Inflation/deflation - The Big Debate

[cloudhopper]

A superb discussion of this topic in the latest (July 8) TAE

http://www.theautomaticearth.blogspot.com/

clarifying monetary vs. price inflation and real vs. nominal pricing issues which always seem to cloud the discussion. Also should be interesting to bi/triflationists and gold bugs.

[flying]

A superb discussion of this topic in the latest (July 8) TAE

Lots of info on that page. Also from that page a link to the story about IOU's from CA. being treated as securities

You know someone told me this a week or so ago & I just laughed thinking it was just a sarcastic comment. Now I see it was accurate prediction

SEC calls for Calif. IOUs treated as securities

Edited July 10, 2009 by flying

[midas]

For those who believe that inflation will be the problem.........when do they

expect to see signs of this ? I mean there is no sign of sign wage inflation

so hen is it going to start appearing ?

[flying]

For those who believe that inflation will be the problem.........when do they

expect to see signs of this ? I mean there is no sign of sign wage inflation

so when is it going to start appearing ?

If in fact inflation does mean.......

a general and progressive increase in prices; "in inflation everything gets more valuable except money"

Then it has in fact started. At least it sure has here in terms of things that matter such as food.

Or from Merriam....

a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

I know your looking for the increase in wages & I have not seen that except with a rise of the Federal Minimum wage level in October I think?

I am not saying I'm sure inflation will be the biggest problem. But I am seeing some of these things happening in my world.

Lastly here are two things we see as mentioned in the investors glossary..... Inflation can be caused by either too few goods offered for sale, or too much money in circulation.

Edited July 10, 2009 by flying

[cloudhopper]

For those who believe that inflation will be the problem.........when do they

expect to see signs of this ? I mean there is no sign of sign wage inflation

so when is it going to start appearing ?

If in fact inflation does mean.......

a general and progressive increase in prices; "in inflation everything gets more valuable except money"

Then it has in fact started. At least it sure has here in terms of things that matter such as food.

Or from Merriam....

a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

I know your looking for the increase in wages & I have not seen that except with a rise of the Federal Minimum wage level in October I think?

I am not saying I'm sure inflation will be the biggest problem. But I am seeing some of these things happening in my world.

Lastly here are two things we see as mentioned in the investors glossary..... Inflation can be caused by either too few goods offered for sale, or too much money in circulation.

The Merriam version is correct IMO and the summed volume of money and credit is in fact shrinking. Price change is a lagging result of this ratio ((M+C)/(G+S)), among many other factors.

[midas]

For those who believe that inflation will be the problem.........when do they

expect to see signs of this ? I mean there is no sign of sign wage inflation

so when is it going to start appearing ?

If in fact inflation does mean.......

a general and progressive increase in prices; "in inflation everything gets more valuable except money"

Then it has in fact started. At least it sure has here in terms of things that matter such as food.

Or from Merriam....

a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

I know your looking for the increase in wages & I have not seen that except with a rise of the Federal Minimum wage level in October I think?

I am not saying I'm sure inflation will be the biggest problem. But I am seeing some of these things happening in my world.

Lastly here are two things we see as mentioned in the investors glossary..... Inflation can be caused by either too few goods offered for sale, or too much money in circulation.

So what different factors are resulting in this happening in Japan compared to where you are ?

" Many stores have cut prices on items such as bread, blue jeans and sofas. Seiyu Ltd. started a campaign to match competitors' lower prices if customers brought in their ads, borrowing a strategy of its parent company, Wal-Mart Stores Inc. "

Japan Braces for Protracted Stretch of Deflation

Tokyo Forecasts Two Years of Declining Consumer Prices; U.S., EU and China Also Feel Effects of Lower Food and Energy Costs

http://online.wsj.com/article/SB1241052377...u=MKTW#mod=MKTW

[flying]

So what different factors are resulting in this happening in Japan compared to where you are ?

" Many stores have cut prices on items such as bread, blue jeans and sofas. Seiyu Ltd. started a campaign to match competitors' lower prices if customers brought in their ads, borrowing a strategy of its parent company, Wal-Mart Stores Inc. "

Japan Braces for Protracted Stretch of Deflation

Tokyo Forecasts Two Years of Declining Consumer Prices; U.S., EU and China Also Feel Effects of Lower Food and Energy Costs

http://online.wsj.com/article/SB1241052377...u=MKTW#mod=MKTW

I dont know

I can tell you prices here are not going down at all.

As for price matching well that is used here as a common way of beating a price once it is known.

