The Definitive Inflation vs Deflation Debate and What to do About It Thread

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The Definitive Inflation vs Deflation Debate and What to do About It Thread

Given the popularity of the discussion following Dr. Martenson's recent report: Martenson Report - Inflation vs. Deflation - What Comes Next?, I thought it might be prudent to give the inflation vs deflation debate its own thread. Typically, discussions of this sort engender a great deal of confusion and ambiguity, but given the seriousness of the matters at hand, I believe this discussion can only benefit this community. 

While I think a portion of the discussion on this thread should focus on the various pro-inflation and pro-deflation arguments, I think it would be very prudent to discuss "real world" preparations that each of us should take to personally deal with possible inflationary / deflationary outcomes. For example:

  • What changes should a person make in their daily life to deal with significant inflationary forces?
  • How could someone prepare for a deflationary spiral in their personal life?
  • What investments and financial decisions should one make to mitigate the effect of high inflation?
  • What investments should be avoided in a deflationary environment?
  • What preparations are equally prudent in both an inflationary and deflationary outcome?

I'm perfectly aware that the inflation vs deflation debate is a never-ending exchange, but I think the true purpose of this thread should be focused on tracking the news and data as it unfolds, and to provide the community members with ideas and actions to deal with whatever scenario unfolds in our future. That being said, I have my doubts that this thread will invoke any input, but I felt it is an important enough subject that I needed to try.

Thanks

 

 

 

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Re: The Definitive Inflation vs Deflation Debate and What ...

Good idea JAG.

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Re: The Definitive Inflation vs Deflation Debate and What ...
JAG wrote:

That being said, I have my doubts that this thread will invoke any input, but I felt it is an important enough subject that I needed to try.

Thanks

Well, I'm here to prove you wrong!

I like the term bi-flation, and found a wikipedia entry for it. It explains how both deflation and inflation are occurring simultaneously. Bearing this article in  mind, it makes planning for the future a little easier.

http://en.wikipedia.org/wiki/Biflation

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Re: The Definitive Inflation vs Deflation Debate and What ...
agitating prop wrote:
JAG wrote:

That being said, I have my doubts that this thread will invoke any input, but I felt it is an important enough subject that I needed to try.

Thanks

Well, I'm here to prove you wrong!

I like the term bi-flation, and found a wikipedia entry for it. It explains how both deflation and inflation are occurring simultaneously. Bearing this article in  mind, it makes planning for the future a little easier.

http://en.wikipedia.org/wiki/Biflation

Sounds remarkably like the current situation in the US, the article is 6 days old too.

 

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Re: The Definitive Inflation vs Deflation Debate and What ...

Gungnir, I like the reconciling of the two in a way that is easy to understand through personal experience. You don't have to be an economic scholar to see which way the dollars go---similar to, you don't have to be a weatherman to see which way the wind blows.

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Bi-flation

 Thanks Prop!

Bi-flation sounds like the perfect definition of our current circumstances. I think it is a more accurate description of the economy than the term stagflation is. I'm always open to a new point of view, especially one that integrates opposing viewpoints within a larger context.

Excellent! Thanks again.

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Re: The Definitive Inflation vs Deflation Debate and What ...

Totally, agree. I like the description, even though Wikipedia is asking for citations.

 

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Re: The Definitive Inflation vs Deflation Debate and What ...

This is a very difficult question and to analyze it properly we will need to look at several situations at once.  Lets focus on some major areas that effect our daily life; employment, food, utilities, oil (and oil based products), housing, US monetary system

1) Employment = deflation with job loses mounting and those that have jobs pay is being cut or benefits reduced.

2) Food = inflation as I have stated before and can give some more examples that food have gone up in the stores by 30 to 75% over the last year.

Examples:  Campbell's soup standard can $0.50 to $1.50,  one pound of Kidney beans from $1.00 to $1.45, basic can of green beans $0.40 to $0.54, Cheese Its same cost but boxes went from 9.5 oz to 7.5 oz.  The only items that have held costs are milk and bread but people began to get angry at these costs going up. 

