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Inflation/deflation Debate

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As I always say, you can't predict inflation or deflation, because either one will be the result of irrational panic on behalf of governments and central bankers.

So, panic and freeze like a rabbit in the headlights = deflation

Panic and act to flood away the debt = inflation

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Mish wipes the floor with his opponent here, I think.

His definition (Money + Credit), whilst the CPI definition just confuses people.

I found mish to be inconsistant.

he starts the debate by defining inflation/deflation as an increase/decrease in the supply of money+credit.

but then he keeps saying throughout that we're experiencing deflation because 'stocks and real estate are falling'

is deflation a fall in money+credit or is it a fall in stocks and property?

make your f****** mind up!

I'd also like to know what measure of total money+credit he is going by...

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Mish wipes the floor with his opponent here, I think.

think you were listening to somthing else

assets bought with leverage down (but thats not deflation even though lots of people who should know better state that it is)

assets you need for day to day living up

eventually assets purchased with leverage will go up when the currency starts moving and we reach crack up boom stage

Japan didnt have deflation

Mish lost that argument and so he should have

just listening to Mish say that Japan didnt have deflation and yet earlier he used Japan as an example of a modern currency with deflation - eh

he also used the US in the 30's - when backed by Gold - :blink:

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I found mish to be inconsistant.

he starts the debate by defining inflation/deflation as an increase/decrease in the supply of money+credit.

but then he keeps saying throughout that we're experiencing deflation because 'stocks and real estate are falling'

is deflation a fall in money+credit or is it a fall in stocks and property?

make your f****** mind up!

I'd also like to know what measure of total money+credit he is going by...

no he is right, the credit part is heavily related to the value of property.....the banks have financial Assets based on the value of property...MBS, CDOs etc.....when the value of the properties fall, then the amount of credit that banks can lend is cut...indeed has to be withdrawn otherwise the banks are insolvent and have to be closed.

so the credit is reduced due to property crash.....its a cause and effect....the reverse of the creation of the credit in the first place.

QE has replaced to a small extent the value losses at the banks.....so thats where it stays....it cant come out into the wild while property is still falling, bankers are suffering walk aways and defaults through busines failures....then theres all the fraud and overbooking.

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Both made good points, but I don't think Mish was prepared for the argument.

Dan seems to be hanging his hat on a 1970's style scenario. He kept coming back to it again and again.

If so, he has made a fatal error. The consumer and the government in the 1970's had historically low debt levels.

Now, as we know, this is different. Although Dan stated that there has never been 'symbolic' currency deflation....etc etc, Mish should have countered with 'There has never been such astronomical debt burdens, and a confluence of so many unresolved asset bubbles'...

I have concluded that assets are going to deflate around the world, simply because the debt must be deleveraged back to normal levels. Mish is right to make the point that the consumer behaviour has changed. This is going to be a trend for a generation.

However, the CPI is a different story. First of all you simply cannot trust the statistics coming from government. Secondly this is not going to be a smooth trend. I liken it to more of a step function, oscillating from inflation to deflation over time, but I suspect that slowly the CPI will follow asset values.

All in all it will be the most difficult investment scenario in history.

Edited by Toto deVeer

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no he is right, the credit part is heavily related to the value of property...

but not all of it is related to property

therefore if you think deflation is a fall in the supply of money+credit, then to find out whether we have deflation or not you would simply look at the supply of money+credit to see if it is falling or not. you would not keep banging on about property and stocks falling like Mish does.

PS you haven't said anything in your post about the fact Mish kept saying 'stocks are down' (he must have mentioned it at least a dozen times :lol: ).

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but not all of it is related to property

therefore if you think deflation is a fall in the supply of money+credit, then to find out whether we have deflation or not you would simply look at the supply of money+credit to see if it is falling or not. you would not keep banging on about property and stocks falling like Mish does.