I could go down a list of food staples & say it has all gone pretty nuts here IMHO

I would be interested in hearing about other places in the US

Prices are dropping on housing but that is a horse of a different color IMO

This is not the result of inflation or deflation

It is the result of excess inventory being liquidated. I should say attempt to liquidate as it is not moving still.

Edit: Doesn't look like commercial real estate is doing much better than residential.

http://finance.yahoo.com/news/Commercial-r...set=&ccode=

Edited July 10, 2009 by flying

[Chunkton]

Ultimately I will put my faith in Bernanke (definitely one of the top 10 economists in the world).

This is the first positive Benanke comment i have ever read.

The Helicopter Ben cartoon should be self explanatory. Every article I have read (I don't watch CNBC) ridicules both him and especially his predecessor Greenspan as total incompetents for setting up the bubble/crash cycle. So I am curious as to why you place him on a pedestal. What is it exactly you think he has done for the betterment of the economy?

[Chunkton]

This video showing some Bernanke quotes sure gets one scratching ones head about him being one of the top economists in the world. Rather than looking at the top 10 by income perhaps we should look at who actually gets it right?

[Naam]

Ultimately I will put my faith in Bernanke (definitely one of the top 10 economists in the world).

This is the first positive Bernanke comment i have ever read.

not all of us are parrots!

[AlexLah]

He must be a government sponsored agent..........

[flying]

The Helicopter Ben cartoon should be self explanatory.

Ben dont need no stinkin copter

[AlexLah]

Clicker the click, is animated

Edited July 11, 2009 by AlexLah

[Naam]

patience! the award certificates for the resident armchair economists, armchair politicians and faithful believers that conspiracies lurk around every corner will soon be ready for distribution. besides the usual laudatio they will state:

"...has proved beyond reasonable doubt that he possesses a wealth of no freaking idea."

[VegasVic]

It seems to me that the most important question you can get right in investing is whether, on a ten year view, expectation for inflation will decline or rise.

Debate is polarized.

But the bear case against USTs is not that obvious to me now.... here is the deflationary view spelled out....

http://www.hoisingtonmgt.com/pdf/HIM2009Q1NP.pdf

And here is the inflationary view by perhaps the world's leading expert on deflation.

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

I have always thought that the US will inflation the way out of their debt crisis but people like Krugman seem to be right (at the moment) that deflation is a more destructive and powerful problem than people have anticipated.

Any views? And to the extent you have one, what is the best play TIPS? TBT? Gold? etc.

You are exactly right that deflation/inflation is the crucial issue of the day! I also read Hoisington & Hunt every quarter. They have had some good calls in the past few years. So far, I lean toward the deflationist camp for these reasons:

1. With US capacity utilization down to 67% and U-6 unemployment up to 15%, it is hard to see how an inflationary spiral can get started. High inflation, such as during the 70's (peaked at 18.5%), seems to require a wage/price spiral.

2. The scale of the losses so far vastly outweighs the govt intervention. Between houses and stocks alone, the US has lost $15 trillion or more. Obama's stimulus calls for spending $200 billion in 2009, half of which will be tax cuts that don't have much impact.

3. Japan both printed money (increase money supply by 1/3 during 2001 and 2002) and doubled its national debt in Keynesian spending. Inflation never happened. The money sat in vaults. You only get about 1.3% interest on a 10 year Japanese Treasury.

Also, all the generals fighting the last war expect inflation, which they know and fear. But deflation is unfamiliar. So, it will not be priced correctly. And deflation has arrived in any case: CPI for the trailing 12 months is slightly negative.

IMHO, the upshot from an investment/preservation of capital point of view is that the best buy now is bank/credit union CDs. You can still get 4% going out 5 or 7 years at some CUs. If deflation were to play out as it did in Japan during the 90's, you would be delighted to have a safe 4% when prevailing rates drop below 1%. On the other hand, if the call turns out to be wrong and inflation does return, you can get out of a CD without loss of principal at the cost of a few months interest. That can't be said for Treasury Bonds.

But some serious people, such as Rogoff and Blinder, do see a risk of high inflation. So, the situation bears careful attention.

Capt., The deflatioary argument that you laid out in this post 2 1/2 months ago is not only spot on, but even more relevant today! What the inflationists (mostly goldbugs) just can't seem to grasp is the point that you made in #3, if the velocity of money is at or near zero as it is currently, then there will be no inflation In the U.S., unemployment continues to rise, the work week for those still employed is shrinking as are their real wages, when you throw in the fact that the savings rate is creeping back to near all time highs and consumtion is down markedly that equates to deflation for as far as the eye can see In the states one can see deflation across the board, although real estate is the most glaring example, everyday products like electronics, appliances, houshold furnishings and most grocery items are also experiencing a serious bout of deflation, and food stuffs will continue to be under pressure for quite some time as there is a record corn crop that will be harvested in the U.S. over the coming months! Deflation is a nasty bugger and it looks like it will be with us for years to come

[VegasVic]

The Helicopter Ben cartoon should be self explanatory.

