Saturday, Jun 26, 2010
Interesting article inflation v deflation v gold
Ricks Picks: How Deflation Threat Helps Policymakers Inflate
"In fact, I believe that our heroic policymakers depend on periodic bouts of deflationary fears to boost the implied confidence that they need to continue — you got it — inflating; or at least trying to inflate. I have little doubt the game will end very badly one day soon, and it is open for debate as to whether the resulting depression will be deflationary or inflationary.
so is this it, the final deflation? If so, a world of assets is going to decline hard and opportunity is going to be present for the “D Boys” to finally buy all those assets from all those frightened and naive inflation believers. Or are policy heroes preparing a mother of an inflation yet to come..."
Posted by techieman @ 08:30 AM (1566 views) Add Comment
26 Comments
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1. bellwether said...
Hey Techieman, on the subject can I recommend the article I posted yesterday. One of the best I have read.
2. simon68 said...
UK is heading to inflationary depression.
Gold price, commodities price can only go up and imports products become more expensive.....................whereas UK house price can only go down.
UK pulic and private sectors did overdraft the future decades' earnings...............no bullets left.
It's now pay back time or defaults. Let the lenders or foreign buyers of gilts to suffer.
3. simon68 said...
Do you know what the Chinese are doing?
They are limiting the exports of rare earth. These materials are widely used in military equipments and electronics such as radar. China is the only country that possesses the majority of the world’s rare earth reserves.
China has abolished exports rebates for certain industries in order to discourage manufacturers to sell their products abroad. This policy is in line with the State strategy to develop its internal market.
So UK citizens be prepare to pay higher price for whatever products which needs to be imports from China (e.g. pound shop stuffs or electrical/garment).
4. quiet guy said...
It's a balanced article which makes a nice change from the mud slinging often seen between precious metal bull vs bears and inflationists vs deflationists.
Ackerman's article also reminds me a bit about a recent offering in the Market Oracle regarding gold and Gibson's Paradox.
A Look At Gibson's Paradox And Gold by Jim Richter (sorry, ignore the bit about price suppression)
Basically, Richter suggests that gold prices and interest rates tend to be negatively correlated which does not seem to be incompatible with Ackerman's ideas either.
5. simon68 said...
Rudd ‘Fully Committed’ to 40% Australia Resource Tax (Update1)
June 1 (Bloomberg) -- Australia’s government is committed to its planned additional tax on natural resource companies and the 40 percent rate is “right” because firms aren’t paying a fair amount, Prime Minister Kevin Rudd said.
Governments in resources rich either nationalized oil mines like Argentina or acquiring a controlling stake in mines like Mongolia or get a fair cut in profits like Australia.
China needs to import metal, coal etc from Australia or Brazil for production usage, if the imports price is going up they have no choice but to add on their increase costs to Europe buyers.
Thus, don’t expect a deflation in the years ahead!!!
6. simon68 said...
The house price bubble in UK is replying on reckless mortgage lenders (banks and building societies), moron regulator, corrupted politicians and loonies buyers……………but where are they now?
7. estrader said...
simon68 "but where are they now?"
They are queing up for the latest iPhone, not a house. Do we still need Ultra-low interest rates? People still seem to have more money than sense.
http://www.guardian.co.uk/technology/2010/jun/24/iphone-4-snapped-up-british
8. hpwatcher said...
They are queing up for the latest iPhone, not a house
Yes, it's amazing isn't it. People love overpriced consumer cr@p.
9. stillthinking said...
I think that people buy iPhones and the like because they have no chance of buying a house.
Deflationists don't believe that there is going to be no inflation, they believe that either you accept deflation or you go on to experience very high currency collapsing levels of inflation. Just that deflation is first. For the UK, a large chunk of sterling is saved abroad, it literally isn't here to pay off the debt that created it. That is enough for prices in the UK to deflate. Labour said well we can deficit spend our way out of deflation, ignoring the fact that in the future they had no way to raise taxes sufficient to balance the books. The current government have chosen the necessary path of deflation, as have the Europeans. Probably there will be imported inflation from China, but is that going to be enough to offset the government spending 30% of GDP as opposed to 50%+? I don't think so.
Probably the UK ends up with inflation eventually, but look at the people buying BoE gilts, aka treasury notes, aka cash. They are so desperate to convert to cash that they accept 0.5% or whatever it is. I hold paper cash in my wallet at 0% return. They do the same but allow the BoE to look after the paper for a smidgeon of return. This is what people are doing, not just my opinion.
Labour wanted to pass the buck down the line, and reflate today but pass the cost to tomorrow's taxpayer. Nobody believed this was realistic. Tesco's have already reported deflation in food as people switch the fixed amount of money they have for expenditure towards fuel prices.
I think we are going into deflation, and I hope we are because the only true way out.
10. fallingbuzzard said...
@9, a very good summary. i think you're right. food prices are falling now but they should be increasing. non-food prices have increased but non-food runs on discounting strategies now. but china will only export inflation if they can keep export prices high when export volumes fall. my guess is no and that they will adapt. when the boe talks about slack labour markets in the UK, they fail to see that versus china its a very tight labour market here.
