Which Camp?

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Davos's picture
Davos
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Which Camp?

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 convoluted) definition 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!

Davos's picture
Davos
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Re: Which Camp?
Davos wrote:

The only time PMs don't go up or down is when they leave the mine,

Should have read: The only time PMs GO up or DOWN is when they leave the mine,,,

JAG's picture
JAG
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Re: Which Camp?

Davos,

The financial asset markets, including the currency markets, have nothing to do with supply and demand. Their primary driving force is fear. Fear of losing out on a potential profit, and fear of taking a potential loss. The smart money is the perpetuator of this fear, and the dumb money acts on it. It is the opportunity for the smart money to literally capitalize on this fear, that creates the trend changes or turning points in the market indexes. 

In 2008, we saw the smart money capitalize on the ubiquitous fear of a currency crisis/inflation. In March of 2009, we saw them capitalize on the dominant fear of an all-out crash. What is the predominant fear now?  How could the smart money profit from the widespread acceptance of this fear?

I'm in the anti-fear camp, whether that is the inflation/deflation camp is not really all that relevant in my opinion.

PS: Great post by the way.

 

RJE's picture
RJE
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Re: Which Camp?

Davos, I'm really commenting on everything today so here's my question. If we the almost unemployed are hunkering down, staying home, not going out as much, and bonding with our families more, etc...Wouldn't it be logical then that we would spend more on food, clothing, energy and shelter to keep the family structure solid. Eliminating non-essentials. If this is the case I could make an arguement for deflation with some parts of the market experiencing inflation. I'm guessing inflation but deflation seems to be everywhere. I love this stuff and feel I'm learning so much. Fear doesn't concern me, it is what it is...Maybe a little!  Enjoyed your postings...Regards

investorzzo's picture
investorzzo
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Re: Which Camp?

I am in the short term camp of stagflation at this moment. There isn't enough evidence of a trend either way. So longterm I look for inflation, but short term stagflation, only because of the massive money printing, yet the economy is still very weak. I see no clear trend. PM is the safest place to be, as it does well in either camp of deflation or inflation.

Davos's picture
Davos
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Re: Which Camp?
robert essian wrote:

Davos, I'm really commenting on everything today so here's my question. If we the almost unemployed are hunkering down, staying home, not going out as much, and bonding with our families more, etc...Wouldn't it be logical then that we would spend more on food, clothing, energy and shelter to keep the family structure solid. Eliminating non-essentials. If this is the case I could make an arguement for deflation with some parts of the market experiencing inflation. I'm guessing inflation but deflation seems to be everywhere. I love this stuff and feel I'm learning so much. Fear doesn't concern me, it is what it is...Maybe a little!  Enjoyed your postings...Regards

Hello Robert:

While I totally agree with essential and non essential purchases - it sounds to me like your in the Keynesian camp with regaurd to how you define inflation and deflation. Thats cool, I don't know who is right. I'm just not in that camp but I'm respectful of your and other's views.

Just to drive the point home: IMHO, inflation and deflation pertains only to the size of the money supply. Big supply (no matter where it is or isn't parked or what its velocity is or isn't equates to a diminished dollar value. Gold and dollars store value. 1950 small money supply, gold 35 dollars per ounce. 2009 HUGE money supply 950 an ounce. The dollar has lost value. 

In other words, I don't think falling or rising prices is inflation or deflation.

Take care

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Ken C
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Re: Which Camp?

While I fit the formal definition of an educated person (college degrees) I freely admit that my financial education did not really begin until I came to this site. For example, I like so many others did not pay  much attention to important things like "What is money?" ; "Where does money come from?" and that our current economy was built on cheap oil.  So thank you Dr. M and all other folks that contribute to the wealth of information found here.

At this point it is difficult to decide exactly which "camp" I am in. I read a treatise by one person that provides an excellent argument for inflation and then go on to read an equally compelling argument by someone else that is convinced that deflation is here for a good long while. There appears to be a select group in each camp with strongly held views on each end of the inflation/deflation continuum. It also appears to me to be the case that the large majority of people are (like me) stuck in the middle reading these compelling arguments and trying to decide:

What to do?

 

I am pretty well convinced by the arguments on both sides of the issue that we are headed for a "waterfall event" but what the aftermath of that event looks like is still unclear me.

Ken

 

RJE's picture
RJE
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Re: Which Camp?

Ken, Amen...