3) Utilities = inflation water has gone up in my area around 8%, I am on a balanced budget program so next January I will get to see the change in these bill (I do not look forward to that).

4) Oil (and oil products) = year or year deflation but recent trend is 40% increase in costs since the beginning of the year.

5) Housing = deflation in my area the only people buying homes are with 2 families going into one home.

6) USD = flat line, we can only imagine what will happen to this in the coming time.

Basically we are looking at most costs going into inflation and most items that are considered equity items for the average Joe going down.  This is by definition Slumpflation http://www.merriam-webster.com/dictionary/slumpflation . Fujisan informed me about this term.

IMO Slumpflation is the worst of all inflation's (looking at stagflation, deflation and inflation ((than you can put hyper- on all of them).

 

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A Strategy for Inflating Gas Prices

 A while back I posted a personal strategy of mine to hedge against rising gasoline prices in Simple Strategy to Hedge Against Rising Gasoline Prices.

I have to say this strategy has worked perfectly for me. My initial investment in the UGA ETF is up 63% since I implemented this trade at the beginning of the year. Though I will probably wait to take a distribution to avoid the short term tax rate, it is good to know that I have effectively froze the price of gasoline at $1.60/gal for my family this year.

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Re: The Definitive Inflation vs Deflation Debate and What ...

Higher unemployment should represent a deflationary force, but it could play out along the lines of-- demand down, supply down even more, as a consequence. More business failure, more corporate consolidation. High fixed costs, due to weakening US dollar. 

Food is interesting, isn't it? I've noticed the same in my locale. The areas that are going to see the most food appreciation are in areas where competition between stores is limited to begin with, like the inner city, (no mega stores). Where there are still competing food stores, particularly mega stores, you could still be seeing competition, particularly if  the megas can cross subsidize their store by location, to drive out competition.

 

Add to the inflationary dynamics, the tendency for money to flow into the "safe haven" of commodities, like grain and corn, bids up price for retailers. This, added to crop failures due to climate change, and water shortages...real bad. Chris's three E's really get together for a nasty manage a trois in the grocery store.

 

 

mpelchat wrote:

This is a very difficult question and to analyze it properly we will need to look at several situations at once.  Lets focus on some major areas that effect our daily life; employment, food, utilities, oil (and oil based products), housing, US monetary system

1) Employment = deflation with job loses mounting and those that have jobs pay is being cut or benefits reduced.

2) Food = inflation as I have stated before and can give some more examples that food have gone up in the stores by 30 to 75% over the last year.

Examples:  Campbell's soup standard can $0.50 to $1.50,  one pound of Kidney beans from $1.00 to $1.45, basic can of green beans $0.40 to $0.54, Cheese Its same cost but boxes went from 9.5 oz to 7.5 oz.  The only items that have held costs are milk and bread but people began to get angry at these costs going up. 

3) Utilities = inflation water has gone up in my area around 8%, I am on a balanced budget program so next January I will get to see the change in these bill (I do not look forward to that).

4) Oil (and oil products) = year or year deflation but recent trend is 40% increase in costs since the beginning of the year.

5) Housing = deflation in my area the only people buying homes are with 2 families going into one home.

6) USD = flat line, we can only imagine what will happen to this in the coming time.

Basically we are looking at most costs going into inflation and most items that are considered equity items for the average Joe going down.  This is by definition Slumpflation http://www.merriam-webster.com/dictionary/slumpflation . Fujisan informed me about this term.

IMO Slumpflation is the worst of all inflation's (looking at stagflation, deflation and inflation ((than you can put hyper- on all of them).

 

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CPI Drops 1.3% in Past Year, Biggest Drop in 59 Years

Commentary from Mish

 CPI Drops 1.3% in Past Year, Biggest Drop in 59 Years; Where To From Here? 

