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Credit Contration = Deflation



July 12, 2008 – Comments (9)

I am still in the deflation bandwagon, and with saying that I don't accept price increase or decrease as a definition of inflation or deflation, but the expansion or contraction of money supply as the definition.  Price increases and decreases are lagging indicators and can be simply because of other things, like supply and demand.

John Mauldin has a piece that shows a beautiful graph of credit contraction which ultimate is a contraction of money supply. The graph is about 1/3rd the way down the article.

If you haven't read John Mauldin's stuff, well I recommend giving it a read.

9 Comments – Post Your Own

#1) On July 12, 2008 at 7:58 PM, dwot (29.20) wrote:

Naked Capitalism on deflation...

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#2) On July 12, 2008 at 8:06 PM, DemonDoug (31.27) wrote:

Monetary considerations

Industry and agriculture, transport and power, and similar production and consumption expenditures account for less than 0.1 percent of the economy’s flow of payments. The vast majority of transactions passing through the New York Clearing House and Fedwire are for stocks, bonds, packaged bank loans, options, derivatives and foreign-currency transactions. The entire stock-market value of many high-flying companies now changes hands in a single day, and the average holding time for currency trades has shrunk to just a few minutes.


Debt deflation will hit the FIRE and Government economies while it will increase the flow of funds into the P/C economies (where inflation is measured).

I think after my recent blog posts, failing to convince the doubters, I'm going to create a blog post as a primer on inflation, including all the resources I have used to find the truth about inflation and deflation, and why it is inflation we see.

Incidentally Deb, in that link you provided, I wanted to give you a little statistical analysis.

Word          Number of times used

Deflation              0

Inflation               1

Looks like the home team won that one in a pitcher's duel. :D

How's that oil dropping prediction working out for you by the way?

BTW, I really suggest you start reading itulip.  Eric Janszen is one of the best if not the best economists out there showing you the truth in the markets, and he does it in a very readable, sometimes very entertaining way.  Here is a recent example:

Peak Cheap Oil Diaries: Anatomy of a collapsing government sponsored oil anti-bubble

June 6, 2008, iTulip

by Eric Janszen

Oil is not “too expensive” now, it was “too cheap” before

-Global central banks, by inflating the value of the dollar since 1971, distorted the oil market for decades, exaggerating oil demand, and causing over-consumption and rapid depletion

-Soon after the start of the Iraq War in 2003, markets began to reassert control of oil prices as US political influence waned

-As the housing and other FIRE Economy asset bubble markets started to deflate in 2006, markets began to wrest control of the dollar’s exchange rate value from the weakened dollar cartel known as global central banks

-Now we have too many dollars and not enough oil

-Ten reasons why oil cannot ever be an asset price bubble

As oil price spikes drive up the cost of everything that requires oil to grow, be dug up, blown, packed, scrubbed, crushed, shaken, warmed, cooled, pickled, packaged, processed, or moved – that is, everything on God’s green earth including your own hair and the hot water you used to wash it this morning – the phrase “oil bubble” gets thrown around these days as carelessly as dead cat at a dead cat bio-diesel manufacturing facility.


c'mon you have to admit, you have to smile at that last analogy. ;)

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#3) On July 12, 2008 at 8:18 PM, dwot (29.20) wrote:

Doug, I've looked at tulip before and I probably couldn't figure out how to feed it to my reader which is why I don't read it. 

So far that oil prediction isn't working out, but it isn't over yet...  I've been down over 100 on several caps picks that I closed out positive, eventually.

Another scary post on ... book value perhaps - bloggers rule.  The predition that true value is from 56 to 75% of book value at Indymac is terrifying, really...

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#4) On July 12, 2008 at 8:39 PM, dwot (29.20) wrote:

This story really touches me.  I've taught at Terry Fox High School and being his home community his story and what he did for cancer research is always a big deal with the annual Terry Fox runs for cancer we've had since his death.  And then there are always people who met him, or his family members that speak at the school every year. 

