Inflation Or Deflation ?

[mikefluk]

Throughout all of this credit crisis one question has troubled me immensely. Are we heading for inflationary times or conversely are we heading for a depression

This is very important because if we believe we are heading for inflation we should stack up on gold but if we think we are heading for a depression we should hoard cash

We have heard the experts in the press; what do the members of this forum think..and why ?

[House of Lords]

Throughout all of this credit crisis one question has troubled me immensely. Are we heading for inflationary times or conversely are we heading for a depression

This is very important because if we believe we are heading for inflation we should stack up on gold but if we think we are heading for a depression we should hoard cash

We have heard the experts in the press; what do the members of this forum think..and why ?

What: Deflation

Why: Because cgnao is wrong, wrong, wrong. 100% guaranteed.

[crash2006]

We will enter Disinflation, but gold is always good to have even in a depression.

[Oliver Sutton]

Throughout all of this credit crisis one question has troubled me immensely. Are we heading for inflationary times or conversely are we heading for a depression

This is very important because if we believe we are heading for inflation we should stack up on gold but if we think we are heading for a depression we should hoard cash

We have heard the experts in the press; what do the members of this forum think..and why ?

Doesn't the BOEs willingness to give NR limitless funds point to inflation?

If it had been allowed to go bust then this would have been deflationary.

[House of Lords]

Doesn't the BOEs willingness to give NR limitless funds point to inflation?

If it had been allowed to go bust then this would have been deflationary.

No, if it had been allowed to go bust all hell would have broken loose (if you don't include massive queues and a bank run all hell!).

They bailed them out just enough not to cause chaos but they are going to the wall anyway. And they won't be making more loans either.

The BoE need to be seen to do stuff and they did stuff but not actually that much.

[AvidFan]

Deflating house prices, inflating prices in everything else related to natural resources (energy, food, etc.)

To be better able to afford your house, you can sit and wait with your deposit in cash or you can try and benefit from rising inflation in everything else. Up to you.

[AvidFan]

In fact, rising prices in consumer goods as well, so basically most of everything you'd normally want to buy.

What else won't be going up? Wages. Not until the pound falls significantly anyway.

Edited September 16, 2007 by AvidFan

[Oliver Sutton]

They bailed them out just enough not to cause chaos but they are going to the wall anyway. And they won't be making more loans either.

But it would still have been deflationary. All those deposits vanished.

[Starcrossed]

Slightly off-topic but I have a question about the inflation-basket.

Does the BoE attempt to factor in relative changes in spending patterns that occur during a boom/bust?

BTW I don't have an an answer for the original poster except to say that deflation would be my more likely result based on the similarities between the 1920s leading to 1929 and now. But I don't discount the influence of 'soft commodities' like wheat to mess around with that outcome.

Edited September 16, 2007 by Starcrossed

[Waiting Patiently]

A year or two of stagflation followed by a longer period of deflation accompanied by much weeping, wailing, and gnashing of teeth.

[House of Lords]

Which shows your inability to put together a coherent case.

I was getting bored of stating my case. I notice you gave up arguing in your thread earlier

[paradigm]

I agree this is an interesting question that I have often pondered. If you truly believe we are entering a period with massive inflation, the most obvious advice would be to buy real-estate using a fixed-income loan. This is because rates are now historically low and does not appear to "expect" a hyperinflationary scenario. Hence, if you are right about hyperinflation you could basically get a home for free this way (even though the first years might be difficult). The argument against this is the fact that rates ARE low so conventional thinking says you have to be more clever than the market for this to materialize. On the other hand, you could argue the low rates are due to massive monetary expansion by the central banks which is what will in the end cause massive hyperinflation. This is a somewhat paradoxical situation and I think it's a situation that will have to be resolved soon. Bond markets appear to think the central banks will protect them by keeping inflation at really low levels, and will raise rates should inflation pick up again (and there are many signs it has just temporarily fallen). However, stock markets are pricing stocks at prices only in line with fundamentals if rates stay low!

You could also say that the property market is already hyper-inflated and now it is other goods and items turn to pick up. Property prices could even fall in the same period.