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Re: CPI Drops 1.3% in Past Year, Biggest Drop in 59 Years

Mish should know better than to cave to "fed speak". They are signalling by highlighting the episodic cpi, their intent to forgo raising interest rates. This is a total CPI inflationary signal.

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Re: The Definitive Inflation vs Deflation Debate and What ...
mpelchat wrote:

 Food = inflation as I have stated before and can give some more examples that food have gone up in the stores by 30 to 75% over the last year.

I do all the grocery shopping in my family, and I have used an iPhone application to track prices for 9 months now. While I don't doubt you are seeing higher prices, my experience has been little to no price increases in the items that I buy for my family. Meat, in particular, has dropped in price for me over the last few months. I don't have a full year's worth of data yet, so it could be that year over year changes will be significant, but as of now I'm paying the same as what I payed during the fall of 08. 

(Houston, TX)

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Re: CPI Drops 1.3% in Past Year, Biggest Drop in 59 Years
agitating prop wrote:

They are signalling by highlighting the episodic cpi, their intent to forgo raising interest rates. This is a total CPI inflationary signal.

I would have to totally agree with your assessment of the intent behind the Fed's statement. Its not very often that Mish would agree with anything the Fed had to say, however.

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Re: The Definitive Inflation vs Deflation Debate and What ...

JAG,

Check volume vs price as well.  Many national brands like Cheese it are keeping price the same but the quantity is less.  A good one is a can of tuna went from 6 to 5 oz but cost stayed the same or creeped up a bit.

 

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Re: The Definitive Inflation vs Deflation Debate and What ...

Guess you guys missed to news....

The bottom is in.  Green shoots are sprouting up everywhere.  A return to unfettered growth is imminent.  The Four Horsemen of the Barackalypse said so.

Now where's my cup of purple kool-aid?

Seriously -

Over the past several economic reports we have seen:

1. Higher unemployment but lower than expected job losses (we're getting worse but not as bad as we used to )

2. A monster jump in Housing Starts (I guess the bulldozing in Flint, MI is changing the denominator????)

3. Much lower than expected PPI, CPI (ain't no inflation goin' on here)

It begs a few questions.  Despite all evidence to the contrary, one would like to think that our leaders aren't as stupid as we know they are, oops, that was my inside voice, I meant "think they are".  So what do they gain by presenting false information?  They have to know what is going on and these underhanded meatballs they keep tossing out to the public are at best doing nothing more than creating a false sense of security until TSHTF.  Or do they truly think that they have "fixed" things and are in actuality as clueless as the people they are feeding the info to and will be just as surprised by TSHTF as the rest of them?

Or have they fixed things and we will slowly gain some traction and crawl out of the canyon that has been dug for us?

I have to believe that given their well documented history of bumbling incompetence that the answer lies somewhere between the first two choices.

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Re: The Definitive Inflation vs Deflation Debate and What ...
agitating prop wrote:
JAG wrote:

That being said, I have my doubts that this thread will invoke any input, but I felt it is an important enough subject that I needed to try.

Thanks

Well, I'm here to prove you wrong!

I like the term bi-flation, and found a wikipedia entry for it. It explains how both deflation and inflation are occurring simultaneously. Bearing this article in  mind, it makes planning for the future a little easier.

http://en.wikipedia.org/wiki/Biflation

 

Indeed, this definition does seem to fit the current situation. It will be interesting to see if this "biflation" continues.

 

Ken

 

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Re: biflation for the challenged

I think a good definition of biflation, borrowed by me from another site, is inflation in price for all of the items you need and deflation in price for all of the items you want.

 

SG

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Re: The Definitive Inflation vs Deflation Debate and What ...

Jag thanks for starting this thread. Here is what I am doing.

1. What changes should a person make in their daily life to deal with significant inflationary forces? Buy everything you can afford now before new taxes & prices inflate. I am trying to buy what I can think as far as 10 years out (things that will last). If it gets real bad as many think I will watch things unfold on my big screen over a cold one. I plan to do the socialist shuffle & just enjoy being alive while I produce less so not to be taxed so much. Ain't socialism just great...brings out the best in us! Buy some PM.