 

Davos, honestly I have no idea what camp I belong. Like Ken I read compelling arguements from both sides of the issue. I guess I  favor inflation but the little fellow sitting on my other shoulder starts screaming. Selfishly, I think I want inflation to pay off my fixed debt...Soon!

Davos's picture
Davos
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Re: Which Camp?

Wow. My ability to convey a point is nill.

My bad.

The question I was trying to ask was not are you in the inflation camp or the deflation camp.

IMHO The 80 trillion dollar question is: Do you believe the Keynesian definition of inflation and deflation? I don't.

I think that the (Keynesian) definitions are fundamentaly flawed.

investorzzo's picture
investorzzo
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Re: Which Camp?
robert essian wrote:

Ken, Amen...

 

Davos, honestly I have no idea what camp I belong. Like Ken I read compelling arguements from both sides of the issue. I guess I  favor inflation but the little fellow sitting on my other shoulder starts screaming. Selfishly, I think I want inflation to pay off my fixed debt...Soon!

I stand on the side of Austrian economics. Why, just look at the value of the dollar. It's simple for me, as inflation will continue unabated. That is the only way government can lessen the over all debt. The only question is how long before we see it's full impact into hyperinflation. That and how long the governments of the world will continue to support the dollar. The basket of currencies is on the table, how long before it comes to play and just how hard the dollar will be hit once it happens. I'll be looking for the next bailout sometime next year, when the government realizes that the economy can't be fixed......

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mainecooncat
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Re: Which Camp?

I think the currency issue is critical and, in my estimation, has always been the angle Davos has taken when he’s talked about inflation over the last few months. I’m gettin’ ya, man!

However, I don’t think the issue of Keynes vs. the Austrians is that important. Here’s why: the typical person, including myself, is most interested in consumer prices for obvious reasons and only concerned about supply issues in that they can influence prices. But, theoretically, we are not concerned with this issue, other than for the purposes of intellectual exercise.

But the important part is this: the impetus for prioritizing prices over supply isn’t whatever economic philosophy we are wed to but practical day-to-day issues – how much money is in my wallet. This isn’t ivory tower stuff. So to say that if someone is looking at prices instead of supply that makes them Keynesian is just wrong. (Kind of like saying that someone is a Marxist because they want a lunch break – maybe they’re just tired and hungry.) I think it makes them pragmatic instead of theoretical. Which is the opposite of where many hardcore inflationists are now, stuck in the theoretical as reality isn’t responding correctly to human-generated theory.

I mean, supply is important but isn't the only reason we're concerened about supply is that it will one day translate into prices?

From my interpretation of the different arguments it seems that perhaps many times the deflationists misinterpret or presuppose the cause of hypothetical inflation when they talk about "credit destruction"and other supply issues, which, of course, have their place in another part of the discussion about the greater whole.

It seems right now though that the most likely springboard for price inflation in the US is a devalued dollar of some degree or another. As events unfolded the severity in price inflation would then probably be a function of the level the dollar had been debased. I think this is where you see inflation, Davos.

In this instance, then, total available credit and the larger money supply could be contracting at historical levels while prices in the street could be rising.

To me this seems like a very ecological view of the process. It’s not an either/or situation and the same outcome can have different triggers and the same triggers given different contexts can have different outcomes.

And just think – all camps could be simultaneously correct.

One last thing, as far as trends go. Isn’t the macro-trend in US history undeniably inflation? And furthermore, wouldn’t periods of plateaus and minor deflation be just mere blips in an overall movement upward?

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docmims
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Re: Which Camp?

I'm in the camp that both are right.  I believe that even though the fed is pumping money into the system like crazy; the rest of the world is continuing to buy into the dollar a safe haven in uncertain times.  Also, quite frankly, the huge unemployment rate puts the brakes on inflation as the printed money isn't getting into circulation -- yet.  I saw an interview with George Soros recently, he indicated that he KNEW what was going to happen, but was not at liberty to say (to the interviewer).  Since he poured tens of millions into the Democratic campaigns and he knew their policies --just call me crazy but i don't think he was out for social justice.  Since i'm not rich i'm perfectly happy to put my monthly allowance into silver while the central banks are dumping metals on the market to buy the dollar.  I'm happy to buy cheap silver whilst the Giants fight it out.  I figure the worst that can happen with silver is Bernanke will pull a rabbit out of his hat and stave off hyperinflation and I'll lose a few investment dollars while my life goes on normally.  However, I'll be ready if the Austrians are right, and I'll admit I kind of lean that way.

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