Deflation turning into inflation...

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kidz kargo's picture
kidz kargo
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Deflation turning into inflation...
Deflation turning into inflation...
 
I want to start a discussion about a popular topic of late and to glean insights from the well-valued opinions of those here. Chris, I would love to hear your insights as much as you have time for it.
 
For some time I have been trying to understand the assumptions, definitions and reasoning with the two main camps of the "deflationists" versus the "inflationists" regarding their interpretations of current events and the line of reasoning behind their expectations for the near to medium term future. I read everything I can on these topics, yet, I'm still fuzzy on a couple of topics.
 
To start, I understand that "inflation" starts with an increase in the money supply and then leads to higher prices as a result, higher prices being a function of where the increased money gets directed to.
 
The leading opinion, in my view, so far, and I'm willing to change my opinion if new information comes about, is that our current price declines are due to people liquidating their assets and are also a function of bubble forces correcting.  In a sense, while prices are decreasing, this isn't because of a true contraction in the money supply but rather because of other factors that are reducing demand. (i.e., tighter lending standards for houses, people spending less due to massive debt payments and job losses.)
 
What is a little difficult for me to grasp, is how debt plays into the picture of deflation and inflation.  While the money supply seems to be expanding with the bailouts and Federal Reserve moves, the essence of how that new money being creating flows into a segment of the economy that leads to higher prices seems elusive to me.  I'm trying to grasp the concept of the velocity of money moving at some point and also the US dollar losing it's appeal as a safe haven and trying to understand the predictable results of where the money will be moving to.
 
Will the money move into a hands of a few who are rich and the money will move somewhere from there?
 
Will the money move into the general economy with everything, including houses again, and even houses will inflate? hyperinflate?
 
Will debt, the digital money out there, magically be reduced and disappear and then lead to deflation. Are their any examples of debt being erased from the last year?
 
Thanks in advance for any responses.  I'm really trying to grasp these concepts.
 
Paul 
pir8don's picture
pir8don
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Re: Deflation turning into inflation...

Hi kidz kargo

You are grappling with a problem that I too have tried to understand and have come to a fairly clear (to me) conclusion about.

As I see it; money does nothing real until someone is prepared to work for it. Goods already created by work are more or less immaterial on the deflation - inflation spectrum. That is because with ownership nothing changes in reality - just names on pieces of paper (if that).  No matter how extreme the price paid and no matter how big or small the goods created.

There is a lot of money now sitting in banks and that is a lot more than there was because heaps has been printed (made into digits). But nothing changes till that money "gets leggs". That is; people work for it.  At the moment less people are working and we have deflation.

If and when people stop just buying existing things with all this extra (printed) money and try to get people to do things for it we will see inflation. 

Governments can print money till the cows come home and in my view it won't matter until those with the money try to get others to do work.

Debt is just a promise. Promises can and will be broken.

Hope I am not wrong and have not led you astray.

Don

____________________________________________

7 billion people can be wrong, very wrong

Lemonyellowschwin's picture
Lemonyellowschwin
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Re: Deflation turning into inflation...

Paul,

Here are a couple of thoughts that might be useful in your quest for answers:

1.  Trying to understand these economic processes is sort of like trying to understand the game of chess.  You can learn the rules in about 20 minutes.  But the game can never be fully mastered.  It is far too complex.

2.  As in chess, the outcome is neither mechanical nor pefectly predictable.  So many factors and variables come into play -- pushing and pulling the game in all directions -- that prediction becomes very difficult.  It is a fluid and dynamic game subject to all kinds of ebbs and flows.

3.  As in another game -- poker -- the best you can hope for is to make general predictions about probabilities and consequences and position yourself accordingly.  Be wary of making definitive conclusions.  In poker you can rarely know what cards your opponent holds.  You decide whether you think he has a strong hand or a weak hand, realize you might be wrong, calculate the pot odds, and accept the fact that even if you are correct in your analysis, there are still "cards to come."  Over time, an excellent player hopes to win more than he loses.

4.  For an experienced and intelligent chess or poker player, intuition plays a very important role.  So too in higher levels of macroecomic analysis.

5.  There are very intelligent people who are trying very hard to understand where we are and where we are headed.  In some cases they come to hold very different points of view.  There is no one "right" answer to any of this stuff.

Having said all this, most people don't even give macroeconomics a second thought.  They have no idea what forces are at work.  I think an intelligent person can study this stuff hard and get somewhat ahead of the curve.  But there will always be fuzziness.

xpromache's picture
xpromache
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Re: Deflation turning into inflation...
Quote:

There is a lot of money now sitting in banks and that is a lot more
than there was because heaps has been printed (made into digits). But
nothing changes till that money "gets leggs". That is; people work for
it.  At the moment less people are working and we have deflation.

