Hyperinflation Vs Deflation

[The Spaniard]

Some great posts on this thread, HPC.co.uk at its best.

I can’t decide. (Am I generally decisive? Well, yes and no.)

I feel like the guitar player in the “duelling banjos” scene from Deliverance.

The PTB are the apparently stupid banjo player.

They have lost me as they increase the pace of change.

[roman holiday]

Some great posts on this thread, HPC.co.uk at its best.

I can’t decide. (Am I generally decisive? Well, yes and no.)

I feel like the guitar player in the “duelling banjos” scene from Deliverance.

The PTB are the apparently stupid banjo player.

They have lost me as they increase the pace of change.

Hi-S, Perhaps a simpler way of looking at it is to ask whether the currency will implode.

Currency survives: deflation

Currency implodes/deflates: inflation

Just a thought.

Regards.

Edited September 25, 2008 by roman holiday

[WiseBear]

Come on....

Multi Billion dollar / pound bail outs and injections of liquidity on a daily basis?!

I voted DEFLATION.

They just won't print the money.

It will take a lot, lot more than the few trillion already created/loaned and this would destroy the bond market and their power base.

It's DEFLATION for me.

[The Spaniard]

Hi-S, Perhaps a simpler way of looking at it is to ask whether the currency will implode.

Currency survives: deflation

Currency implodes: inflation

Just a thought... not rigorously thought through.

Regards.

Thanks RH, two good data points there in the space of possibilities.

Much depends on how deep the rabbit hole (warren?) really goes, and each of us can only make an informed guess at that.

The PTB control the MSM, so keeping at all informed is hard work, though fascinating.

[subsidiser]

Inflation

[waitsee]

Excellent thread and a lot of very interesting posts, although I am not sure if this debate regards the UK, the US, or the world.

Regarding the UK for me there will be deflationary tsunami; probably the government will try to tackle it in some way, but will not be able to do much about it; so it will be strong deflation, at least for a few yeas.

The key to me is to understand what will happen to the different currencies. To me it seems that in both scenarios (deflation or hyper inflation) the UK pound will fare much worse than currencies in countries that will manage to keep inflation under control and avoid deflation (possibly Asia, Middle East, maybe Switzerland or Scandinavia).

Not so clear to me the outlook of gold and commodities in the deflation scenario.

Any views?

[Backseat Economist]

Still in the deflation camp. Stagflation phase though may carry on for longer than I thought.

As ?...! succinctly put it, the funds are going nowhere,velocity of supply has slowed to a crawl - at least for large assets.

The bailout for American banks is for them to recapitalise and wipe the slate clean - with reformed lending practices and tighter regulation.

The extra money will be a huge bung in " managing" the deflationary bust, but the overrriding amount of "value" created will still be wiped out.

DEFLATION - mark my words.

GT.

[gravity always wins]

DEFLATION

When I see wage settlement above 20% then I shall start to worry.

People cannot afford oil at $140.

Too much debt for consumers to be able to afford hyperinflation.

No collective wage bargaining anymore.

Globalisation is a deflationary force has been for decades.

[subsidiser]

Here's my thinking -

The government controls the printing press (or in fact the BOE controls the money supply). We might well be facing a deflationary scenario now (because of bank failures etc) but its not clear (because of high oil and food). As soon as deflation does become clear the government will ensure that they print enough money to prevent it.

Deflation is a catastophe. Its not a politically acceptable event.

[DC10]

Some inflation still to work through the system, but then years of DEFLATION

[winkie]

Deflation for now, but inflation is never far away.

[Yoss]

I think wages will deflate, as will housing, Food (As we know it today), energy and travel etc will inflate massivley.

so what should I vote?

[bearwithaconscience]

Asset price deflation (as much as 80% decrease in value)

Cost of living high inflation (40% already in some areas of basic living costs)

Overall result High inflation

Pay inflation continue to be lower than overall inflation leading to decreased cost of living

Major tax increases nipping away from the other side - both stealth and visible

New political party and huge decreases in public spending

Recessionary decade.

[Guest Skint Academic]

I have a theory that the more money they use as bailouts the more we are heading towards deflation. But because this is counter-intuitive, you'd normally expect inflation to be the danger and central bankers are more scared of deflation, the central bankers will carry on oblivious that they could be making the problem worse. After all, central bankers don't deliberately opt for hyperinflation or deflation, they end up with it by accident. For example the Weimar republic thought that there wasn't enough money, so they printed more, which made inflation worse, which made them think that there was a shortage of money.