PS you haven't said anything in your post about the fact Mish kept saying 'stocks are down' (he must have mentioned it at least a dozen times :lol: ).

course, not all of it is related to property...but credit is generated by loans...loans are limited by capital in banks...if the capital falls, then the credit must follow.

real money doesnt deflate unless it is withdrawn on wealth increases and money stays the same.

credit is risky...it can be defaulted....it is being defaulted. this is deflation in action.

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  • given that the very first thing Mish says in the debate is that he is going to define inflation/deflation as an increase decrease in the money+credit supply

  • given that the money+credit supply is increasing:

sgs-m3.gif

surely Mish actually making the case for inflation!

yes, but the M1 is NOT going out into the wild...its on deposit at the FED....its balance cheet is astronomical right now...so is the amount on deposit by banks at the BoE.

They CANT lend it out.....so much for helicopters.

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  • given that the very first thing Mish says in the debate is that he is going to define inflation/deflation as an increase decrease in the money+credit supply

  • given that the money+credit supply is increasing:

sgs-m3.gif

surely Mish actually making the case for inflation!

well ive been consistently right over the last 3 years with regards this debate and remain in the flation camp

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yes, but the M1 is NOT going out into the wild...its on deposit at the FED....its balance cheet is astronomical right now...so is the amount on deposit by banks at the BoE.

They CANT lend it out.....so much for helicopters.

:lol: I could have sworn the Fed was monetizing hundreds of billions of dollars of treasuries (which the gov't then spends on state sector salaries etc).. There's another $112bn of Treasury auctions in the coming week. should be fun. :D

anyway, you're diverging from Mish's point.

btw, I don't agree with Mish's definition of inflation/deflation.

I am merely pointing out that by his own definition he should be an inflationist!

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:lol: I could have sworn the Fed was monetizing hundreds of billions of dollars of treasuries (which the gov't then spends on state sector salaries etc).. There's another $112bn of Treasury auctions in the coming week. should be fun. :D

anyway, you're diverging from Mish's point.

btw, I don't agree with Mish's definition of inflation/deflation.

I am merely pointing out that by his own definition he should be an inflationist!

treasuries need to be paid for....thats a draw down on the circulating money....thats M1 money.

credit is disappearing faster than Sibleys wallet when its his round.

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Mish wipes the floor with his opponent here, I think.

His definition (Money + Credit), whilst the CPI definition just confuses people.

The debate went nowhere, until they tightened up the definition

Yes a good debate and the inflation argument went much better than I had expected but Mish was a clear winner.

It seems that the only way Daniel was able to compete was to change the definition.

Surely we all agree that Inflation is an increase in money AND credit and deflation is the opposite?

therefore if you think deflation is a fall in the supply of money+credit, then to find out whether we have deflation or not you would simply look at the supply of money+credit to see if it is falling or not. you would not keep banging on about property and stocks falling like Mish does.

The problem with looking at the supply of money and credit is that no one can agree on a definition of either money or supply. The only thing left is to look at what effect an increase/decrease in money supply would have and work backwards - clearly not ideal I agree.

Mish refers to the price of property & shares in addition to bank failures, a drop in bank lending, increased savings, low interest rates, rising unemployment, falling commody prices, banks hoarding cash etc. in support of a decreasing money supply. Daniel had very little to support his view, he just mentioned higher medical insurance as far as I can recall.

I agree with Mish, the debate is over, we clearly have deflation. The real debate is what comes next.

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The only reason that we have not seen full blown, head on, massive deflation is that regulators have allowed the banks to suspend all realistic asset valuations. Thus there is huge pent-up deflationary pressure that will ultimately be unleashed. That, more than QE or stimulus is the reason why the true impact of deflation has not been felt yet.

The problem for the present scenario is that the longer that realistic asset valuation is put off the more the credit markets suffer and this will completely kill consumption and employment. These factors are working against each other.

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they both agreed on asset deflation, and the growth in money supply, mish argued that this lagged in the past where money supply wasn't increased during credit expansion.

but they both really agreed on the decrease in the purchasing power of the dollar (inflation) and the decrease of asset price deflation.

it was also mentioned that the fed would prevent hyper-inflation as that would destroy the banks, and they have made it clear that the banks will survive at whatever cost

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bond markets wont allow.
monetize the bonds then...oh wait, they already are! :lol:

Quite. Chartalism by the back door, as it were.