If and when people stop just buying existing things with all this extra
(printed) money and try to get people to do things for it we will see
inflation. 

Governments can print money till the cows come home and in my view it
won't matter until those with the money try to get others to do work.

For me the definition of inflation is that the same amount of work is done for more money. In the worst case money is spent for no work - for example unemployment benefits. If out of a sudden everybody is unemployed and the government doesn't get any money from taxes but pays unemployment benefits - that is inflation - the money have no value since you cannot get anything done with them.

This is what is happening how in my opinion - the government spends a lot of money to cover the housing bubble debt, then the natural thing would be for the other prices to catch up with the inflated house prices.

scepticus's picture
scepticus
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Re: Deflation turning into inflation...

pir8don's reply is very insightful. Money and banking is merely the world's accounting system for world production of real things.

Recently the accountants have taken to skimming a little too much off the top, as a result of which they have broken things rather badly. But the problem runs deeper.

Fundamentally, the world has misallocated it's resources over the last 30 years and built stuff which we are not going to find too useful in the future. As our societies age,  as the growth in population falls off,  as oil gets harder and harder to extract we shall find we have greater need for saving, and also that things get more expensive. So all the strip malls, mcMansions, fancy restaurants etc turn out to be fools gold - it turns out that what we will be needing were communities where several generations of a family can live together, energy sources and transport not dependant on oil or gas, and durable consumer goods that last for decades rather than being disposed of after 3. 

So now we have all thes buildings and factories  that make or sell stuff we no longer want. But these are our assets, and now they are not worth anything. So I say deflation is the likely outcome. Asset prices will increase when the asset base reflects what people need to prosper. However we shall have to build them first. 

 

 

 

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Mike Pilat
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Re: Deflation turning into inflation...

pir8don, lemonyellow, and scepticus: your replies are most insightful. Thank you for your inputs.

I think it's very correct to say that debts will be defaulted on, but I do accept that this can happen through inflation which to me is a little less honest than simple default. Entitlements like social security and medicare and medicaid will be defaulted on, the question is how.

Most of the goods we've produced and now own do indeed represent more wealth than the the FRNs that we've given the Chinese. Yes, even junk from China is worth more than paper debt-notes. But the catch in it is that China arguably has a much greater productive capacity than we do: more factories and stronger industry. So that's not so good for us.

Looking at this scenario, it seems to point to a great deflation for us as we find a great surplus of junk. But perhaps the deflation will only play out in the "old paradigm." The money that has been sucked out of the old goods, combined with the freshly created money, will be looking for a home and eventually, I think it will "find legs." We might be beginning to see this now as inflation or at least non-deflation is seen in certain asset classes: gold and guns and ammo. Without doing a detailed study myself, I think the money is going to shift from say, aftermarket in-dash DVD players, to say fuel, food, and even farm land and equipment. 

Just keep in mind as well that as prices fall on many goods, the money that I don't need to spend on them is money that I will direct towards something else and money that will eventually add to inflationary pressure somewhere. I think this can be looked at from a macro scale of money creation and destruction. Clearly a lot has been destroyed in the markets, but a lot has been created to replace it as well. As long as those are roughly in balance, I don't see how we could have an aggregate net deflation for too much longer. As long as there is an excess of money in the system, people will find goods on which to spend it.

It angers me to think that as long as the system remains the way it is, we really don't seem to have much control over what the outcome is. With 0% interest rates, the Federal Reserve can pump as much money as it likes into our system and that is only what we see on the surface. If Ben really did pilot a literal helicopter, you better believe there would be massive inflation. The only thing that could prevent that is an educated public taking a strong stand against the dollar and the status quo. I remind everyone here that Fouding Fathers were generally quite well educated and required that education to understand the nature of liberty, banking, and debt slavery. Perhaps we, as part of a growing group of people, are called to do the same...no delusions of grandeur, but if we fail to take a stand, then who will take it for us?

I am reminded of two very pertinent and surprisingly instructive episodes of one of my favorite childhood cartoons, DuckTales:

- this is a VERY explicit inflation warning from Scrooge himself

Also, look up Duck Tales Episode 096 - The Land of Tra-La-La on youtube, in which a previously moneyless society is nearly ruined by inflation when bottle caps get used as currency.

If only the kids watching these picked up on the lessons. These episodes are really pretty powerful if you ask me.

Cheers!

Mike

 

mpelchat's picture
mpelchat
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Re: Deflation turning into inflation...

Inflation is here, and has been except in the case of housing (realestate) and gas/diesel prices.  Oh and do not forget salaries/wages for workers.

Case and point (which has been made on other threads)

Base value can of vegetables in 07 was $0.42 now are $0.55 approx 30% increase in about 15 months.

A bag of Dry beans in 07 was $1.00 now are $1.39 approx 39% increase in about 15 months.

