answers tend to be correct answers.

Inflation: A larger amount of money in circulation.

Symptoms: The larger the supply the less value that each individual piece of the currency holds. 

Result: More dollars are needed to purchase individual assets.

Deflation: A smaller amount of money in circulation.

Symptoms: The smaller the supply the more value that each piece of the currency holds.

Result: Less dollars needed to purchase individual assets.

I can test this theory, and I have, with metal we purchased in the early 2000s when “Easy Al” was getting crazy hanging paper. With metal I could buy more assets, gas, food, land, you name it, then with paper. The “Federal” moths made swiss cheese of the paper’s value.

It can be substantiated with simple deduction as well. Assets fall into many classes. I don’t think many (perhaps even any) “deflationists” (Keynesian) would argue that we had a real estate bubble. The bubble has popped. Assets in that class are falling. Precipitously falling.

Is that deflation? No. Not at all. It is supply verses demand. Supply is 19 million vacant homes, millions more in or verging on foreclosure, and 4-5 million on the market. Buyers? Well, not as many since a good portion of the boom was created with “exotic” instruments. Those buyers won’t be back, the traditional buyers that were taken out will also have a tough time getting back. And we have 26 million under employed and unemployed workers out of the 150 million total. 

Gas, oil, food? I’m not seeing asset prices in these sectors go down. In fact I’m seeing them rise, and demand hasn’t risen. That to me indicates that the value of the dollar has fallen.

I sincerely don’t think that deflation is selective. I sincerely believe that prices have more to do with supply and demand and if those two remain equal and the price goes up then that indicates that the value of our dollar went down.

Look back, from 1930-1970 gold was about 35 an ounce. Then we declared force majeure and started papering the world with dollars and the value of the dollar has dropped. Gold is just south of a thousand bucks. The only thing that went up with respect to gold or silver or copper is production and how much of it is above ground. The only time PMs don’t go up or down is when they leave the mine, the VALUE of the dollar is what goes down.

If you don’t believe me then I’d encourage you to wrap your mind around the Keynesian/current (and IMHO convulted) defintion of inflation and deflation. I think you might find that it just doesn’t hold water.

Best wishes and may your beliefs be wise investments for the future!


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