I was at Terry Fox in September and they had the annual assembly honoring his mission and it was very touching listening to a woman talk about watching him do his training for his "marathon of hope" on the hills in Coquitlam and then how confident she felt that she would beat breast cancer when she got it because of him and what he did for cancer research.

Back in 1980 he raised more that $1 for every man, woman and child for cancer research, an enormous amount of money for the time.  I personally found the money very evident as I did so much anti-tobacco work in the 80s and 90s and you never had any problems getting supplies to take to a school from the Cancer society whereas the Lung Association or Heart and Stroke Association were stingy about supplies.

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#5) On July 12, 2008 at 8:44 PM, mrpickles (26.77) wrote:

I think the real deflation will not start until the fed is forced to start raising rates. Then deflation will be fast and furious.

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#6) On July 12, 2008 at 8:54 PM, DemonDoug (31.27) wrote:

Unfortunately the main body of all of the itulip's articles are in their messageboards so that may be why it's screwing up - it's not in a blog format.  They also use their own coding too.

I think you would really, really like what they discuss over there.  They are just as doom and gloomy as you are, in fact I get the same vibe from you as I do from many of the posters over there (although many of them are grumpy old men types, most are highly intelligent).  The discussion on itulip gets insanely complicated sometimes, talking like 500 level macroeconomics courses.

From the naked capitalism post, please look at what akrowne said:

Debt deflation is here, but we're *still* getting monetary inflation in the real economy -- that is because of global dynamics. Plenty of "money" has been printed... 90% of it could disappear and if that last 10% sought safe haven in commodities, we would have hyperinflation. Global hyperinflation.

This goes hand-in-hand with what I'm tryyyyyyyyyying to educte you on.  Real inflation is in the production/consumption economy.  Where the real assets are - as opposed to paper or digital assets.

This seems to be the one big undercurrent that I now see is the difference between inflationists and deflationists.  Inflationists understand that there are 3 major types of economies working with and against each other at all times, with the FIRE economy owning the bulk of the money and transactions.  Deflationists seem to not understand that when the Fed gives out a 100B loan that will never be repayed, 99.9% of that loan stays in the FIRE economy, while only .1% trickles into the P/C economy.  Except now more of that money is going into the P/C economy (mostly in the form of precious metals, ag, and energy plays), and hence, inflation.  I'll get my primer on inflation up on Sunday, hopefully you'll be able to read some of it Deb.  

In the meantime, I highly recommend you check out this site:

I'm trying to see where he first came up with the FIRE economic theory. Earliest mention I can see is from 1997.

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#7) On July 13, 2008 at 1:51 PM, mgiv (44.25) wrote:

dwot,  I'm with you on that.  Deflation yes. Oil bublle burst yes.

The credit contraction will dictate all prices.

I started shorting energy sector stocks as well because I believe the top has come in.  There may be some short term pain but I feel my risk is limited at this point because I don't see another 50% increase in share price at these levels.  If I do have short term pain I simply will not let these picks go because I know they will come down. 


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#8) On July 13, 2008 at 3:26 PM, ATWDLimited (< 20) wrote:

I see where the deflationary aspect is coming from, but I though Inflation, is caused by money supply, or M3. The liquidity of the US government as a lender is increasing, at the same rate, the banks, etc are decreasing, so to me in the end the deflation if any will not be severe, in fact there could be extreme expansion and inflation, as we have seen, total M3 is up 20% this year so far, the Federal Reserve is flooding the economy with loans, and bills to bailout the banks, so the deflation may be overrun by the printing press of the Fed. Plus don't forget that emergency discount window can always be opened up. Consumption/Supply inflation is still here for basically materials, so prices will remain high. There are more $s chasing the same energy, which is needed for everything, so prices will remain high.

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#9) On July 15, 2008 at 9:05 PM, lquadland10 (< 20) wrote:

Why is it when a CEO gets a million dollar pay raise that is not inflation is a job well done but when the janitor get a pay its called inflation. I just don't get it.

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