Monday, Jun 29, 2009
Inflation or deflation? Both...
The Oil Drum: Have We Reached an Inflection Point in Economics History?
A fierce debate now rages among economists, investors, pundits and the puppetmasters of fiscal policy: What’s next, inflation or deflation? Has the most massive money-printing spree in history successfully stimulated the global economy and put it back on an upward course with rising inflation? Or are we still in a global downturn, temporarily masked by the stimulus, with prices, wages and employment still falling? It’s not an either-or question. In fact, we’re seeing inflation (of prices) and deflation (of assets) simultaneously: “indeflation”. [When central banks are setting interest rates, will they consider price inflation or asset deflation?]
Posted by drewster @ 01:10 AM (1440 views) Add Comment
30 Comments
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1. fubar said...
This article probably contains useful information but it was a gimp of a read due to the tricksy lingo of the author. Indeflation being one example. Badly constructed sentences obscuring the point: e.g.
[quote] It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.
I think that as it is now constituted, the market is inadequately equipped to face this inflection point of indeflation, and history is no longer a useful guide. [/quote] I found myself thinking what do they mean by an "inflection point" and "what the fuckery are they on about?"
2. fubar said...
In my defence it was 2:30 this morning I was reading it.
3. Camping said...
fubar , inflection is like an infection with a flick to it, hence inflection, or call my bluff it is a pussy boil on the backside of a city bankers butt due to incessant after lunch gaseous exchanges between primarily a tweed saville row cloth and a leather office chair, or an inflection is as you say , some reflected inversion of a point of indeflation, w.t.f? anyway gave me laugh , however if anyone out there is interested watch this over the next few years, i am in a part of the world where this is happening :{ whats next after property? food , water, medicine?
http://wallstreetpit.com/5019-peak-soil-investment-this-quiet-land-grab-is-just-beginning
4. debtfree said...
Can anyone answer this please?
Lets say the Bank Of England stops printing and auctioning £'s.
If foreign investors and governments don't want to hold £'s anymore and cashed them in, what would happen to the price of goods in the UK?
Would we have deflation because the bank has stopped printing money?
or
Would we have inflation because the £ has been sold off and therefore a mass inflow means more £'s are chasing the same amount of goods?
or
something completely different?
Cheers
debtfree
5. happy mondays said...
Indeflation ? Indenile me thinks !
6. happy mondays said...
or even Indenial...
7. debtfree said...
happy mondays,
you could have been sailing a boat indenile?
8. happy mondays said...
@ debtfree, yes mate, getting my English language mixed up with my egyptian jokes..
9. p. doff said...
Would that be a felucca ride? :-)
10. crash n burn said...
Spot on the money with that article. The best I've read on here for a LONG time. Nice find drewster.
11. stillthinking said...
This is an interesting view. That should the global economies ever hit normal production levels, they cause a resulting spike in energy costs which then collapses demand.
But he doesn't say why this isn't (profitably) smoothed out by the markets.
Our present problems are due to excess borrowing and a resultant deleveraged collapse in credit (money). Looking elsewhere for reasons is unnecessary.
12. japanese uncle said...
Don't you ever see demand is systematically destroyed throughout the advanced economies, which is creatings ginormous slack? The only answer is deflation. Forget about 'inflection point', yet another propaganda pushed by speculators, which is no different from 'demand factor that pushed up house prices' . Cost of oil production will collapse as each element of cost constituting the cost of producing oil, including wages and salaries will collapse. People will no longer drive, but share motor pool or public transport as millions more will lose jobs. Manufacturing activities around the globe is coming to a standstill, including the '21st century workshop of the world' Make no mistakes. The party is over, once and for all.
13. japanese uncle said...
Having said that I really want the MPC to raise IR ASAP to calm down the price of ROWES honey.
14. happy mondays said...
@ JU, would it be cheaper to produce your own organic honey? with the decline of the honey bee, could be a thing to think about, not sure if this would be viable, but a very nice productive interest that pleases the taste buds...
15. 51ck-6-51x said...
I'm with JU on this one.
Inflating energy and deflating assets at the same time?
Isn't that just a hum drum oil bubble in a deflationary environment?
16. japanese uncle said...
hm
Unfortunately I don't like honey bees (wasps are the worst), but bumble bees with characters.
17. bellwether said...
debtfree @3 not sure what you are asking you seem to envisage 2 sceanrios BOE stopping printing and auctioning and 3rd parties fleeing from our currency.
Otherwise price of commodities is speculation based on a global recovery that isn't going to happen anytime soon. Once this bear market rally is done we are heading down again, watch the dollar strengthen and the price of oil collapse. Sterling will collapase again as will markets particularly the FT which seems is running at a P/E of nearly 27.
18. debtfree said...
@16, thanks for your response bellwether.
what im trying to get at is all the talk of deflation / inflation when does it really boil down to a currency matter?
19. debtfree said...
@16 bellwether
'dollar strengthen' ,am I missing the joke here?
20. bellwether said...
debtfree no joke, as soon as we head back down there will be another flight to the USD just as there was last year- there is literally nowhere else to go.
Still not 100% sure what your question is re currency. Inflation happens where there is increasing amounts of money chasing same number of goods. I see this as different from "import inflation" which is a recognition that your currency is weaker, but there may be a number of reasons for this weakness and the expansion of the money supply is just one, excessive debt, shrinking GDP poor prosepcts would be others.
There was a massive expansion of the money supply via the credit system from 1999 to 2007, it is not now possible to replace or even sustain this expansion (which collapsed of its own volition) with QE because the amounts involved are simply too large and to even try to print that much money would sink the currency in question, and if the currency in question is the USD the world.
