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Is it deflation?



October 10, 2011 – Comments (18)

I got onto the deflation bandwagon back in 2007-2008. 

I just saw this post on Calculated risk showing that household incomes have declined significantly during the so-called "recovery."

Now, I don't think the market has behaved with what I see as the reality of the economy.  This is a huge decline in spending power and it has to hurt the bottom line for many businesses.


Deflation posts:


18 Comments – Post Your Own

#1) On October 10, 2011 at 6:12 PM, alstry (< 20) wrote:

It's Zombulation....

rising food, fuel, commodities, taxes and insurance costs......

collapsing wages and home values as delveraging and advancing technology replaces the need for people to work.

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#2) On October 10, 2011 at 6:42 PM, alstry (< 20) wrote:

In some nations, food consumes upto 80% of a family budget....

as wages keep declining in America and Canada, and food prices rise.....we will definitely see social issues on a scale our countries have never seen before.

Peanut butter gets nuts
Commodity costs are powering increases of as much as 40% in peanut-butter prices in the coming days.

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#3) On October 10, 2011 at 6:50 PM, chk999 (99.97) wrote:

Inflation and deflation are defined as rises or drops in the general price level. The prices of individual things will rise or fall as supply and demand contend.

So far nobody has shown any examples of large scale deflation in a fiat currency, so I think it is unlikely. I think we will get pretty high inflation at some point, but not yet. There is too much idle capacity to get us into the wage/price spiral that really makes inflation roar. 

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#4) On October 10, 2011 at 6:51 PM, lavillex (63.05) wrote:

I have witnessed the decline for 40 years. In the 60's and 70's a person could get out of high school and find a good manufacturing least around here (the midwest.) It did not seem great at the time but you could raise a family, have a modest home and consider yourself living the "American Dream." I am afraid those days are gone...for now anyways. I wish the best of luck to all the young people here and hope the situation gets better for all someday.

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#5) On October 10, 2011 at 7:29 PM, Frankydontfailme (29.38) wrote:

Well if you define deflation and inflation relative to prices, then don't hold your breath (as chk suggests).

However, this standard definition of deflation/inflation isn't particularly meaningful in our present situation. Prices may rise due to an increase in the money supply, an increase in demand (where the supply takes time to catch up to demand - such as difficult to establish copper mines), or a decrease in the supply of a key component in goods. So... its complicated. With peak oil production upon us, we can expect higher prices for virtually everything.

I would instead recommend defining inflation/deflation based on the money supply + credit. Since 2008, the western world has been in a default hyperdeflationary scenario. Massive amounts of credit must be written off - from mortgage debt to sovereign debt. What central banks have done, however, is to print absurd amounts of money (I get it, the money is stuck in reserves and won't be lent out... doesn't matter). Furthermore, most western nations are running absurd deficits, and thus expanding sovereign credit. The boom from 2009 on was entirely caused (IMO) from central banks printing, and nations deficit spending to overcome the amount of credit contraction. We haven't seen the end of credit contraction (anywhere close), but we also haven't seen the end of money printing (absurd deficits continue, BOE initiating quantiative easing, ECB buying bonds etc).

So how does it end? No one can know. Clearly a lot of debt has to be defaulted on. If nations flat out default then we will a deflationary panic. If central banks/nations print to overcome it we will have inflation instead. At some point though, the printing has to stop or we will have hyperinflation. I give these central bankers zero credit, but they are at least not complete lunatics. Also, quantitative easing loses its shine once interest rates are at zero. This is why I think we will eventually move towards a deflationary contraction of credit.

Prices will rise nonetheless. Peak oil will be painful until we transition to nuclear (moving away from it at the moment). Also, western currencies will be shunned in the coming decade as our government's continue to print/default and asia continues to expand and run surpluses.  Confidence in the currency is another element that can cause "price increase inflation" that is often overlooked. So, my vote is an extreme case of stagflation leading to the slow decline of the western world.... if only we can go out with dignity (unlikely).

