Deflation

[Helena]

What is Deflation and What Causes it to Occur?

Deflation, inflation, money, credit and debt


Comments ?

 

[brewer12345]

Ha! Have you looked at the commodities market today?

 

[dex]

Elliot Wave - your posting that here?
Read up on it and you'll regret wasting your time.

 

[Helena]

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.

 

[haha]

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.

Almost no one expects Martians to land warships on the White House lawn either. Doesn't mean it will happen.

Now I realize that this is a non sequiter, but IMO a Martian landing is about as likely as deflation in the USA. Right now credit and especially mortgage credit is deflating. Don't worry, something will take its place. Maybe another equity financed boom/bubble, patterned after the Dot Com era.

Money can be spun out of thin air. All it takes is a speculative minded public, an aggressive Wall Street, and an enabling government. Not many doubt that we have all these in spades.

Ha

 

[brewer12345]

I am guessing the next buble is commodity-related.

 

[Nords]

Almost no one expects Martians to land warships on the White House lawn either. Doesn't mean it will happen.
Now I realize that this is a non sequiter, but IMO a Martian landing is about as likely as deflation in the USA. Right now credit and especially mortgage credit is deflating. Don't worry, something will take its place. Maybe another equity financed boom/bubble, patterned after the Dot Com era.
Money can be spun out of thin air. All it takes is a speculative minded public, an aggressive Wall Street, and an enabling government. Not many doubt that we have all these in spades.
Ha

I happen to share your assessment that deflation is unlikely, but I'm a bit surprised to see you so dismissive of a contrarian opinion from a poster who may be made to feel intimidated or even unwelcome...

I am guessing the next buble is commodity-related.

Between a dropping dollar and what appears to be oceans of capital still sloshing around the shores of the commodities markets, this could go on for quite a while.

We all knew the NASDAQ was overpriced, and we knew it for years. Same for most of the [insert favorite bubble here] markets. But how many shorts were squeezed out by their logic while awaiting the inevitable?

 

[Marquette]

I am guessing the next buble is commodity-related.

Seems like a good pick... oil, ethanol, maybe some poultry (bird flu culling). Maybe Swedroe will smack Ferri down for good.

 

[haha]

I am guessing the next buble is commodity-related.

Could be. I can't see well enough at this point. The ideal bubble IMO has three characteristics. It allows massive fees and rakes by Wall Street; it can be made to sound positive or good for the country (and thus the government); and it keeps the peasants (us) pleasantly deluded about what is going on. Both the Dot Com bubble and the housing bubble fulfill these criteria. Remember how easy it was to be happy in the late 90s?

I think commodities are either sub-optimal or downright failing at most of these points. Commodities may well continue very strong, but my guess is that if we see $20 wheat it will be because wheat really is worth $20 to people who need to consume it.

Ha

 

[twaddle]

I happen to share your assessment that deflation is unlikely, but I'm a bit surprised to see you so dismissive of a contrarian opinion from a poster who may be made to feel intimidated or even unwelcome...

[Must resist....]

I bet some people know the difference between attacking an idea/opinion vs attacking the person.

The analogy between our current situation and Japan-1990 seems to be coming up a lot more these days. I think we'll see an easing of inflation, but I don't know how to predict how low we'll go.

Economist's View: Fed Watch: Japan Again?

 

[Marquette]

I think commodities are either sub-optimal or downright failing at most of these points. Commodities may well continue very strong, but my guess is that if we see $20 wheat it will be because wheat really is worth $20 to people who need to consume it.

Ha

Energy sector commodities.... green tech, good for you, good for America, etc etc. Mandatory 80% ethanol fuel. No more farm subsidies if you're a row farmer... sucks if you're trying to farm dairy.

 

[brewer12345]

Could be. I can't see well enough at this point. The ideal bubble IMO has three characteristics. It allows massive fees and rakes by Wall Street; it can be made to sound positive or good for the country (and thus the government); and it keeps the peasants (us) pleasantly deluded about what is going on. Both the Dot Com bubble and the housing bubble fulfill these criteria. Remember how easy it was to be happy in the late 90s?

