INFLATIONISTS vs. DEFLATIONISTS -- a compendium in progress

[ninakat]

Thank YOU Robert for making this a sticky. I was hoping someone might. 

Please feel free to make suggestions, corrections, new names, etc.

[ZombieHordeLeader]

It is hard to deny the current environment is deflationary, but...  The US is a debtor nation with a fiat currency and it is trying to create inflation.  When has such a nation ever failed to create inflation in the long run?

[BJ]

Nina thanks for putting this together.  This indeed is the major question that keeps me awake, just what direction it will take.  I read them all and they all make a good case, both Inflationists and Deflationists.   It seems such a short time since almost everyone was preoccupied with inflation only but the turnaround has been very swift.  Here in NZ the Dec quarterly inflation result was released today = -0.5% but it mainly resulted from lower fuel prices (-22% for the quarter).  I suspect that any future oil price increase (soon or later?) will add inflationary fuel. 

[ninakat]

Thanks BJ. Glad you read through them all. Yes, they all do make a good case. That said, I'm tending to go with the larger crowd (inflationists) as far as my planning is concerned, especially since even some of the deflationists are saying gold is a good idea. Do you trust the NZ govt's statistics regarding inflation? The U.S. is notoriously unreliable, which is where ShadowStats.com comes into play. If you're interested, here's a primer on the CPI (Consumer Price Index): http://www.shadowstats.com/article/56

And here's an interesting chart from Shadowstats on inflation:



More info on the above chart here: http://www.shadowstats.com/alternate_data

[suburban_junkscape]

People either say deflation or hyperinflation but there's always the middle, year after year of 10-20% inflation which is still disastrous.

[ralfy]

I thought that deflation is happening now and that hyperinflation will follow.

[Stoneleigh]

My most recent contribution to the debate - an article called Inflation Deflated - can be found in full here:

http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-29-2008-inflation.html

It is indeed a vitally important distinction.

[unrepentantcowboy]

If you use money supply figures, the technical definition, and shadowstats figures, we aren't yet in deflation. Just a much reduced level of inflation.

But if you use money velocity in your definition, the argument for deflation is valid.

I think people have parked a lot of wealth. I don't really blame them, but I think this reflexive tendency is killing the economy and will at some point cause shortages and hardship that didn't have to be--not yet anyway.

I hear stories of serious amounts of money parked offshore in countries that consider banking confidential.

I believe the stories.

In some cases the money was earned elsewhere, and therefore this is a legitimate practice. In other cases, the money was earned here and moved to avoid taxes.

I'm not a proponent of high taxes, but I do realize that people that earn money in this country utilize public resources to accomplish their goals--things like roads, security, subsidized natural and processed resources, etc.

The people taking money from our system and hiding it are not patriots.

[Stoneleigh]

Money supply measures to not account for the on-going destruction of credit, which has functioned as a money substitute during the long credit expansion.  Effective inflation was understated on the way up, and now effective deflation is underestimated on the way down, now that credit is losing 'moneyness'. Combined with the velocity of money dropping like a stone, the effect is highly deflationary. Credit destruction is far outpacing the monetization of debt and that will accelerate later this year.

[aboutime]

My most recent contribution to the debate - an article called Inflation Deflated - can be found in full here:
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-29-2008-inflation.html

And it's this one that [currently] makes the most sense to me.  Thanks for linking us to this Stoneleigh.

Great job Ninakat!

[peakoilmom]

Thank you, Ninakat, for taking the time to do this. This is the topic that I've been trying to read about for the last couple of weeks. I, too, think I am in the deflation now, inflation later camp. Some argue (maybe even some of those you linked to) that unions are too weak to trigger wage inflation so that will keep a lid on inflation as a whole ... But that certainly didn't seem to have any effect on gas prices several months ago ...


I also tend to agree with the poster who said even regular inflation, not hyperinflation, is bad enough to deal with -- inflation in 10-20 percent annual range ...

[feelingweird]

Money supply measures to not account for the on-going destruction of credit, which has functioned as a money substitute during the long credit expansion.  Effective inflation was understated on the way up, and now effective deflation is underestimated on the way down, now that credit is losing 'moneyness'. Combined with the velocity of money dropping like a stone, the effect is highly deflationary. Credit destruction is far outpacing the monetization of debt and that will accelerate later this year.

I absolutely agree Stone.. I have written extensively about the inflation/deflation scenario. I have for years been talking about the deflationary end to a hyper-inflationary period. And if viewed in the "correct" lense, the last 25 years WORLDWIDE has been inflation of historic proportions. America successfully offshored most of the inflation WE created by allowing other countries to partake in the greed(through CDO's and the like). Even with the trillions and trillions of offshored inflation we still (using the shadowstats.com version of CPI-U) were seeing inflation in the 14 to 15% range at the end of it. But places like Dubai and other ME kingdoms(or China for that matter) were seeing 20 even 25% inflation rates in their countries even as revenues and trade imbalances were in their favor by a large margin.

As you correctly pointed out INFLATION on the upside was vastly underestimated, especially in the United States. And now that demand destruction has started a REAL deflationary spiral WORLDWIDE, the true monetary destruction(ala credit availability, which as you stated was just a cash alternative over the last 20 years) is clearly pointing to monetary deflation with absolutely little chance of this trend reversing until it has burned itself out, ala the Great Depression AND NOT Weimar Germany.

Robert

[Stoneleigh]

Agreed.

It comes down to understanding the nature of a credit expansion (the Roaring Twenties or now), as opposed to a currency hyperinflation (Weimar Germany or Zimbabwe). I covered this in an article I wrote in August 2007 for The Oil Drum when I was an editor there. It's called The Resurgence of Risk - A Primer on the Developing Credit Crunch and can be found here:

http://canada.theoildrum.com/node/2871

Essentially, currency inflation is a form of forced loss sharing as the real wealth pie is divided into more and more pieces, with each one becoming less valuable. A credit expansion instead creates multiple and mutually exclusive claims to the same pieces of pie. When expansion is no longer possible, as the weight of debt can no longer be supported, the excess claims are extinguished in a chaotic free for all as everyone tries to cash them in at once. Only a few will be able to press their claims successfully and cash out. The rest will be the empty bag holders.

What the bailouts are doing is creating new excess claims and handing them to bankers who understand that they must cash them out quickly, while leaving everyone else in the dark. Bailouts only ever benefit a few insiders at the expense of the rest. The money disappears into a giant black hole and does nothing whatsoever to increase the velocity of money, compensate for credit destruction or otherwise stimulate the economy. They only ever line the pockets of the already wealthy who have for years been gambling with other people's pensions and bank deposits.

This credit expansion has indeed been worldwide, and we will now see a worldwide credit crunch that sends purchasing power off a cliff. It will also sew the seeds of division to an extent that none of us has seen before. This is the real tragedy of our times.

[jonny quest]

Good work.  If you're looking for more info, I would suggest listening to Barry Ritholtz.  It was originally broadcast on Financial Sense on 11/01/2008.  I can't find the interview on FSN's site, but it's here:

http://libertyvalley.com/2008_11_01_2_ask_experts_barry_ritholtz_11_01_2008#comments

Basically he's saying all bets are off regarding inflation until ALL deleveraging is done.  When that happens, he doesn't know because he doesn't know how deep the rabbit hole goes.

[Stoneleigh]

Here's another article I wrote that I think is an important part of the big picture. It explains the Ponzi dynamics underpinning many human systems, including financial bubbles. Deflation is inevitable as a Ponzi scheme implodes.

From the Top of the Great Pyramid
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-26-2008-from-top.html