[OzzMosiz]

I agree this is an interesting question that I have often pondered. If you truly believe we are entering a period with massive inflation, the most obvious advice would be to buy real-estate using a fixed-income loan. This is because rates are now historically low and does not appear to "expect" a hyperinflationary scenario. Hence, if you are right about hyperinflation you could basically get a home for free this way (even though the first years might be difficult). The argument against this is the fact that rates ARE low so conventional thinking says you have to be more clever than the market for this to materialize. On the other hand, you could argue the low rates are due to massive monetary expansion by the central banks which is what will in the end cause massive hyperinflation. This is a somewhat paradoxical situation and I think it's a situation that will have to be resolved soon. Bond markets appear to think the central banks will protect them by keeping inflation at really low levels, and will raise rates should inflation pick up again (and there are many signs it has just temporarily fallen). However, stock markets are pricing stocks at prices only in line with fundamentals if rates stay low!

You could also say that the property market is already hyper-inflated and now it is other goods and items turn to pick up. Property prices could even fall in the same period.

What about wages? You are suggesting they will rise significantly. Surely business will outsource or move to cheaper waged countries to ensure maximum profits (or to ensure the company continues to exist).

[House of Lords]

Case? Have you stated a case? I didn't see an explanation, only babble.

cgnao, you've spoken more babble than anyone on here - you're happy to ramp gold all the way as it suits your cause.

You open yourself up to criticism by all your 100% guaranteed babble. You might be right, I might be right. Who knows? Nobody - that's the only 100% guaranteed bit.

My view is money will soon be disappearing from the system. We'll have high inflation in food, commodities etc. But money supply will shrink as assets decline and debt is repaid or evaporates.

This bubble is at an end even if interest rates are cut because lenders are being so badly burned already before even the real fun begins. Next to get burned will be the man on the street and they'll all have a long memory.

[Della]

There are plenty of economic arguments against inflation being the sensible course. The main political argument against inflation is that inflation is more unpopular than deflation even if it allows you to inflate away your debts, and a politician following an inflationary policy is more likely to be blamed for the fall out, and be slung out.

If someone is going to be crushed by their debts anyway in a deflationary or stable world they would tend to blame themselves for getting in to too much debt and ultimately losing everything over a course of years, in an inflationary world they will blame the politician for making everything so expensive that they lost everything in the course of months, which would be a more intense experience.

People still remember the Tories for the 15% interest rates even though it was only for 2 days, if the Tories had tried to keep things stable and avoided rocking the boat too much they might not have got so much of the blame for the fallout from the borrowing binge that happened earlier.

Edited September 16, 2007 by Della

[Madman]

What about wages? You are suggesting they will rise significantly. Surely business will outsource or move to cheaper waged countries to ensure maximum profits (or to ensure the company continues to exist).

Only if the exchange rate doesn't tank!. Which it will, IMO.

[IP Newcomer]

No, if it had been allowed to go bust all hell would have broken loose (if you don't include massive queues and a bank run all hell!).

They bailed them out just enough not to cause chaos but they are going to the wall anyway. And they won't be making more loans either.

The BoE need to be seen to do stuff and they did stuff but not actually that much.

Personally I think that Northern Rock should have been allowed to fail and the compensation scheme for savers be allowed to kick in (plus bankruptcy provisions).

But then I'm a market fundamentalist, and my views are mad.

However, within the current concensus this is the best that we could really expect. There is no bailout for the shareholders and not much better for commercial lenders (who will probably be taking a haircut in some form). It could be worse.

[IP Newcomer]

People still remember the Tories for the 15% interest rates even though it was only for 2 days, if the Tories had tried to keep things stable and avoided rocking the boat too much they might not have got so much of the blame for the fallout from the borrowing binge that happened earlier.

Actually it was about three hours.

But to be fair between 5 October 1989 and 8 October 1990 we did have a longer period of 15% interest rates.

http://www.moneyextra.com/dictionary/Inter...ory-003455.html

[uro_who]

Actually it was about three hours.

But to be fair between 5 October 1989 and 8 October 1990 we did have a longer period of 15% interest rates.

http://www.moneyextra.com/dictionary/Inter...ory-003455.html

What is really interesting about that table is the interest rate spread. Many years it is not the current 1%. 1.5 or 2% seems much more standard.

This would give us 7.25 - 7.75 which would sink many in the UK.

Why have spreads been low? The decrease in the premium associated with risk. What have the recent events done. Reminded lenders of the true cost of risk.

Expect mortgage rates of 7.75% some time soon.