Tuesday, Apr 29, 2008
Good explanations of terms here
Safe Haven: Credit Contraction, Economic Bust, and Deflation
"Members of the deflation camp assert that the large-scale contraction of credit happening within the banking system means that deflation is upon us, even if the money supply is expanding. At the same time, another camp is pointing to the breathtakingly rapid growth in M3 money supply as evidence that hyperinflation is a near-term threat. In our opinion, both camps are wrong"
Posted by sold 2 rent 1 @ 10:33 AM (519 views) Add Comment
12 Comments
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1. cornishman said...
Regarding inflation, I came across the following snippet this morning which goes some way towards explaining the varying CPI measures we are being given recently:
"In the US food has a 14% weight in the consumer price index. Compare that with Canada at 17%, the Euro zone at 16%, England at 11% and Japan at 25%. Only Japan lacks the fullness of food self sufficiency. Sure, food price inflation is important. But it is not the most important issue in these major economies."
2. Dbc Reed said...
Safe Haven is right about how credit is provided "out of thin air" or "lent into existence".Not sure about the rest of it.Once it has been created it doesn't just disappear: it will show up in new deposits in the bank system somewhere and these will be used as the basis of fresh loans.As the American politican said when he retired into banking "Why did n't someone tell me about banking before?"
3. stillthinking said...
This gold pushing site ignores Japan. Large scale contraction of credit -has- led to deflation in the past. Goldman Sachs have just issued advice to short government gilts, the BoE has just 3 billion capital, and while the government is taking debt on their books, the cash is not for further loans.
Making a distinction between credit expansion and money supply seems wrong to me for the simple reason the most purchases are made with credit. Take the credit away and the purchasing stops. If the UK cannot get funding or investment from abroad, due to risk of default or the steady lowering of the value of sterling, then we can't continue buying things. If the UK gov. provides funding, then purchasing can continue on the basis of taking wealth from savers. Perhaps the inflation we see now will continue for a long time, a year, but eventually, as has happened already with depreciation on used cars for example, prices will drop. Real wages are dropping already. Real supermarket prices are dropping in the UK vs a basket of currencies (not the dollar or sterling). The price of everything in the UK is already going down for the people of Germany and Euroland, Russia, Japan etc. and the fact that we are pretending to keep them up in sterling is just to give inflationary expectations at the expense of pensioners.
We are going to hit a deflationary collapse because people won't or can't borrow, pretty much everybody on this site has made a personal promise not to borrow for 4 or 5 years, and it looks like the population of the UK is coming around to that view also.
4. icarus said...
Re the quote posted by cornishman @1 - the low weighting for food in the UK is a major reason for the gap between the CPI measure and most people's experiences. Bigger weightings in the UK are on items that figure prominently in the expenditures of companies (therefore tax-deductible), rather than families or individuals, e.g. (from memory) Hotels & Restaurants, Transport, Entertainment. The average family spends a lot more than 10-11% of its income on food, but only 10-11% of total expenditure (including that of companies) goes on food, according to CPI.
5. cornishman said...
If you ran a major bank and you had cocked up recently and then your central bank offered your bank a wodge of money to stop you going under - would you lend it to someone to buy a house, or would you speculate on the markets with all your mates and push up the price of grain and oil and hope to recover some asset value in your bank?
Everyone else is doing it - so you owe it to your shareholders to do the same. Everyone reckons that they will be able to get out before the bubble pops...
6. Debtfree said...
for there to be a deflationary collapse, the central banks would have to stop bailing out the banks that are in trouble.
there is a bottomless pit of goverment created bonds that will be used instead of letting the banks fail.
inflation is the hidden tax that most people are unaware of. ministers plus central banks know this and just can't help themselves, they will keep creating bonds and worthless IOU's at all costs.
IMO, there will be deflation, but only on goods and services that were cheap to service before inflation took off. for example, car industry and property has fallen drastically in western countries.
7. shipbuilder said...
I'd wondered myself how, when the majority of money is created as credit, we could get hyperinflation in a credit crunch - it just didn't make sense.
But - the article makes the point that defaulted loans are still money in the economy - money is not destroyed and so they are not deflationary. So the if the money being pumped into the economy is not used to loan to the public, it results in inflation.
But - if the BofE stops pumping in the money and the banks still aren't lending, deflation will occur.
So it makes sense for the BofE to keep pumping the money in to avoid deflation, but this shafts the public because the money goes straight to the banks.
Surely in this case it would make the most sense for the BofE to lend directly to the public?
It's all a bit of a head-melter - anyone?
8. cornishman said...
S2R1 - You are probably aware of the gold price at the moment - and I can imagine what is going on right now with your feelings.
I am backing my hunch of further falls tomorrow and later this week before I get back into gold, but I have to tell you - it's just as nerve wracking being out of the market as in! This thing could go either way.
9. rocket robbie said...
Cornishman
Would it be silly to suggest that you get back in once the price goes over 950 -1000 again. I know you would miss out on some profit but at least once it reaches that level again you would be pretty certain that the price should be on the way to new highs??
10. cornishman said...
robbie - who knows what is silly and what isn't?
All my life, I've bumbled along making 'things' and getting paid for them. This investment lark is all new to me!
11. rocket robbie said...
Me as well
I have sold my gold for the time being. I have made a tidy little sum and would hate to see it erode it the next month or two.
Its been a eye opener though how much money can be made in the stock market, just hope S2r predections come true and the prices start heading up again soon.
12. sold 2 rent 1 said...
Gold is at 870 as I write.
As I said before it may go down to 850 but I still stand by my target of 1500+ by the end of June.
These are testing times.
The May 2006 upleg showed that gold detatched from the USD inverse relationship.
Most people still havent grasped this.
The forthcoming events in May and June will change people's consciousness of how they see fiat currencies and gold will finally be seen as "real money".