Ben dont need no stinkin copter

Flying, that is wrong on so many levels I don't know where to begin

[Naam]

In the states one can see deflation across the board, although real estate is the most glaring example, everyday products like electronics, appliances, houshold furnishings and most grocery items are also experiencing a serious bout of deflation, and food stuffs will continue to be under pressure for quite some time as there is a record corn crop that will be harvested in the U.S. over the coming months! Deflation is a nasty bugger and it looks like it will be with us for years to come

it seems that i'm the only one on this planet who welcomes deflation (IF any).

[lannarebirth]

In the states one can see deflation across the board, although real estate is the most glaring example, everyday products like electronics, appliances, houshold furnishings and most grocery items are also experiencing a serious bout of deflation, and food stuffs will continue to be under pressure for quite some time as there is a record corn crop that will be harvested in the U.S. over the coming months! Deflation is a nasty bugger and it looks like it will be with us for years to come

it seems that i'm the only one on this planet who welcomes deflation (IF any).

Deflation would be most welcome in our household. Inflation may perhaps raise the values of some hard assets, but what does one do if they don't want to sell those assets? then you have to manage your currency holding so as to lower your "cost basis".

The only thing the deflation argument has going against it IMO is that its so dam_n rare, but certainly the conditions that have precipitated it in the past have been present.

[flying]

http://stockology.blogspot.com/2009/07/inf...and-chinas.html

The Inflation/Deflation Debate and China's Commodity Carry Trade

[cloudhopper]

Instead of trying to predict what will happen, how about some of the wise members give their opinion on how to protect ones self and assets in either environment?

Should one be buying land and physical assets while at the same time holding a substantial portion in cash? What percentage of your net worth should you allocate to PM's? What about holding equities? Yay or nay?

Ideas needed on how to be covered in all situations.

Asset allocation must necessarily reflect one's prediction of the future economic situation as well as the viability of active and passive income sources.

I am positioned for deflation so I hold no debt of any kind nor equities. My liquid financial assets are about 80% cash (20% in physical currency (both USD and THB) and the rest in UST MMF) and 20% physical gold bullion as insurance against a currency crisis. While most of that is still domiciled in the States, my Thai wife owns (and I lease from her) our house and about 30 rai of increasingly productive land here in LOS.

If you think it's going to be hyperinflation you would want to be in PM, houses, stocks and debt up to your eyeballs.

And don't forget that in the long (or with my life style, shorter) run, we're all dead. Choke dee everybody! It's going to be interesting times...

[cloudhopper]

Instead of trying to predict what will happen, how about some of the wise members give their opinion on how to protect ones self and assets in either environment?

Should one be buying land and physical assets while at the same time holding a substantial portion in cash? What percentage of your net worth should you allocate to PM's? What about holding equities? Yay or nay?

Ideas needed on how to be covered in all situations.

Asset allocation must necessarily reflect one's prediction of the future economic situation as well as the viability of active and passive income sources.

I am positioned for deflation so I hold no debt of any kind nor equities. My liquid financial assets are about 80% cash (20% in physical currency (both USD and THB) and the rest in UST MMF) and 20% physical gold bullion as insurance against a currency crisis. While most of that is still domiciled in the States, my Thai wife owns (and I lease from her) our house and about 30 rai of increasingly productive land here in LOS.

If you think it's going to be hyperinflation you would want to be in PM, houses, stocks and debt up to your eyeballs.

And don't forget that in the long (or with my life style, shorter) run, we're all dead. Choke dee everybody! It's going to be interesting times...

I should add that my recent investing has all been in making improvements to the land and house to increase our self sufficiency.

Another report on the OP - http://globaleconomicanalysis.blogspot.com...s-real-cpi.html

[CaptHaddock]

Instead of trying to predict what will happen, how about some of the wise members give their opinion on how to protect ones self and assets in either environment?

Should one be buying land and physical assets while at the same time holding a substantial portion in cash? What percentage of your net worth should you allocate to PM's? What about holding equities? Yay or nay?

Ideas needed on how to be covered in all situations.