TBH, it seems that both guys agree on more than they disagree on. However, Mish is under the view that there will be deflation as the rules of modern money mechanics dictate that money has to be leant into existence. Daniel on the other hand seems to think these rules will be broken, which removes such limits, allowing credit to be replaced with printed money.

We are clearly at a cross roads - will/can the existing system cope with massive deflationary forces and is it desirable? I would argue it won't and it isn't, to which I agree with Daniel. However, Mish makes very valid points if the system is left unchanged, but why would it be left unchanged, when it is clearly 1. A rubbish monetary system and 2. Unnecessarily painful for everyone.

QE used for buying gilts/treasuries is the solution, which treads the line between getting new money into people's pockets (via government spending) and taking the pressure off the banks in the mean time (by increasing their reserves). While the intention is supposed to be to repay the QE, I think it is likely that it will never be repaid, even if it is never formally struck from the BoE books - it will just sit there forever (or as long as the world as we know it lasts!). This will then have essentially created more money to go into people's pockets (to repay debt), while keeping the banking system operating to some degree. Both need to happen to a degree, to meet at the middle somewhere (neither a deflationary collapse or a hyperinflationary holocaust are desirable).

However, I think this asks more questions than it answers. The first being, if we are to keep to a 2% inflation target, more money will be needed every year, which ultimately will need borrowing from somewhere in the current monetary system. Clearly, QE has started monetising this debt. It doesn't really matter if it is only via back door, it is achieving the same thing, but not breaking the rules (which are daft anyway - probably encouraged by bankers! <_< ).

If the inflation target is stuck to and the BoE decides how much money should be in the economy by using this, the government has very limited control over the amount issued (assuming the BoE acts independently), then why shouldn't QE be used all the time? Of what benefit is it to the population for this money to be borrowed from private banks, for interest? This is exactly the argument that the chartalist theory makes. The political argument then comes down to how much inflation the population wants... it isn't an accident it is targeted at 2%, it is by design (probably to spur spending). Printing, say, 0.2% of narrow money per year, would feed broad money growth to achieve this. Gilt auction strike? Who cares - why the hell are we even paying for borrowing when we can create our own fiat?!

The next question, is why we allow the private banks to create credit from the future productivity, rather than the past productivity. I am not arguing that credit shouldn't be extended, but by the banks pulling it from the future, it forces the hand of the government to make this credit whole, by printing, should credit extension get out of control. The fact that we are facing the question of whether to force the currency to be debased is because the banks have forced this hand upon us. If you base credit on previous productivity, people may lose money they had, but nothing is taken from the future. It also limits the amount of credit to remain within boundaries, with the supply/demand for money dictating the price savers will lend it out to others for. Making fractional reserve banking with Sterling illegal (fraud) would essentially achieve this.

Then abandon legal tender laws, let banks have their own currencies to do with them what they will, while still providing (safe) Sterling accounts and you have a flexible banking system, whose damage is limited to the users of said banks currency.

EDIT: P.S. BTW, great point from Mish about the central banks ignoring house prices being a big part of the problem too. It has been said many times here.

Edited by Traktion

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Yes a good debate and the inflation argument went much better than I had expected but Mish was a clear winner.

I agree with Mish, the debate is over, we clearly have deflation. The real debate is what comes next.

someone else who listened to a different debate than me

Mish was unable to come up with an example of a fiat currency with significant long term deflation (cost of goods for living decreasing) not asset prices

his 2 examples Japan (didnt have deflation) and 1930's US - Dollar backed by Gold

and you could tell in his voice that he was losing the argument so in the end he changed it and came up with his deflation definition

Dan believes that assets are generally still overvalued but at some point the rate they reduce in value will be slower than the rate of currency debasement - and he is is right and for US house prices i think we are close to that point - not close for UK ones though

nature wants deflation becuase of all the debt and nature will get deflation just not when measured in paper money

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