deflation?

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sosMsos's picture
sosMsos
Status: Bronze Member (Offline)
Joined: Nov 18 2010
Posts: 42
deflation?

Just want to know how a are the chances of deflation after global financial crash before hyperinflation comes into place. As this would pretty much change shortterm positioning. Or are we already in deflation mode, dont understand this?

(Cause in the Weimar republic we had nearly ten years of a deflational crisis befor hyperinflation kicked in that only existed for a few month)

Just questioning this cause, what would be an investment strategie in this scenario?

 

 

ewilkerson's picture
ewilkerson
Status: Gold Member (Offline)
Joined: Jul 18 2010
Posts: 390
Re: deflation?

I imagine that deflation is not going to occur, since the Fed is alreading pumping billions into the economy each week.  It's a complicated question, as you have read on here, because many commonity prices are rising rapidly.  They, I believe, are trying to get the housing market moving.  Anymore deflation there causes loss of wealth and people won't buy things then to get the economy going.  You might wantt to keep an eye on holiday shopping to see how consumers feel.

I'm sure this isn't the best explanation, but it really is a tough question.  Gold and silver seem to be the best way to ride it all out.  There is no perfect answer.  We all just have to hope for the best.  No matter what we do we are going to loose some wealth.  I'm in American oil and gas companies and gold and silver.

sosMsos's picture
sosMsos
Status: Bronze Member (Offline)
Joined: Nov 18 2010
Posts: 42
Re: deflation?

I read somewhere, that hyperinflation only becomes a real threat if the FED would push in 25 times of current volume.

Atm the commodity prices rise as the dollar looses value. But there is not included the purchasing power of the people. And that purchasing power will decline the heavier the crisis will hit them and the less loans will be granted. -> Usually this will let prices fall -> deflationary crises.

So there will be at the same time - on the one hand the FED pumping up M3 and on the other hand decreasing purchasing power of the people determining comodity prices.

So what will affect the prices more heavily?

Atm i am rideing the commoditiy markets up and down. Risk there is, most of the money is not used cause of  margin requirments, bankroll rules and not enough opportunities. Still searching for a good strategy where all the money is used mosyt efficiently.

 

PS:

here in Europe it looks like we will get a deflation first, we might be already facing it. all the EU countries are falling like

domino stones, and the creditors claims (big banks) will be feeded through tax payer money ->global  expropriation -> deflation.

Stan Robertson's picture
Stan Robertson
Status: Platinum Member (Offline)
Joined: Oct 7 2008
Posts: 665
Re: deflation?
ewilkerson wrote:

I imagine that deflation is not going to occur, since the Fed is alreading pumping billions into the economy each week.  It's a complicated question, as you have read on here, because many commonity prices are rising rapidly.  They, I believe, are trying to get the housing market moving.  Anymore deflation there causes loss of wealth and people won't buy things then to get the economy going.  You might wantt to keep an eye on holiday shopping to see how consumers feel.

I'm sure this isn't the best explanation, but it really is a tough question.  Gold and silver seem to be the best way to ride it all out.  There is no perfect answer.  We all just have to hope for the best.  No matter what we do we are going to loose some wealth.  I'm in American oil and gas companies and gold and silver.

There has been much discussion of inflation vs deflation on this forum since the beginning of the financial crisis some two years ago. There seems to be a consensus that inflation/deflation should be defined as an increase/decrease in the suppy of money in circulation plus credit (debt in our system). With this definition it is clear that we are in a strongly deflationary period. People are inclined to save rather than borrow and banks are no longer keen to lend to poor prospects. The contraction of credit is highly deflationary. Some argue that Fed money printing can defeat any contraction, but it isn't clear that even Helicopter Ben would choose to stand in front of a real deflationary tsunami. Others assert that QE1 and QE2 have already caused inflation and that disaster awaits if they are followed by QE3, QE4, etc. (If QE3,4,..N occur it will probably be due to a continued need to fund out-of-control federal government spending and that would be a disaster.)

What seems to be missing is that the definition of inflation/deflation is incomplete without some theory of how  these interact with the real economy in the lives of real people. Ordinary folks correctly consider inflation and deflation in relation to their wages and costs of goods. As long as these are relatively stable, they don't give a darn what Big Ben does.

QE1 and QE2 have been highly inflationary if one considers stock and commodity prices. If not for the effect of the latter on the costs for food and some consumer goods, there would be little consequence for most people. More generally, however, Fed money creation for the two decades after the 1982 recession produced an average of about 12% per year growth of the stock market and a corresponding growth in the financials sector of the U.S. economy. During this period the GDP grew only at about 3.5% per year. Wages and prices generally rose together. The end result is that this period was highly inflationary by the definition, but hardly noticed by ordinary people while the Fed quietly blew a bubble.

What happened in this decade is that Fed money creation produced multiple bubbles in property, equities, etc. This was, again, inflationary and again it was not uniform within the economy. If you weren't into housing or stock markets you might not have noticed until the wheels fell off in 2008. That was such a jolt that everyone has felt the consequences. These will continue until the excesses of the bubble housing and real estate markets have been digested. The fair thing to do under the circumstances is to let those who created the mess suffer the worst of the consequences.

Most people will draw the conclusion that any deflation is bad and to be feared, but this is incorrect. It is only the bubbles and crashes that are bad. To see this, consider a hypothetical situation in which we would simultaneously find major new energy sources, have bumper crop yields and major productivity increases across broad sectors of the economy. such a windfall abundance would stifle lending for the development of new productive capacity and cause prices to fall; all very deflationary. Only a banker would think it to be bad. In conclusion, it is pretty clear that we would not have crashes if we didn't create bubbles.

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