There are not many investments that help you in either deflation or inflation. For Americans there are TIPS, which offer the only real protection against inflation among securities. They also protect against deflation, but only if you hold the individual bond until maturity. Canadians have a similar govt bond with inflation protection, but those can lose principal during deflation, unlike TIPS. Don't know about the British version.

However, expats have a tougher problem because it is the local inflation rate that counts, not the one back home.

My own call is for deflation, but since one cannot entirely rule out inflation hedging is attractive. As an American I find bank CDs to be the best solution available, and the longer term the better. For example, you can still get 4% in a 50 month CD from NASA FCU, a credit union. I think the trailing inflation rate now is a little over 1%. So, the inflation-adjusted return is 5% guaranteed for 5 years with the same credit as Treasuries. If, however, the inflationists turn out to be correct and interest rates move up, you can break the cd and get all your principal back at the cost of only a few months of interest.

If I were dead certain of deflation, I would buy 30 year, zero-coupon Treasury bonds, but I am not. Similarly, only someone convinced of inflation would look at land.

Finally, cash is not a bad choice right now.

The main point it to pay close attention and be prepared to change your mind.

Edited July 14, 2009 by CaptHaddock

[flying]

I am positioned for deflation so I hold no debt of any kind nor equities. My liquid financial assets are about 80% cash (20% in physical currency (both USD and THB) and the rest in UST MMF) and 20% physical gold bullion as insurance against a currency crisis.

Actually I am identical to you & I dont really think about which way it will go. I think it is just a good way to live.

Edited July 15, 2009 by flying

[cloudhopper]

http://www.telegraph.co.uk/finance/finance...ion-spiral.html

[Naam]

inflation / deflation

what i am missing in this thread and in the relevant quoted sources is the fact that inflation as well as deflation not only can but has different impacts depending on the individual situation of a person/family. i leave out countries and corporates as i am sure neither a country nor a corporation has ever posted in Thaivisa.

as i can't judge others i refer to my situation and those close to me, id est our domestic employees.

Driver: married, one young child, using his motorcycle to commute from his home to the job. inflation would hurt him most if it concerns foodstuff, basic daily amenities and rental cost because that is where his money goes. his salary and benefits, although quite generous, are just enough to make ends meet. deflation would be a blessing for him and his family.

Live-in Couple: no children, no cost for new childrens' clothing or shoes, commuting, rent, food, drinks, electricity, gas, water, cable/satellite fee, toothpaste, soap, washing powder, replacing a defect TV or DVD-player. no impact on them by inflation, no impact by deflation.

Naam, wife (still singular) and dogs (now plural): inflation (not hyperinflation) has hardly any impact as income is a multiple of total expenses, investment can be reshuffled and will always yield a certain percentage above inflation except cash in present times which yields virtually zero. deflation not a concern either. it doesn't make any difference whether the market value of my house is 1 million or 25 million as there are no plans to sell till the time when they carry me out feet first. and that applies to the other properties we own too.

question: where's the beef as far as any inflation/deflation impact on other posters is concerned?

[vedantafx]

inflation / deflation

what i am missing in this thread and in the relevant quoted sources is the fact that inflation as well as deflation not only can but has different impacts depending on the individual situation of a person/family. i leave out countries and corporates as i am sure neither a country nor a corporation has ever posted in Thaivisa.

as i can't judge others i refer to my situation and those close to me, id est our domestic employees.

Driver: married, one young child, using his motorcycle to commute from his home to the job. inflation would hurt him most if it concerns foodstuff, basic daily amenities and rental cost because that is where his money goes. his salary and benefits, although quite generous, are just enough to make ends meet. deflation would be a blessing for him and his family.

Live-in Couple: no children, no cost for new childrens' clothing or shoes, commuting, rent, food, drinks, electricity, gas, water, cable/satellite fee, toothpaste, soap, washing powder, replacing a defect TV or DVD-player. no impact on them by inflation, no impact by deflation.

Naam, wife (still singular) and dogs (now plural): inflation (not hyperinflation) has hardly any impact as income is a multiple of total expenses, investment can be reshuffled and will always yield a certain percentage above inflation except cash in present times which yields virtually zero. deflation not a concern either. it doesn't make any difference whether the market value of my house is 1 million or 25 million as there are no plans to sell till the time when they carry me out feet first. and that applies to the other properties we own too.

question: where's the beef as far as any inflation/deflation impact on other posters is concerned?

You are quite right in what you are stating regards inflation/deflation in that it depends on the financial health or sickness of the individual. The neo-keynesian economists that are prevalent in the world of central banking and government think delfation is a bad thing. I m not sure why falling prices can be a bad thing in any society. Cheaper housing benefits the many not the few. People don't like paying higher prices for fuel, but seem when this is applied to assets it seems to be a bad thing.