11. novice pete said...
iPhones today, rubbing two sticks together tomorrow? I don't know, but prices at my local supermarket are going up every time I visit (twice a week). How many people are still hooked on credit cards I wonder. The 'get it today, worry about it, uh..... never!' The debt will just get written off like everything else mindset.
12. techieman said...
Well ST, i broadly agree with you. The point is that moves from inflation to deflation cannot be analysed by using a ruler to extrapolate a prior trend. This is what some of the inflationists just cannot see. Deflation is caused by a rapid move to a bust. It is difficult to argue for deflation and have any credibility because it is so rare. However its a bit like a Tsunami rather than a flood. A flood is predictable within parameters and can be managed, A Tsunami comes out of the blue and is far more devastating. A flood might be frequent but not severe, A Tsunami is infrequent, very servere and causes the loss of far more lives. That is what makes a Tsunami more dangerous.
Some people argue that there wont be a Tsunami, thats just wrong. There will be but the real question is when. Will there be one now or later or much later? That is why i quite like the article - it has balance, per Quiet Guy. I agree with your last sentence but of course others are entitled to argue the other way. If they do though it would be nice once in a while if they actually backed up their view without resorting to reviewing lagging indicators and extrapolating those. or even explaining why such deflation cannot occur (of course it already has - my point is that is the point of the stimulation!). Each to their own i spose.
As for the iphone4 i cannot see the relevance.
13. techieman said...
B/wether - just read it (Pragmatic capitalist: When will (US) bound auctions begin to fail?) as i said they generally just dont get it!
14. simon68 said...
“Tesco's have already reported deflation in food as people switch the fixed amount of money they have for expenditure towards fuel prices.”
You know what? Deflation is the final curtain of the show!
Why there is no inflation in Zimbabwe? Why there is famine in Africa?
GDP per capita each year in Zimbabwe is just $200. They simply can’t afford it, even the basic foods stuff in the west.
I wonder if people shift the family budget towards fuels and shrink expenditure for foods, how can they afford to buy a house?
15. simon68 said...
One last thing, it is not because Zimbabwe people don’t have money.
They need to carry mountains of Zimbabwe bank notes to buy a loaf of bread, that is deflation in US dollars term buy inflation in Zim currency term!!!!!!
16. simon68 said...
The $200 GDP per capita is of course in US dollars term but trillions in Zimbabwe currency!!!!!!!
17. novice pete said...
My apologies if this is too simplistic, but it sounds like a good case to me, (not educated beyond secondary modern school).
Capcha 'you housed'
18. simon68 said...
The Chinese may say to British that “there won’t be changed in our products price which is XXX Yuan or USD XXX, if you can’t afford it, it is your fxxking problem not ours”.
19. simon68 said...
I can assure you that the Chinese will not cut their throat to sell products at a loss to UK, rather they will find another region, perhaps BRIC/emerging market where people there can pay the price.
In view of escalating materials costs and labour wages, don’t think they will trade at loss.
Facing sluggish sales, wholesalers and retailers in UK will order less until the stock is depleted and new equilibrium is reached. And price will go up again.
20. simon68 said...
Do you know what is “poor developed countries” and “rich developing countries”?
21. techieman said...
novice pete - yes Chris is right as to what inflation is. i.e. M3 But this is not up to date.
First see: http://www.federalreserve.gov/releases/h6/discm3.htm [i.e. the fed stopped tracking M3]
second see: http://www.shadowstats.com/alternate_data/money-supply-charts [this shows m3 continuation by shadow stats] . That shows that M3 is contracting.......
22. techieman said...
Simon - do you always talk to yourself?
23. simon68 said...
Look at US M3 Chart the significant jumped in M3 for almost 18% in mid 2008 is due to liquidating position in all risky assets including derivatives and commodities etc…………by the same token is it bad for money flowing back into the real economy? Where the money represented by M3 has gone? Why is M1 so static or even a bit rising up?
http://img12.imageshack.us/img12/9224/moneysupply.gif
24. simon68 said...
Credit is a double edged sword, it can create prosperity if it is being put into productive use in economy. On the other hand, it will have devastating outcome if……………….you guess.
25. novice pete said...
Thanks techieman, and simon68, keep on rockin in the free world. Where is devo these days, miss his posts, but I suspect I am in a minority there. After the Guillotine pic I posted (which was meant to provoke debate) the thread was deleted before I had a chance to see the results of my dirty work. ;-) . I would like to say that thanks to this site and the many and varied posts, that I am now far more aware
of the (what I see as) imense complexities of economics and well blah blah blah. Thanks to all the 'bears', may you get your honey!
And to the Bull Sh*tters may you get a pan full.;-)
26. simon68 said...
As I previously said, businesses cannot operate on deflationary environment for a long time since they won’t be able to survive as going concern entities.
Facing sluggish sales, wholesalers and retailers will order less until the stock is depleted and new equilibrium is reached. And price will go up again.
Take Japan as an example, CPI for the period from 1983 to 2010 is just swinging up and down between positive 1 and negative 1, even though Japan’s properties market experience decades’ slump.
http://img716.imageshack.us/img716/7724/japaninflation19832010.gif
http://img267.imageshack.us/img267/6451/japanlandpriceindex8008.gif