The list goes on and on.  You would expect that the prices would go down with gas/diesel prices going down but they are not.  This trend of  increasing cost of basic consumable goods has been happening more over the last short period of time than any other I can remember but like the cable companies they make small increases overtime and have big sales on lost leader items to get people into the stores.

Think of this:  If you drop a frog into boiling water he will go nuts and try to save itself.  If you put a frog in cool water and heat slowly, it will sit and eventually boil to death without much fuss.

 

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DrKrbyLuv
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Re: Deflation turning into inflation...

I don't think our markets or the economy behave either free or naturally anymore which renders much historical based analysis virtually irrelevant. What do the experts have to draw from in order to accurately predict where we are heading - inflation or continued deflation?

The FOMC (Federal Open Market Committee) and PIP (Plunge Protection Team) regularly intervene in our markets without announcing either intent or actions. We know that billions and billions of dollars are pumped into our markets - we just don't know where or why.

And we have the manipulation of the gold market that has been taking place for over 40 years. GATA (Gold Anti-Trust Committee) has been alleging this for years and recently they found a "smoking gun" through the efforts of Elaine Supkis. Elaine is an investigative journalist (a rare thing indeed) and she came upon a recent document that clearly shows that the private Federal Reserve along with our government, decided to manipulate the price of gold beginning in the 1960s. You may find the information at: James Turk: The Fed's blueprint for market intervention

I'm pleased to say, and should disclose, that I consider Elaine Supkis a personal friend and covered the "Ron Paul Rally for the Republic" (Minnesota) for her website, "Culture of lIfe News" back in early November 2008.

We also have the constant manipulation of the futures speculators. Oil rang at over $150/barrel based on the artificial demand of the speculators. Just as quickly the price collapsed to under $50/barrel. The market "disconnect" of the price of oil has been thoroughly covered in the media. What will the price be next week?

So, back to your question - deflation turning into inflation?

My guess is that deflation will be with us for some months to come. I base this guess on the phenomenon that Chris Martenson has defined as the "exponential growth of debt (interest)." Past debt obligations had the loan principal created but not the subsequent interest obligations. These obligations perpetually grow which consumes a growing percentage of our money in circulation - robbing the productive economy. Much of the money that is pouring into our economy is being soaked up by this debt like a dry sponge to dripping water. 

This notion of "insoluble debt" growing in our economy is not shared by everyone -  most Keynesian and Austrian economists would disagree. I agree with Chris, it is a mathematical certainty and not a theory or opinion.

I think we are far along in having this parasitic load accumulate to the point of greatly damaging and destroying our economy. But, what exactly might we expect? Mike Montagne, another proponent of this mathematical phenomenon, has made some predictions that are very relevant to your question:

Mike Montagne wrote:

PROBABILITY FOR WORLD-WIDE ECONOMIC COLLAPSE AS A CONSEQUENCE OF INTEREST

The familiar pattern, contorted by disruption, vacillating interest
rates, data collection methods, vacillating maintenance of the
circulation, and world events. Here we see the first two lifespans of
the so-called Federal Reserve System: A first lifespan to collapse
(1913 to 1930); and a second lifespan to subsequent collapse (1945/50
to present).

Any purported economy subject to interest
ultimately terminates itself under insoluble debt, because to maintain
a vital circulation, we must perpetually re-borrow periodic principal
and interest payments as subsequent debts, increased so much as
periodic interest.
Re-borrowed principal equals and thus retains the former debt its payment would otherwise resolve. Thus the sum of debt increases so much as periodic interest, which is re-borrowed as new debt, above the retained sum of debt.

As ever more of the circulation is inherently devoted to servicing
debt, ever less of the circulation can be devoted to sustaining
commerce, and yet the costs of all things are perpetually driven
upward. Surviving industry increase prices to sustain itself, while
margins and the purchasing powers of consumers erode. Industry is
driven from free countries to slave societies. In its wake and beyond
its bow, representation across the world suffers. And the perpetrators,
who come to own everything, must disinform us so ever more aggressively
that so many of us, dispossessed to such a degree by so few of them,
never or barely realize the stench of it all.

To outgrow this process is impossible, because it
requires growth and consumption both, escalating at ever greater rates
even exceeding the multiplication of debt itself. Yet just because the
world is finite, such growth is impossible, even if the necessary rates
of growth, and even the necessary rates of consumption were not.

We do this eventually without even asking what is the ostensibly justifying principle of requiring such growth?

Yet there can't be such a justifying principle, unless one man is to be
endowed with a right or privilege which inherently not only subjugates
all others, but inherently dispossesses them even to a terminal state,
for if we give such a man the privilege to create money at no cost, and
yet this is to impose such cost on the rest of us for delivering no
real service whatever, then it is just for him to dispossess the rest
of humanity for nothing.

