Sunday, February 8, 2009

Deflation, Deflation, Deflation

Bond Market calls Feds bluff as world falls apart

An article indicating that stimulus isn't working. A few on site think this is inevitable as it has been an attempt at a Keynsian blitz at the top of the cycle rather than at (or at least close to) bottom of cycle. I'm guessing I may not get many posts on this one !

Posted by bellwether @ 09:03 PM (1423 views)
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15 thoughts on “Deflation, Deflation, Deflation

  • The threat of deflation is absolute b*ll*cks….it is being used as an excuse to increase the money supply and inflate away debt. Oh and steal the money of savers………………………

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  • hpwatcher the article points towards the possible impossibilty of inflating away the debt, see also my comment in the header.

    If you are able could react coherently to the content of the article or post, please do.

    Thanks

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  • little professor says:

    Yes, the article explicitly states that the US and other countries will have little choice but to monetize the debt they are creating, thereby stoking inflation.

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  • Agree with hpwatcher. I think most of us with brains can recognise government propaganda when we have it forced down our throats week after week through the media. Inflating the money supply through the scare story of deflation will enable the prices of houses to miraculously rise again and rescue Labours popularity amongst the seriously indebted.

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  • gardeniadotnet says:

    What needs to happen for Zimbabwe-style hyperinflation to commence in the UK?

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  • Deflation sets in at a later stage, maybe in two years, when nobody accepts any of the bailouts. The market was deflating, government is inflating.

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  • I think inflation, as in a devaluation/loss of purchasing power of our currency in relative terms is looking certain. This will be within the context of asset depreciation in real if not sterling terms.

    Chris, someone “with brains” ! Bless you.

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  • If QE is certain to lower the purchasing power of GBP won’t it also lower the value of our existing debt? With this in mind, wouldn’t current renters with savings for a deposit in GBP be best to use that money to buy the most expensive house they can afford right now on the grounds that:

    1) The house debt will be devalued by inflation
    2) Savings may as well be put to use whilst they still hold a decent value

    In other words, if Zimbabwe-style hyperinflation is on the cards, shouldn’t we all go out and get mega-debts so they can be inflated away? Or is this just what they want us to think! 🙂

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  • Wage inflation is the symptom of hyper-inflation, rather than the cause. The spiral begins with a crisis in ‘confidence’ of the fiat currency i.e. people stop believing that it functions as a means of exchange and a holder of value. The confidence can be lost regardless of how much (or how little) regular folks are being paid every month. Also, the confidence crisis can occur outside rather than inside the country – foreigners stop believing in the worth (or value) of the currency.

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  • waitingfor hpc says:

    well with inflation, which i agree is happening. if we are buying a house or any product made in the uk (which admittadly there are not many) we will see deflation.
    how is inflation going to save those with debts? interest rates will rise… and then the real carnage begins.
    how does this policy help anyone? and with inflation we maybe talking 20/25%, i doubt that this will save anyone who is in real debt problems.

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  • Chris, someone “with brains” ! Bless you.

    Oh bellwether, you absolute bitch 😉

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  • TC you make a good point, there is no obvious mechanism and no appetite.

    I guess there are extreme ways of getting money into the system, revaluing the cuurency and therefore devaluing debt (very unlikely), huge tax rebates, so called debt jubilee – govt pretty much controls banks etc. We seem a way from these and such a policy contains the rapid growing seeds of its own destruction as capital and credit would evaoporate leaving us no netter than a south americam or even african state. However incompetent the govt I cannot see the happening.

    A more subtle way of inflating money supply is to buy up govt debt but again I cannot see the UK being given much quarter in this. Indeed the fact that no-one will extent us further credit in such circumstances might be a saving grace in a way. The hyper inflationary implications of what we were doing would be too stark. Bear in mind that the growth of house prices based on credit has already been hugely inflationary.

    While I don’t currently see hyper inflation, I do think that our currency will continue to devalue against stronger currencies and commodities and will be capable of buying less foreign goods, labour. We will be forced to retrench and produce more but that is something that we hardly have a great track record at and it is has become a very competitive niche

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  • mountain goat says:

    I am confused by the use of inflation and deflation here. Normally bond market rates going up signals fear of inflation. But this article keeps talking about deflation, when he means falling prices. So I forget the whole inflation deflation debate and see it like this.

    Bond rates are going up and will continue to go up because bonds lose their safe haven appeal. The situation we have is as follows:

    Normally government debt is the safest there is. The government controls the money supply and so can always pay you back. Now today there is a lot of dangerously toxic bad debt around which after some confusion about off-balance-sheet vehicles turns out to be the bank liability. So the banks are insolvent share prices collapse etc etc. Governments think a banking collapse must not happen so they take the bad debt away from the banks and keep it themselves. But this is still toxic debt which now makes the government less safe.

    Add to this governments throwing money around at bailing out one ailing industry after another. Add to this the world economy is grinding to a halt so governments will earn less tax revenue. Also an ailing world economy means less money to buy up government debt.

    What we are left with is government debt being the next shoe to drop, the final shoe to drop, sky falling-down panic, terror in the streets. The panic will only be because of a shattering of the illusion of safety. Currencies collapse one after another. After a while it settles down and everyone gets used to the idea fact that now anything of material value costs 10 times as it did a few years ago. Is this inflation? I don’t know or care I just want to keep seeing things as clearly as I can to avoid getting into a panic and losing all my savings.

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  • MG a flight of capital from bonds because of a fear that the return will be made but in a debased form is what I think you are describing and that this flight then making matters worse causing the faith in currencies to collapse and at the same time (inevitably) the currencies themselves. Only thing is where would the capital (albeit every diminising) go?

    Anyway I think what you describe is is a worthwhile fear at the outerlimits of what might happen but even at that point wouldn’t countries simply turn inwards as happens during war (speaking of which another real possibilty at outer limits) and in so far as they are able, muddle along with what they have – trading their own “worthless” currency internally – currency in this context being simply an agreed denomination in value, a way to barter, shared meaning . Isn’t the problem with eg Zimbabwe out and out madness along with no internal resources or for that matter system. Remember that the Nazi Germany which was at least a system and a common goal solved hyper inflation very quickly

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  • mountain goat says:

    BW – Only thing is where would the capital (albeit every diminising) go?

    That is the question! I remember reading an article on this site a few years ago how an economic collapse will be heralded by a series of bubbles. Wev’e had dot-com, real estate, commodities and bond bubbles. I think we will get a precious metals bubble soon. Some think we are already in a PM bubble but I expect a sharp fear driven blow off way over $2000 an ounce in gold but it should include silver and platinum group precious metals too. After that who knows? I hope there is no war. People need food and shelter. agri-food and at some point housing will be worth investing in again?

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