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#6) On October 10, 2011 at 11:27 PM, devoish (82.57) wrote:

Now, I don't think the market has behaved with what I see as the reality of the economy.  This is a huge decline in spending power and it has to hurt the bottom line for many businesses.

 - Dwot

I don't know. I think that the stock market is connected to the economy. I agree with you that the bottom line for many business's has to be hurting, we see that in the struggles of stores like sears who catered to a middle class that is going away, and the success off 99cent stores and Ralph Lauren at the top and bottom.

I am beginning to suspect that stock price recovery did not reflect a strength of the overall economy, but an income distribution where a very few have so much money they have nothing to do with it except buy stocks or gold. So money is going into stocks, and out of the economy, and stocks go up and the economy goes down.

I don't know, it is just a glimmer of an idea I have not quite wrapped my thoughts around or figured out how to support with numbers.

Best wishes,


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#7) On October 11, 2011 at 12:14 AM, outoffocus (24.08) wrote:

Sounds like stagflation to me. But I'm sure they economics will figure it out in a decade...

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#8) On October 11, 2011 at 2:48 AM, walt373 (99.90) wrote:

I think that the odds are tilted more in favor of deflation right now. The base case, if you assume the governments did nothing and let the economy run its natural course, is deflationary because of continued deleveraging in the private sector. So you have to look at political appetite for fiscal stimulus. That is nil in Europe, low in the US due to the downgrade and subsequent focus on cutting the deficit, and low in China due to the inflation/speculation problems they are trying to fix. As for the future, that is open to speculation. Governments clearly have the power to create inflation if they want to. But I don't think inflation will happen until they lose their desire to "tighten their belt".

So money is going into stocks, and out of the economy, and stocks go up and the economy goes down.

Money can't really "go into" stocks in aggregate, as the seller gets an equal amount of money that the buyer paid.

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#9) On October 11, 2011 at 3:03 AM, FleaBagger (27.34) wrote:

Ever heard of the 1970's? It's called stagflation.

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#10) On October 11, 2011 at 12:30 PM, chk999 (99.97) wrote:

Changes in people's standard of living isn't inflation or deflation, it is changes in standard of living. It is important to keep concepts straight.

Old joke: 

"If you call a tail a leg, how many legs does a dog have?"

"Four. Calling a tail a leg doesn't make it one." 


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#11) On October 11, 2011 at 12:30 PM, leohaas (29.47) wrote:

Isn't the reality that stock market listed businesses have been making record profits? And wouldn't that mean that the stock market should go up?

Clearly, it is not deflation. After all, deflation increases the value of money. There are plenty of folks here on CAPS who can explain (better than I can) that the value of money is not increasing. So deflation it is not.

Perhaps you are confusing deflation and deleveraging? Because deleveraging is definitely going on:
 - foreclosures and short sales of homes are up
 - more folks filing for bankruptcy
 - businesses are keeping record amounts of cash on their books rather than reinvesting it
 - fewer businesses obtain business loans
 - mortgage standards have increased significantly making it more difficult to get a mortgage

Deleveraging will continue for awhile. To ensure that that will not drive us down a depression, stimulus was (and still is) needed. That will ensure that ultimately the bottom is not as deep as it would be without stimulus, that fewer individuals and business will end up having to file for bankruptcy protection, that fewer folks will be forced out of their homes, that fewer folks will lose their jobs, fewer folks will end up on food stamps (or worse), and so on.

Granted, we'll all pay for that through inflation. So deflation is it definitely not. OOPS, I already said that...

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#12) On October 11, 2011 at 1:10 PM, Frankydontfailme (29.38) wrote:

Leohass - the value of money IS increasing, check the value of gold over the last decade.

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#13) On October 11, 2011 at 1:19 PM, walt373 (99.90) wrote:

Correct me if I am wrong but this is how I see it, why I think deleveraging causes deflation:

If you have increasing debt, that causes inflation because you have the same amount of goods being chased by additional money entering the system, as borrowers spend their borrowed money.