21. stillthinking said...
Not that I have any, but I think that gold will collapse in price soon. I think that event will cause a big sentiment change and knock inflationary expectations out of the ring.
This seems to be a necessary event for the deflationary world view to hold water. Hasn't happened yet though.
22. debtfree said...
@19
"Still not 100% sure what your question is re currency. Inflation happens where there is increasing amounts of money chasing same number of goods"
When the banking crisis hit Iceland and it's currency went from 80 to 340 against the euro, did the bank print large amounts of money overnight ? No the currency lost it's value.
So am I correct in saying that even in a situation where there is less demand of goods / services you can still have inflation if the currency loses it's value?
23. bellwether said...
Also DF even if you could print enough money and not collapse the currency the party won't start again because there is a loss of trust/believe in growth, in trade, in consumption and untill that loss of trust etc itself expires in revulsion and despair (or worse war) that allows things to start again
24. bellwether said...
DF re post 21 I think I attempted to address this at 19 in the distinction between inflation and what I've called import inflation.
I think inflation as classically understood is loss of value through increasing money supply
25. debtfree said...
bellwether, thanks. I'm still confused by some of this. So apologies for asking but with regards to :
"There was a massive expansion of the money supply via the credit system from 1999 to 2007, it is not now possible to replace or even sustain this expansion (which collapsed of its own volition) with QE because the amounts involved are simply too large and to even try to print that much money would sink the currency in question, and if the currency in question is the USD the world.
looking at http://www.shadowstats.com/charts_republish#m3
the money supply is still increasing though ?
26. rumble said...
@stillthinking... not to start a gold promo, just food for thought:
http://www.marketoracle.co.uk/Article11580.html
btw, where's s2r1 disappeared to?
27. stillthinking said...
Interesting article.
http://www.dailyreckoning.com.au/gold-silver-ratio/2008/02/12/
I base my reasoning for the collapse in gold (not that anybody asked but) because 1), I see an ongoing deflationary storm approaching 2) if the real global economy shrinks but the quantity of gold remains the same, gold loses value irrespective of what happens in dollar terms 3) silver is a precious metal similar to gold, and has had 30% of demand cut away as the world no longer needs photosensitive film but has not crashed in price 4) it isn't legal tender anywhere and isn't going to be without a war.
I think rising gold is important because it keeps the dream of inflation alive. Should gold falter and fall, inflationary expectations will falter and fall so perhaps it is surprising that more governments are not supporting the gold price and following China's example. If gold collapses then so do all the stimulus policies of the UK, Japan, US.
Anyway, we shall see I suppose.
28. debtfree said...
@26 stillthinking
since the end of the gold standard, japan is the only developed nation to have an extended period of deflation.
the gold price at the beginning of this period dropped slightly to just under 1000 yen for a gram.
it's now roughly 2900 yen a gram and at one point was over 3000 yen.
so it tripled in price during a deflationary period.
could you explain why gold will drop in price in £/$ during a deflationary period for US/UK?
cheers
29. stillthinking said...
as a story, there was a time when Lawson was defending the pound which had been pegged at a high rate. However, Soros didn't believe the rate was sustainable and so he started selling. Lawson bought and bought and bought and then gave in.
But, nobody thought that Lawson was buying sterling to turn a profit <- key point. Lawson was operating for political reasons.
When the Chinese buy gold, we appear to be saying oh because they want to increase the value of their holdings. But they are capable of printing money. They are beyond wealth, literally.
So why is there this distinction between our observations of Lawson in comparison to the operations of the Chinese government. Who in my opinion are concerned entirely about the size of their REAL economy, not about amassing wealth, they are not private speculators.
We do not know that the Chinese are buying gold to hedge against the dollar. We do not. We can expect them to do whatever is necessary to bring the remaining 700 million (or whatever) people/peasants not connected to the economy within it. Creating a fully functioning billion people modern economy will dwarf their gains from gold. The administrators are not arab princes look to blow their cash in the west.
So there is no reason to assume one way or another, but from that particular Lawson example we know that the goals of government and the pursuit of financial profit are not necessarily the same.
Land is not manufactured and can never be. The price of land in dollars is falling. People who say that gold cannot be manufactured and is therefore sancrosanct against inflation ignore that exactly the same thing is true of land, except more so because land is not mined as gold is.
My main explanation in summary, is that China does not operate as a single trader within a currency system. They have a currency system. If gold collapse then the game is up, and deflationary spiral here we go, and although repetition is boring, Japan have tried to reflate their currency for 20 YEARS and they haven't managed it, but basically because fiddling around with a fiat money system does not increase demand.
The Chinese own and create their own currency system. So do we. We use coins and paper but we may as well use individual fruit pastilles because the whole thing is MADE UP, and that certainly extends to the use of gold (previously confiscated in exchange for paper). So to assume that the Chinese are buying gold for profit seems most certainly wrong to me. I think they are attempting to control the deflating dollar.
Of course I could be wrong !
We will see.
30. stillthinking said...
sorry,
If I have savings in the bank that is pretty powerful stuff. I have the debt of some unlucky mortgage holder. If they don't work for me producing stuff I find acceptable to buy, then they can't pay off their debt. In which case ultimately their house is repossessed, I buy it back, and there is 12 years for them to work as my b*tch while they pay off the difference.
Or gold, a heavy lump of metal. Gold doesn't have the same energy as debt. it is not high powered money. Debt is.