Secondly it depends on the root cause of deflation. True inflation is the increase in money and credit and true deflation the destruction of money and credit. Falling prices does not mean deflation in and of itself. So why do central bankers fear deflation so much? Well, there is an instance in an economy when deflation is a disaster and that is when you have an over leveraged system and high levels of debt. Deflation means real interest rates go up making servicing debt much more difficult. In the UK and US the consumer and the household is over leveraged, they hold far too much debt. The deflation we are experiening now is of this nature, a complete collapse in credit.

Looking at prices alone is not deflation. Prices in computer and electronic equipment have been falling over the last ten years due to the outsourcing of labour to Asia and Eastern Europe and also down to improvements in technology. This is not deflation in the classic sense of the word or if properly defined, as money and credit supply has been increasing in the same period. Prices will rise in certain sectors of the economy due the individual supply and demand factors of individual products/material.

For the ones who are not over leveraged, deflation is good for the middle class and working class, and not good for the rich as they are usally asset rich. Inflation is bad for the middle class and working class and good for the rich as the rich are the first to come into to contact with new money, and can buy assets which will increase in value in an inflationary period, where as by the time the money reaches the man on the street it has lost purchasing power and real income and savings struggle to keep up with the cost of living. In light of that it is quite obvious why the bailouts favour the bankers and asset movers. These bailouts are not good for the man on the street.

[CaptHaddock]

inflation / deflation

what i am missing in this thread and in the relevant quoted sources is the fact that inflation as well as deflation not only can but has different impacts depending on the individual situation of a person/family. i leave out countries and corporates as i am sure neither a country nor a corporation has ever posted in Thaivisa.

as i can't judge others i refer to my situation and those close to me, id est our domestic employees.

Driver: married, one young child, using his motorcycle to commute from his home to the job. inflation would hurt him most if it concerns foodstuff, basic daily amenities and rental cost because that is where his money goes. his salary and benefits, although quite generous, are just enough to make ends meet. deflation would be a blessing for him and his family.

You are making the assumption that the driver's income does not change. While you may be willing to keep him employed without reducing his salary, others in his situation will not be so fortunate. Here in the US, 40% of companies have frozen wages, employment levels have dropped to the 2000 level meaning that all the increase in work force since then is now unemployed, and salary reductions, previously unheard of, are now commonplace. In the face of persistent deflation, even mild, real purchasing power declines, in general. It is a mistake to overgeneralize from a specific case. Ask your driver how his friends are doing.

[Naam]

inflation / deflation

what i am missing in this thread and in the relevant quoted sources is the fact that inflation as well as deflation not only can but has different impacts depending on the individual situation of a person/family. i leave out countries and corporates as i am sure neither a country nor a corporation has ever posted in Thaivisa.

as i can't judge others i refer to my situation and those close to me, id est our domestic employees.

Driver: married, one young child, using his motorcycle to commute from his home to the job. inflation would hurt him most if it concerns foodstuff, basic daily amenities and rental cost because that is where his money goes. his salary and benefits, although quite generous, are just enough to make ends meet. deflation would be a blessing for him and his family.

You are making the assumption that the driver's income does not change. While you may be willing to keep him employed without reducing his salary, others in his situation will not be so fortunate. Here in the US, 40% of companies have frozen wages, employment levels have dropped to the 2000 level meaning that all the increase in work force since then is now unemployed, and salary reductions, previously unheard of, are now commonplace. In the face of persistent deflation, even mild, real purchasing power declines, in general. It is a mistake to overgeneralize from a specific case. Ask your driver how his friends are doing.

generalising is far from my mind Captain. i was only trying to depict three individual situations and the impact of inflation/deflation as i can neither judge the situation of our driver's friends nor can i judge how millions of employees fare in the U.S.

[Naam]

inflation / deflation

question: where's the beef as far as any inflation/deflation impact on other posters is concerned?

my question has not been answered but i read some quite generalising postings

[mijan24]

What about Hyperinflation??

nothing to worry about. hyperinflation will be compensated by deflation. dozens of gurus predict inflation, dozens of gurus predict deflation. logical result = neither nor. now waiting patiently for the next five dozen gurus to appear on the stage and predict stagflation and a new generation of voodoo priests who will scare the living bejesus out of naïve ignorants by forecasting hyperstagindeflation² (any time from now).

[signed Naam... who's striving to be the most hated poster on ThaiVisa ]

Naam do you mean the "most hated" or "the most read" ?