Nonetheless, the probability for world-wide collapse as a consequence of interest therefore is 100 percent. Certain.

That is, irreversible multiplication of debt in proportion to a circulation by interest can only produce a terminal
sum of debt which the subject commerce can no longer afford to service,
because to do so would require more even than the whole circulation; thus
to borrow even further enough to do so would comprise a debt beyond the
capacity of commerce to service, even if no costs whatsoever were
involved in sustaining commerce. In other words, at such a maximum
possible lifespan and beyond, the necessary credit-worthiness is
impossible.

This however is not to say that the world will absolutely suffer a
Second Great Depression, even as such an inevitable event looms just
around the corner.

Nor does that mean the alternate events we should
anticipate are equally or more comforting, because unless we assert the
one and only solution, the whole thrust of the developing pattern
indicates that left to the present forces of governments presently in fact obstructing representation, the developing infrastructures, which everywhere build upon usury, will ensure we are forever dispossessed to the greatest practical degree.

Usury perpetuated by the further tools our unassented masters are
devising will continue to be their tool to control us, to enslave us,
to minimize our consumption, to disinform us, and to deny us
representation forever.

So the forks into the road of the future are,

1) We can stay the course and suffer the collapse of a Second Great Depression:

In this, the evident present case, the world's
hidden credit masters most assuredly will, as they did ten years after
the First Great Depression, at some time simply re-allow us some of the credit-worthiness which their method of dispossession yet will inherently and perpetually destroy.

To maximize their takings forever, we will be
subject to perpetual deceptions to limp along forever. Under that
perpetual erosion, we in the United States might eventually then begin
the third successive lifespan of the so-called Federal Reserve System
or whatever facade of rectification emerges. The rest of the world
likewise will be persuaded that it take a similar tack. We will be
given false reasons for the failure; and these false reasons, accepted
sufficiently by most of the duped public, will be used to consolidate
the powers of the hidden credit masters above us, to perpetuate
world-wide usury to whatever eternity they determine.

2) We can allow the purported forces of "globalization" to pretend solution and pursue the same course:

The purported forces "of globalization," which
everywhere are arising not by public mandate, but by covert efforts
which are not even exposed to the judgment of public assent, without
exception intend to reinforce the persistence of usury. Rather than
reinforcing vital instruments such as our Constitution and Bill of
Rights, the opposed intention here is the permanent dissolution of such
protections, for if these instruments were enforced today by these very
players who presently deny their value to us, they who pretend
to serve us would already have dissolved the world's central banks.
"Globalization" will be wielded as a false alternative, enveiling the
object of permanent usury which will be pursued just the same as if we
tolerate further pursuit of the first alternative.

3) We can establish mathematically perfected economy™:

This course and this course alone will solve our
problems, avert erosion and collapse ever afterward, make us
financially capable of solving problems we may never afford to solve
otherwise, and immediately enable us to achieve the full measure of
prosperity we are capable of.

I should note that Mike Montagne has earned credibility in that he developed a spreadsheet model of our economy back in the early 1980s. In 1984, he shared his findings with the Reagan administration. At that time, his spreadsheet model projected a lifespan that would end in the year 2010. Mike's scenarios point towards deflation.

 

 

kidz kargo's picture
kidz kargo
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Re: Deflation turning into inflation...

I would like to thank everyone for sharing your insights, I have read every response at least twice and am mulling the information over.  Thank you again.

 

Paul 

scepticus's picture
scepticus
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Posts: 129
Re: Deflation turning into inflation...

"Yes, even junk from China is worth more than paper debt-notes."

Not if the junk from china is a lot more numerous and a lot less useful than the debt-notes. 

"But
the catch in it is that China arguably has a much greater productive
capacity than we do: more factories and stronger industry."

I disagree. They have a larger population to feed. Further mosty of industrial capacity created is restricted to making stuff no-one wants any more. The industry remaining in the US and UK is stuff like pharmaceuticals, defence/aerospace and hi-tech design and research and will lead in developing green energy. The french are good at building trains and nuke plants. These  are the things that people will want in future, not what the chinese have today. The challenge for the US is grow domestic industries to supply domestic consumption while exporting the items above. This will be painful but the chinese will suffer more. 

"The money that has been sucked out
of the old goods, combined with the freshly created money, will be
looking for a home and eventually, I think it will "find legs.""

And what will those legs be - the items above, plus new domestic markets like healthcare. But will the volume of these new markets match the old consumer credit-fuelled ponzi? I suggest it won't, hence no major risk of inflation. A sudden discovery of unlimited energy via fusion tokamak or self-assembling organic solar cells would create inflation, but that's a nice problem to have. Inflation will be difficult to come by until the imbalances in the global economy have been corrected through demand destruction and global wage arbitrage - that is all very deflationary.

 

 

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