Wednesday, Aug 27, 2008
Inflation or deflation - which will it be?
MoneyWeek: Inflation or deflation - which will it be?
Whilst imported goods are getting more expensive, houses and financial assets are getting cheaper. And with everyone feeling risk-averse, we’ve got deflation ahead, writes Dominic Frisby.
Posted by damien @ 12:59 PM (552 views) Add Comment
6 Comments
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1. harold said...
For enlightened comment on this issue, see:
http://www.kitco.com/ind/Turk/turk_aug262008.html
Good quote from the article:
"This decline in the price of homes is wealth destruction. But wealth destruction is not deflation. Many people confuse this point."
2. mark wadsworth said...
I reckon deflation is more likely than inflation but about half of 'experts' say the opposite.
3. stillthinking said...
Indeed. Well, I personally think we will get deflation but you can never tell what our idiot government will do. One point though, is that although deflation essentially makes prices lower, it does not necessarily hold up the value of sterling.
The value of sterling can increase inside the UK (deflation), yet fall against other currencies (from worsening trade conditions). As is often quoted, 30% of the UK GDP comes from the financial sector, another 42% is the public sector, so...... that means that 28% is left. Of course there are many companies indirectly supported by the public sector's outsourcing etcetera, but that makes the situation worse not better.
28% of the UK economy needs to provide what the other 2 main sectors do not. This includes food ( 30% of which is imported), energy/fuel (from France/Middle East), clothes (from China), house building (from imported Polish workers), TVs, kitchen white goods, cars, electronics,....
28% of the population cannot provide all this stuff so we have borrowed from foreigners. Now we face a realignment to provide all these things ourselves. The public sector, while too large, will not shrink. The banking service can shrink but probably cannot switch to making what we need.
Fast forward through 28% attempting to provide all the food and consumables blah blah blah we use...
Basically this leads to a big collapse of the UK economy, which is why Sterling has fallen against the dollar.
There are chronic structural problems with the UK. This isn't just a financial disaster and basically, hope for the best and prepare for the worst.
4. stillthinking said...
Of course I don't mean the 28% actually providing all these things, but either providing or providing something tradeable for exchange from abroad.
5. denzil said...
harold quoted from kitco
"This decline in the price of homes is wealth destruction. But wealth destruction is not deflation. Many people confuse this point."
I'm one of those that confuse that point. Looking at MoneyWeek it states:
"That takes us to inflation definition number two: inflation is a growth in the supply of money and credit, leading to higher prices; deflation is a decline in the supply of money and credit, leading to lower prices. "
If inflation, as defined above pushes up the price of houses then surely when the value of property falls then there is a decline in the supply of money and credit and it is therefore deflationary.
From the Kitco article it states:
"
6. denzil said...
continued:
"Deflation is a contraction in the quantity of money, with the result that each unit of money purchases more and more over time as the deflation proceeds."
If house prices fall, there is a contraction in the quantity of money and it is wealth destruction but the outcome is that a unit of money purchases more house than it did when prices were higher, hence it must be deflationary. If deflation occurs it can nearly always be wealth destruction because somebody originally bought anasset at a price that was higher than it currently is.
To summarise I simply cannot see how deflation can be disconnected from wealth destruction as one feeds the other.