When the system deleverages, the reverse happens, and the borrowed money exits the system, meaning less money is chasing goods.

So all else being equal, deleveraging should cause deflation. But if you have other effects overwhelming that, it can lead to inflation. For example, if deleveraging causes a recession that gets so bad that production drops to zero (Armageddon scenario), you will have less money chasing even relatively fewer goods available, and that's inflationary.

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#14) On October 11, 2011 at 1:22 PM, leohaas (29.47) wrote:

#12) The value of gold expressed in fiat money has indeed increased. But I guess that is not what others on this thread were referring to, is it?

PS. Still don't know how to spell my name. Is it really that difficult to get 7 characters in the right order?

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#15) On October 11, 2011 at 1:29 PM, walt373 (99.90) wrote:

By the way... if gold is money, shouldn't gold decrease in value vs. real goods if there is hyperinflation? Sure it will skyrocket in dollar terms but if it gets to the point where food is scarce, I think gold will buy less of it?

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#16) On October 11, 2011 at 3:00 PM, Frankydontfailme (29.38) wrote:

Nice Walt, food would likely be valuable in a hyperinflation, maybe even compared to gold.

But it depends on where you are. If the dollar hyperinflates, the chinese would rush into gold, silver, the yuan and everything else that isn't the dollar. There wouldn't necessarily be food shortages in China due to a dollar hyperinflation, if anything China might be able to import quite a bit of food from America for cheap. 

For Americans, food would certainly be a priority over gold. Once the food situation settled, people would want money :)

Honestly though, I don't think we'll have a conventional mass hysteria hyperinflation. I think the US government will selectively default on some foreign debt - which will cause many nations to move away from the dollar. Along with the already present money printing, the psycholigical affects will take-over and people will lose confidence in the dollar. Over a period of a decade the dollar will lose over 50% of its value... maybe the government will "temporarily" back the dollar with gold (not redeemable)to stem the tide. And for the record, I can imagine (but don't predict) the dollar becoming much stronger in the next year so don't yelp at me until its been at least 5 years.

loehaass- fine/chk. Fine, if you define deflation the way most economists do. Arguing about whether prices are going to increase or decrease in a vacuum is asinine in my opinion so I prefer to use the austrian definition of increase/decrease in the money supply.  You can define anything anyway as long as you clearly say you are defining it such (as I did).

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#17) On October 11, 2011 at 5:09 PM, walt373 (99.90) wrote:

Interesting. So I guess you can get inflation in two ways - either supply of dollars goes up or supply of goods goes down. The end result is the same, that the dollars/goods ratio increases. In the former, gold rises vs the dollar and maintains its value against real goods. But in the latter, both the dollar and gold fall vs real goods. You can have hyperinflation in both cases. So gold does not completely protect you against hyperinflation.

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#18) On October 11, 2011 at 5:38 PM, Frankydontfailme (29.38) wrote:

But what you have to realize about the fall of goods (due to peak oil), is that you would also have less gold ( we are already at peak gold production). In fact, gold production is highly correlated with oil production.

Also, the dollar can inflate because of increased supply as well as well as reduced confidence. This point I cannot emphasize enough. If our deficits persist and our economy does not improve, the world will move away from dollars. The value of a currency reflects its availability (supply) and the desire for it based on the confidence  for the productive capacity of the nation's people (demand). Supply and demand, like everything else. The same could be said for gold.

In a hyperinflation gold usually gains in real value because the demand for money supersedes all (assuming food is available of course). While the poor scramble for food, the rich are looking to protect their wealth. Also, hyperinflations tend to be associated with political instability (to understate) and so the rich are often looking to flee the country with their wealth. Since it's pretty easy to flee with gold, gold's value skyrockets relative to virtually everyting (even silver). If their isn't political instability, silver may actually gain against gold as people rationally look for anything that can be conveniently used as barter (at least this is what I've read about the hypers in Argentina and Germany).

Anyway it sounds like we pretty much agree, but I wanted to emphasize these technicalities as they are often overlooked.


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