  • 2. How could someone prepare for a deflationary spiral in their personal life? Hoard cash in a safe place. Wait to get the best deal as everything gets tougher. Buy some PM.
  • 3. What investments and financial decisions should one make to mitigate the effect of high inflation? Buy commodities that will be most affected. Follow Jim Rodgers & Peter SChiff.
  • 4. What investments should be avoided in a deflationary environment? Avoid the market & be in cash or PM.
  • 5. What preparations are equally prudent in both an inflationary and deflationary outcome? Buy Guns & Ammo, food along with PM. I would pay off your house if you can...just a basic safety net that I feel you can not go wrong with. Right now I find Guns & Ammo better than PM...YMMV. Get some land & a fenced area.

 

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Re: biflation for the challenged
Capesurvivor wrote:

I think a good definition of biflation, borrowed by me from another site, is inflation in price for all of the items you need and deflation in price for all of the items you want.

I think that is exactly what is/will continue to happen.  Looks like Deninger has thrown his hat in the deflation ring:

Ssssshhh.... Its D-D-D-D-....

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What to expect with Inflation, Deflation, Stagflation, etc

 In an effort to determine how to prepare for inflation / deflation scenarios, I came across this chart from Mish's article Humpty Dumpty on Inflation. Its an excellent guide to what one could expect to happen in each of the "flation" scenarios. The regions that are blank are debatable, so they are left blank. (Current conditions are for December 2008)

 

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Re: What to expect with Inflation, Deflation, Stagflation, ...

Interesting, thanks.

 

SG

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Re: The Definitive Inflation vs Deflation Debate and What ...

 Oops, sorry I guess my link to the chart got broken somehow, most likely user error on my part. The link to the article works however.

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Re: The Definitive Inflation vs Deflation Debate and What ...

Ya Know,

I have learned to not like Wiki.... but.... I do like the description of "biflation" or, is it just "stagflation" said a different way.

 

They have to know what is going on and these underhanded meatballs they keep tossing out to the public are at best doing nothing more than creating a false sense of security until TSHTF.  Or do they truly think that they have "fixed" things and are in actuality as clueless as the people they are feeding the info to and will be just as surprised by TSHTF as the rest of them?

Dogs,

I agree with you, I think the answer is somewhere in-between. Why? Because some of the folks really are hard working and believe what their bosses feed them and the bosses are soooo FOS that they believe the lies they feed their underlings.On top of all of that, the data is so corrupted from cooking the books, none of them really know what the truth is and they believe the bad data they make.

Everyone,

What Chris has said many times is to rid one's self of debt. I really don't buy using debt as a hedge against inflation. I want to be able to put my head on the pillow at night. Food simply costs more. From what I have seen in trying to prepare and stockpile food, the price keeps going up.... even if "less quickly" However, I have seen a drop in dairy products. To that I don't have an answer. I would think some .gov tinkering with the dairy market. That could signal that they are trying to prop up the dairy market. I saw that happen many years ago.

So, inflation or deflation? I'd prefer deflation. It means that in my current situation, I can prepare better for what is coming down the pike.

 

FWIW - C.

 

 

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Re: The Definitive Inflation vs Deflation Debate and What ...

How far off would this be on the "what to do about it" aspect? Keep your house in case inflation rears it's head. As to liquid assets, keep them 1/3 in gold, which theoretically could be insurance against either perspective. Keep 1/3 in cash or short term treasuries in case deflation occurs......less money chasing more goods and therefore worth more.......and keep 1/3 in series I bonds.

Those bonds pay an interest rate and tack on the annual rate of inflation (although admittedly indexed to the CPI--fuzzy numbers). If deflation occurs you cannot lose money in series I bonds as anything less than zero inflation simply pays zero.

We wouldn't go broke in either scenario, would we? and we could adjust as events unfold.