The premise behind my theory is that wage inflation is kept at a minimum. There's plenty of reason to suspect that this will continue to be the case. Central banks and governments fear deflation more than inflation as it is more difficult to control once it happens, so they do what they can to keep wage inflation down (staggered pay rises for public sector workers for example). There's global competition keeping wage inflation down. People also generally do not ask for pay rises when they are scared of losing their jobs and are up to their eyeballs in debt. And then of course there is immigration keeping wage inflation down as economic migrants are prepared to do the work that the natives aren't prepared to as it does provide enough to live on for any length of time.

So the central bankers pump loads of money into the system by creating loans. This money doesn't go into the wider economy but just replenishes the reserves of the banks that are in trouble. But the money that was originally lent is still in the system and thus there is some inflation to the system. This goes to causing a short term rise in prices. Wage inflation always lags behind other forms of inflation so people end up with less money to spend on luxuries. This means less consumer spending which slows down the economy and exacerbates the recession. This means more people go bankrupt which means that the banks need to borrow more money from the central banks to replenish their reserves. This means that more bailouts are required.

Consumer spending may slow down, but people will always have to buy the necessities such as food, fuel and heating. The companies that produce these still have to attract the right people as they are the only ones that are doing OK. So the inflation that the bailouts cause is localised to the industries that are essential regardless of the economic conditions. Hence we get biflation, or stagflation. Non essential companies have less custom, therefore less need to employ people and can therefore can keep their wages down. But they also need to compete in order to survive, so they lower their prices as customers are able to afford less. So this is where the deflation happens.

Eventually this cycle continues until the central bankers run out of money or political good will and deflation takes hold properly.

[Pytyr]

Deflation

We've already had hyperinflation

[sithclone7]

It's not as black or white as D or I, It will be a mix much like we have now and takes time to work through the system as the wizards stir their broth. HP will D as with many over valued assets of recent times. As china starts to feel the effects of it's poison the I will hit the goods it currently supplies pushing manufacturing back to the west.

[Pezerinno]

Evening,

Deflation for me please.

Thanks.

[Little Professor]

Biflation

100% correct, guaranteed

[killerbee]

The house market has collapsed.

The stock market is collapsing.

The bond market will collapse.

Hyper-inflation

[narco]

Hyperinflation for me.

The monetary inflation of the last 10 years is already enough to bring the ponzi scheme down. Only confidence is holding it together.

Foreign treasury debt holders are currently keeping this scheme alive but are now losing confidence through the fear of reckless economic mismanagement.

Fiat paper has proven historically time and time again that it will return to it's intrinsic value extremely quickly.

[OnlyMe]

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul

[Guest Skint Academic]

Dear Friends:

...

Ron Paul

A really good letter that's difficult to argue against IMHO.

[neiloxford]

Hi,

Can somebody please answer me this.

Lets assume that unemployment increases in the short term, ie the next 6-12 months. Lets say that unemployment goes from 1.7m to 2.5m, does that not mean that circa 5% of people in the working age range( am kinda guessing on that %age ) are made unemployed. Does that not mean that 5% of take home pay for the average family will be lost. Now this is the crux of the question...does that not mean that employees will on average will ask for a 5% payrise to cover that lose. Ie If you have 20 people in your family all employeed and 1 looses their job then all the other members will be asked to cover the shortfall meaning all 20 people will ask for a payrise of 5% so the family still take home the same amount of money.

What impact on the government figures will a 5% pay rise above what has been expected over the last 10 years have upon inflation ?

Hope you get what I am getting at...

[OnlyMe]

A really good letter that's difficult to argue against IMHO.

Yes, it is not the money, it is what is done with it. Whether you spend more of it in an inflationary environment or less of it in a deflation environment it makes no odds.

Bailout the banks and what have you got, bailed out banks stuffed with personnel who are good at make appalling decisions and misallocating capital.

[kilroy]

Hi,

Can somebody please answer me this.

Lets assume that unemployment increases in the short term, ie the next 6-12 months. Lets say that unemployment goes from 1.7m to 2.5m, does that not mean that circa 5% of people in the working age range( am kinda guessing on that %age ) are made unemployed. Does that not mean that 5% of take home pay for the average family will be lost. Now this is the crux of the question...does that not mean that employees will on average will ask for a 5% payrise to cover that lose. Ie If you have 20 people in your family all employeed and 1 looses their job then all the other members will be asked to cover the shortfall meaning all 20 people will ask for a payrise of 5% so the family still take home the same amount of money.

What impact on the government figures will a 5% pay rise above what has been expected over the last 10 years have upon inflation ?

Hope you get what I am getting at...

If unemployment is rising, wages are falling. Anyone asking for a payrise will get laughed out of the office, period!