I think commodities are either sub-optimal or downright failing at most of these points. Commodities may well continue very strong, but my guess is that if we see $20 wheat it will be because wheat really is worth $20 to people who need to consume it.

Ha

Hmm, massive fees and rakes: check. Look at the pricing of PCRDX, commodity focused funds, structured notes, etc. And I am sure they will find more ways to gank the retail investor.

Made to sound good for the country: that's easy. You don't live in farm country, the oil patch, or a coal mining state, do you? Plus all the exports help the trade balance.

Keeps the peasants deluded/ignorant: Check. We hear the squealing of those who didn't read loan docs for their credit card/mortgage/HELOC. How many of those fine folks could comprehend the futures market or the intricacies of coal mining/markets?

Even better, the commodity markets are still relatively undiscovered by the unwashed masses (aside from gold, Gold!, GOLD!!!!), so when the wall of money really starts to pour in from every idiot throwing their lunch money into it, the commodity markets could really take off (dragging in the last few rubes).

 

[haha]

Energy sector commodities.... green tech, good for you, good for America, etc etc. Mandatory 80% ethanol fuel. No more farm subsidies if you're a row farmer... sucks if you're trying to farm dairy.

Well, the reason I chose wheat instead of corn in my example is that I also believe that corn is in a manipulated and artificially stimulated market.

As for energy commodities, I hate to think what doubling of the oil price from where it now stands would do to American consumers, to the consumer economy of America, and by extension to the manufacturing economy of China.

"Green tech", alternative energy etc. might fill the bill, but that is not what I would term a commodity boom. It would be a focused equity boom.

Like I said, I don't feel like I know. It's just that I see potential problems with the commodity thesis. If most of these necessary commodities get too expensive, down goes the world economy, and and along with it, whatever governments are perceived to be responsible.

Ha

 

[Helena]

[Must resist....]

I bet some people know the difference between attacking an idea/opinion vs attacking the person.

One wonders why some feel it necessary to attack.

 

[Marquette]

Like I said, I don't feel like I know. It's just that I see potential problems with the commodity thesis. If most of these necessary commodities get too expensive, down goes the world economy, and and along with it, whatever governments are perceived to be responsible.

Ha

Agreed. I don't think any of us know but it's fun to speculate. Heck, if I knew what the next bubble was going to be, I'd be so heavy into that market right now...

 

[twaddle]

One wonders why some feel it necessary to attack.

Good point. But what if we are overrun by an army of annuity salesmen?

Anyway, Gary Shilling made a fortune betting on deflationary pressures for the last 25 years:

A. Gary Shilling & Co.

So, far he's nailed it by betting on decling interest rates over that term. Looks like he still expects rates to decline.

 

[barbarus]

It might interest the more casual economics enthusiast to contemplate the fact that they can have a full-fledged "deflation" without prices falling. The worst of both worlds for most of us. A kind of "stagdeflation".

In a practical sense, inflation or deflation, means rising or falling consumer prices,(I'm in this group), but there are so many other forms.
Asset-deflation would send waves of revulsion through high-rollers,( hi Brewer!).
We're seeing credit-deflation now as wise businesses are increasingly passing on taking out loans, in spite of Easy Ben's latest escapades.
Commodity-deflation would presumably occur if economic activity slows, which it isn't, cuse the government says it's not.
There's a heap more categories I reckon, but you get the drift.
The only two things that count to an economist would be money&credit, but I doubt most of us would consider deflation in those terms.

 

[MichaelB]

Between a dropping dollar and what appears to be oceans of capital still sloshing around the shores of the commodities markets, this could go on for quite a while. ?

With Helecopter Ben at the throttle, the oceans of cash, like first life, may soon rise out of the sea and expand until there are no more trees to kill to make paper money.