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Re: The Definitive Inflation vs Deflation Debate and What ...

 Jerry,

That seems like a reasonable approach to me. If inflation does come roaring out of the gate at some point, you could use your cash to invest in commodities. And I like the series I bonds idea as well, as long as your holding the bond directly (not through an ETF or Fund vehicle). In the event of deflation, you get your principle back in dollars worth more than they are today. What would be the duration on the series I bonds? If its more than 5 years,  I might be afraid that there wouldn't be a government to pay you back on expiration.

Thanks for the input.

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Re: What to expect with Inflation, Deflation, Stagflation, ...

 Jeff,

Thanks for digging that up.  That sure clears things up for me and I have to say I'm now fully in the deflationist "camp" at least for the foreseeable future.  Like Davos and others have alluded to though, there is never anything better than having your own ideas challenged by thoughtful and rigorous debate, so let the debate go on!  It sure is fun (though also darn right scary) to watch and be able to participate in.

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Re: The Definitive Inflation vs Deflation Debate and What ...

The one thing that seemed to particularly ring true with me is that the notion that it is usually MUCH easier to move from a deflationary preparatory stance to an inflationary one than it is the other way around.  In other words, selling off your possessions/assets in a deflationary environment is a lot harder than buying up assets with your cash savings in an inflationary environment (assuming something not quite as extreme than Zimbabwe).  I lean a little more towards the inflation camp (or more specifically, a mix of inflation and deflation depending on what you're buying) regarding the next 3 years, but I'm still keeping a lot of my savings in cash form.  Though I will add I'm keeping the majority of that cash savings outside the bank.... I don't discount the possibility of bank failures or holidays, and having one's money stuck in the bank during a inflationary event would be extremely painful and frustrating.

- Nickbert

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Re: The Definitive Inflation vs Deflation Debate and What ...
nickbert wrote:

The one thing that seemed to particularly ring true with me is that the notion that it is usually MUCH easier to move from a deflationary preparatory stance to an inflationary one than it is the other way around.

Great point nickbert. I would have to agree with you. Though Gold and Silver might be difficult to buy if there was a threat of a dollar collapse in parallel with the inflation. But commodities would be much easier to buy in an inflationary environment, than to sell in a deflationary environment.

Thanks for your input.

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Re: The Definitive Inflation vs Deflation Debate and What ...

Bi flation certainly seems to fit today.  However, was wondering how major bank holidays would play out in the scheme of things.  It would seem that bank holidays are a likely event especially as the Alt A, Option Arm, Commercial and Credit Card defaults play out in earnest.  All the "solid" banks that avoided the subprime debacle are probably the ones heavily invested in one of the other forms about to hit.  It would seem that going forward no bank will be immune.  So, if a major bank holiday occurs and trillions in peoples savings in banks gets wiped out (FDIC wont come to the rescue for something of this magnitude), would this be an even that could make deflation the rule?  Would it be more powerful than the trillions being printed to drive inflation?

On the other side of this issue, if its next to impossible to determine which banks can ride out whats to come, then were is the best place to put ones savings?  I was thinking Gold & Silver to hedge for the possibility of inflation, but also don't want all eggs in one basket (for reasons above).  The stock market seems far too risky now.  Thus, short term Treasuries would seem the best bet- but what about US vs other countries treasuries such as Canada?  

Kman

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Re: The Definitive Inflation vs Deflation Debate and What ...

I'm no financial expert, but my plan is to diversify amongst the following fairly evenly:

25% - gold/silver

25% - Treasury Inflation Protected Securities (TIPS)

25% - Cash US$

25% - Stock up on items I think I will need over the next few years (bikes, garden supplies, clothing, tools, guns, ammo, etc.)

I am waiting for house prices to drop further before purchasing a home again. Once I do, I will pay it off quickly.

Does that sound about right?

Can anyone please talk further abut how gold can be helpful in both inflationary and deflationary scenarios?

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