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October 09, 2008 – Comments (11)

I just ran into a very well written post on deflation by Robert Prechter over at Safehaven. 

I like the post because it is exceptionally well organised.  It enables me to read it and to consider deflationary history and then to consider what might be different today (didn't I just read somewhere, like a most recommended post today, that $3.8 trillion has been spent trying to keep the markets liquid?)

What don't I know?  I don't know how big that injection is relative to the existing cash money supply as opposed to the money created through credit.  That is a whopping 13k for every man, woman and child in the US and that is simply scary.

I looked a little more around the website and this guy explains inflation and deflation very well.  Actually, the above post is contained in this broader write-up. This really is worth a read and I am considering getting this guy's book.  

I am still thinking deflation because as much money as they've put into the markets I still think credit is contracting fast.  But it is scary...  Certainly should the market change that credit can expand and be leveraged grossly out of wack again it would be inflationary because there's no question the base has gotten considerably bigger.

11 Comments – Post Your Own

#1) On October 09, 2008 at 9:25 PM, Jhana9 (21.85) wrote:

Excellent write-up. Thanks.

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#2) On October 09, 2008 at 9:38 PM, dwot (49.06) wrote:

I had to laugh when I read BeSpoken.  There is no official admitting that we are in a recession, however, with a 25% drop in the stock market it is fair to say there was a stock market crash.  But hey, since we aren't really in a recession that really wasn't a crash...

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#3) On October 09, 2008 at 9:57 PM, gman444 (28.68) wrote:

Dwot,

Your posts are much appreciated, and you obviously study the markets carefully and think for yourself.  I've been pondering your perspective more and more lately....I've evolved from a position very similar to yours to a somewhat modified view (had I stuck to my earlier "doom and gloom" my real money portfolios would be a lot better off...sigh).  

But I think that now is not the doomsday deflation; that will occur in the future---rather, I believe we will rally soon pretty significantly, so that inflation resumes.  Part of what I think is happening now is a transfer of power away from the US and Europe, to the BRIC and other emerging economies; corporate and other US entities will remain major players on the world stage, but as a country, our power and influence is being significantly reduced.

My question for you is twofold:  How open is your perspective to modification, and what would have to happen for you to think that the doomsday deflation may be preceded by hyperinflation, or some combination of inflation/stagflation?

Thanks again for your posts.

 

 

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#4) On October 09, 2008 at 10:10 PM, alstry (35.42) wrote:

Nice post.

Is that really your picture????

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#5) On October 09, 2008 at 11:14 PM, dwot (49.06) wrote:

gman, I am watching it closely.  When you consider that overpriced assets were used for reserves which were then leveraged to say 40 times the value, well, taking the credit down by 10%, well, you'd have to print 4x the existing money to offset that, but then of course the leverage ratio would be ok.  But they didn't print 4 times the existing money...  They increase the existing money by say 50% and the credit contracts 10%, well that money printing only replaced 12.5% of the lost credit, and it is still way leveraged.

And the term stagflation is the most misconstrued word going, completely demonstrates the post I linked is not generally understood.  Stagflation implies price increases and wage declines implying that inflation is price increases and deflation is price declines.

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#6) On October 09, 2008 at 11:18 PM, dwot (49.06) wrote:

Yes alstry, that is really my picture.

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#7) On October 09, 2008 at 11:37 PM, alstry (35.42) wrote:

I am technically incompetent.

It is amazing what some of you guys and gals can do with imbeds and pictures.

Again, nice  discussion on inflation/deflation.

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#8) On October 10, 2008 at 1:22 AM, dwot (49.06) wrote:

alstry, I didn't do that.  I think that anyone that makes it to the top 100 players can send in a picture and you can get a personalized avtar.

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#9) On October 10, 2008 at 1:32 AM, MikeMark (29.39) wrote:

Thanks, Deborah!

You may have saved my family from lots of pain in the next ten years. After going through many of your past posts and interests, I'm nearly completely out of the market. I have a much greater understanding of why certain things could happen and when.

Lucky me, I missed most of the recent drop.

Thanks again

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#10) On October 10, 2008 at 3:08 AM, dwot (49.06) wrote:

Mike, glad to hear you missed most of the recent drop. 

 

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#11) On October 10, 2008 at 12:20 PM, gman444 (28.68) wrote:

dwot,

 Thanks for your response--I only have a minute to reply as that inconvienent day job is getting in the way.  I will read more about stagflation tonight.

Unless I misunderstand, you make my point.  First, do we really know how much money has been printed?  There can be only one reason why the govt. stopped releasing M-3 data.  Second, what the present deleveraging does is to provide a pause in the longer term inflationary trend.  If my theory is correct, and the markets rally, things will go back to business as usual for awhile, and inflation will resume.  This sets us up for a doomsday deflation down the line which will make the present problems look tame.  I will write more in depth tonight......

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