I remember a saying from a past life: "Never fight the Fed". Throughout history and around the world, politicians have shown an uncanny ability to inflate their way out of trouble. I see no reason why the current politicians are any different. (with the exception of Mr. Trichet)

Deflation is a risk - but there are other risks just as great or even more so - and my greatest concern is the loss of purchasing power even while the CPI stays low.

Michael

 

[emilylynn]

In a recent article, Antal Fekete discussed the thesis that we may be on the verge of experienceing inflation and deflation at the same time.

Antal Fekete: Can We Have Inflation And Deflation All At The Same Time « Oikonomika Blog

 

[Helena]

Wow

Check out the article and Fed graft at link below:

Market Ticker


The Fed has been aggressively draining the SOMA account,
with the pace of that drainage stepping up precipitously
since December.

 

[brewer12345]

My Gawd, that blog is so egregiously ill-informed/just plain wrong it boggles the mind.

 

[danm]

I wouldn't spend much time with the Elliot Wave guys, I haven't found them to be a good source of information in general.

But studying deflation is a good idea - in fact we're 'enjoying' a large bout of it right now. When people think of deflation they usually only think of the Great Depression. But the US, prior to that, regularly experienced mild deflation of 1-2%, which as Gary Shilling points out also coincided with GDP growth. Read his books to see the historical evidence.

Shilling posits that during the post war period we haven't seen deflation, good (of excess supply - mild) or bad (of deficient demand - Great Depression) due to a few factors, but mainly war. We've been on a war footing - with attendant overspending, which caused an unusually long inflationary period (the govt overspends on tin, for bombs and tanks and such, which is not balanced in the consumer arena, since the material is blown up or otherwise thrown away in the war effort).

At any rate we are experiencing deflation right now. Deflation goes beyond generalized price deflation. Housing is in massive deflation (1T so far in paper losses?), credit is in massive deflation (early estimates of 500B, with leverage equalling a few trillions), and many other industries are experiencing it too (airlines, autos, furniture, etc.)

We're not at generalized price deflation, but with retiring baby boomers who generally haven't funded their retirements, and with a world of excess production, many think that there's a good chance we'll see it. The Fed will fight it tooth and nail, but it may be pushing on a string (why take out a loan for a new car, even at 0%, when you don't want a new car?)

Commodity prices can as well be due to speculation, as supply.

Otherwise my deflation hedges earned me 20% last year. If I was more aggressive I would have earned, as others I know did, 600%

 

[Helena]

Any comments on this Fed graph posted on Market Ticker ?

 

[cute fuzzy bunny]

I bet some people know the difference between attacking an idea/opinion vs attacking the person.

I'm a little confused about which one you prefer.

Is it dismissing out-of-mainstream ideas thats bad? I see here someone who was upset about a dismissal last week, yet is now doing the dismissing.

Is it attacking someone who dismisses the out of mainstream ideas or attacking the person who questions the dismissal? I see here someone attacking a poster who is questioning the dismissing, yet that person was complaining about this behavior just last week.

Just so I can get my dance card straight, are we all supposed to welcome any and all ideas and debate them thoroughly and afresh without any dismissal or attacks, or are we supposed to randomly break into groups where one group dismisses the ideas we've already discussed before, while the second group attacks the first? Then the following week we switch?

Wow...the irony is so thick you could walk on it.

Almost no one expects Martians to land warships on the White House lawn either.

No one expects the Spanish Inquisition!!!

 

[barbarus]

Someone on another site expressed the situation in a simplistic but useful phrase.

We are going to experience INflation in the things we need (read: food, energy, etc.) and DEflation in the things we want.

It probably comes down to a matter of simple, enduing faith.
Their going to figure out how to give us the worst elements of any economic outcome. We can't see how they do it currently, but it's going to happen.

A deflation with a declining standard of living, but increasing prices.

An inflation with skyrocketing prices, but stagnant opportunities.