September 30, 2008

So, you diggin on this deflation thing yet?

Take a bit of historic asset price deflation
Add a pinch of currency debasement
Add a cup of demand destruction
Grate in some recession and job losses
And a heaping tablespoon of credit retraction
And enjoy the deflation stew

This inflation/deflation discussion is the most important one. We're writing new history now - a massive deflation underway with a Fed and government doing anything they can to create inflation. An epic battle royale.


Anonymous said...

When the lines of credit are one buys anything!!


Andrew from Russia said...

Why it may be worse than 1930s: the public was inoculated with rising wages/prices in the past decades. Everybody now relies on this 3% slope and everything implicitly depends on it. Not only the government has to re-create inflation, it must create a very credible inflation - heavens forbid if prices stall!

Anonymous said...

A real question... since the fed isn't exactly a gov institution... why cant we just sue it?... if we don't agree with its proposals..with our money?..

emmy said...

I don't know about overall deflation. People still owe other people money, and those people want to collect it. So what if housing deflate, lots of room for improvement in someone's income if they dump thier mortgage. And crude is still in the 90's. And there are 6 billion people on earth, alot more than 10 years ago, putting strain on world markets of food and commodities...

Skaven said...

Welcome to the party, Keith, are you off the inflation/gold bandwagon yet?

As I have been telling you for months, deflation is inevitable, and it will be quite painful. All asset classes will fall, INCLUDING precious metals.

Cash is king, as you are fond of saying, provided that cash is not USD.

If 700 billion dollars are pumped into the economy, it will delay the inevitable by, at most, 3 to 6 months.

Sorry folks, I hate to be the one to bring you the news, but as Ambrose said a few months ago, this depression/deflation is going to make 1929 look like "a walk in the park."


keith said...

Gold, silver and oil are all feeling like deflation. And of course so are houses, real estate, stocks and bonds.

Hell, everything feels like deflation, what am I talking about.

The only complication is currency debasement. Like adding sweet to sour, it just evens things out a bit.

But the sour taste of The Great Unwinding is much greater than the sweetness of the printing press.

Anonymous said...

Why do you people make this such a big deal? I'd think if the economy deflates back to the 1910s or whatever that it would be party time for you all. Imagine buying a house for $100.00 or a mansion for $1000. You don't need a job or anything like that. Of course most people would be ruined but isn't that pretty much inevitable?

Mammoth said...

Keith said,
"Hell, everything feels like deflation, what am I talking about."
Yep - I sure saw Deflation in action just yesterday, when that 10# bag of potatoes I bought for $4.00 only cost $0.99 two years ago.

Be specific, Keith - Delflation is in things you DON'T need and inflation is in things you can not live without.
When they fire me for blogging when I am supposed to be working, I think that I will just take up farming full-time.


Lady Di said...

deflation + Fed's misguided and unsuccessful attempts to fight it through inflation = R.I.P. U.S. dollar

Anonymous said...

The market force of correction is fighting the government intervention.Easy money credit/fraud produced fake inflation of assets and mis-pricing of risk .

The market is saying that money should cost more and the market is saying that easy money lending is high risk ,especially at a cheap price .The market is saying we are going into recession and therefore loaning money in a contraction is
higher risk .

The Paulson Plan just tries to put us back to the fake asset inflation by easy money again .

The natural correction of this market would direct money where it should be directed in terms of risk . The power that be are trying to stop this correction and go back to the debt Nation high inflation of assets keep the party going scheme .

I don't trust Paulson because he just cares about getting free money from the government so his
buddies can get health and betray the public again .

MrCoffee said...

I don't see deflation. I see higher prices for commodities like food and gas. Also, I see higher prices for goods from China. The oil exporting nations are going to do everything they can to keep the price per barrel over $100.00. Also, with the revised bailout plan, I see that price spiraling back to $150.00, if not more. This is clearly inflation.

People will have no choice but to conserve resources, and this will cause unemployment to rise. The damage to the economy and buying power will likely be severe.

I believe that luxury goods like gold and silver may drop, as well as the continuing real estate decline. If it's not a necessity like oil and food, then the fundamentals won't be there to support it.


Anonymous said...

I have to admit, I was on the fence pertaining to this inflation/deflation debate for some time now.

We have all been aware of how the Fed has been desperately injecting money into the system to maintain liquidity. Everyone naturally would assume this to be an inflationary creating device.

But what is interesting is that money is being 'destroyed' equally if not more quickly as all the CDOs and various derivatives have their net worth evaporate into thin air. Yesterday, with the big plunge in the stock market, almost $1.2 trillion was lost in wealth.

I am beginning to think that the deflation camp will indeed win out in the end. Especially if there is a flight to the dollar and people begin hoarding their money.

As it stands, they have lost faith in stocks & real estate. Not to mention no faith in the government run by President Shit for Brains.

That being said, it does appear as though the dollar may become king. Gold and Oil may be real or maybe just another bubble. Hard to say. (I would say that it is a combination of both)

May you live in interesting times....

vanilla ice said...

Would someone please explain to me what is wrong with deflation?

What is so bad about money becoming more valuable? Inflation puts a grindstone to the borrowers. Inflation rewards savings and investments. Isn't that what we all want, the opposite of the last 30 years?

Paul E. Math said...

Keith, you're absolutely right: inflation/deflation isthe most important thing. Thank you for returning to the discussion so frequently.

What we have is deflation but there's a catch. What's the catch? Catch 22: currency debasement. Like you said.

So, to restate the most important question: where to put your money?

How can we really think that the USD will rise when we have a fed chairmen who once suggested dropping money from a helicopter? Then again, USD has risen despite all the bailouts.

But the sinking economy will give this bearded bastard all the excuse he needs to do everything but drop money from a helicopter.

Still, despite all his actions we have the leading indicators of commodities falling in value, as Prechter mentioned.

Can us treasuries really be the answer?