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DemonDoug (99.67)

Yup! Still Deflation

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April 16, 2009 – Comments (23) | RELATED TICKERS: DEF

In case none of you have bought milk, eggs, or bread recently, the data has confirmed: We are still in deflation (warning: pdf).  Mike Shedlock (Mish) wrote a very detailed post Deflation Has Gone Global that outlines deflation in the US, Germany, Japan, and China.  Back in January I wrote a blog Why I have been convinced we are in deflation - that post along with all the comments are great reads for anyone who missed it, and this can be considered a follow up.  My main prediction then is that it is likely we would have deflation for at least the next 6-12 months, and so far that has been proven true by the data.

I would like to remind all members reading this post that I am neither an "inflationista" nor a "deflationista."  As in all things in life, I am a realist, and I do my best to try to see things as they currently are.  I am not married to any one theory or way of investing, although generally speaking I am a long-term buy-and-hold investor.  So please, any comments here, keep in mind that I am not a "hyper bear" as some have been wont to describe, but by the same token I'm certain not a cheerleading pollyanna.  I oftentimes argue vehemently against the pollyannas, and that is usually because I'm right and the fundamentals are completely against the ramblings of brainwashed idiots bullish arguments.  Deflation is very, very bearish for many types of investments.

For example, here are 3 things that do really bad in a deflationary environment:

1. Stocks (less money * velocity means less liquidity which means lower prices, not to mention the fact that many companies continue to be completely overleveraged and are being propped up by government support and are in effect failed zombie companies at this time)

2. Commodities.  (This would include anything from copper to water to oil to real estate; gold is up for debate, can be considered commodity or currency)

3. Any entity with debt (people, companies, governments)

Things that do really well in deflation:

1. Cash/money (gold bug deflationists claim gold is money which is why it would do well in inflation - the jury is still out on this one, and I'm not ready to claim a winner either way; tbills while technically bonds are as liquid as cash and can be considered cash for now)

2. Visionary entrepreneurs - regarding this, I consider many Top Fools as visionary entrepreneurs, and while many bash the scoring system, I'd be willing to bet that the top CAPS players are soundly beating the market, and many probably have even been net positive in terms of their total returns over the past 12-24 months.  I can cite dwot specifically who I'm fairly sure has 100% of her investments in cash/government bonds and owns no stocks.  I could also cite EverdayInvestor (who documented his trading profits in a post late last year) because in deflation markets tend to be wildly volatile, and volatility = profits for people who know how to trade markets.  If you are not a trader, you should be mostly in cash if not 100% in cash/gold.

In any case, here is the chart that shows that we are clearly in deflation currently:

(courtesy of Mish, red highlights are his)

As I see it, cash is probably the best thing to own right now.  Even the best blue chip stocks won't do too well for the LTBH invsetor over the next few years.  The current rally is, in this light, one of the biggest headfakes/sucker rallies yet, possibly worse than the Nov-Jan rally.

Here now is a lesson in current events.  Some still mention hyperinflation or high inflation (much as I thought I was seeing last year), and I can't but help to think about Zimbabwe.  Zimbabwe's hyperinflation got kicked off by the central bank and executive government of that country when they raised salaries for all government and military employees.  One of the main ways that governments create inflation/hyperinflation is by simply paying its individual employees and officials more money in printed money.  And the reason I bring this up is this news item: L.A. Unified moves to cut 5000 teachers and others.  This is deflation in action.  When government bodies start shrinking and jobs start contracting, you know that money is not being printed willy-nilly as a quasi-government handout, and therefore the deflationary market forces will continue to pull down prices, growth, and valuations.  The inflationary forces of increased hiring on the federal level will be not be enough to overcome the deflationary forces of the local, county, and state layoffs that are happening all over the country.  This is a continuation of the vicious cycle of deflation that is now happening globally, as Mish pointed out in the link at the beginning of this blog post.

OT: I nominate myself for the "Best Tickers on CAPS Blogs" award.

23 Comments – Post Your Own

#1) On April 16, 2009 at 9:10 PM, alstry (39.63) wrote:

We will have inflation one day....just probably not for a while.

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#2) On April 16, 2009 at 9:49 PM, GeneralDemon (74.50) wrote:

Last year, when I first came aboard on CAPS, I wrote a blog on why there was not going to be inflation any time soon. As one of my arguments, I stated that past inflation was caused by over-employment (both Zimbabwe and Wiemar).

Over-employment is typified by increasing salaries at the same time as decreasing productivity. As you reposted Mish today:

"Zimbabwe's hyperinflation got kicked off by the central bank and executive government of that country when they raised salaries for all government and military employees.  One of the main ways that governments create inflation/hyperinflation is by simply paying its individual employees and officials more money in printed money."

 And yet, you, Doug, posted this on my Blog from last August:

 My Statement:

You can't have excessive inflation without salaries going up. Period. Are salaries going up?

#3) On August 21, 2008 at 5:12 AM, DemonDoug (99.93) wrote:

You can't have excessive inflation without salaries going up. Period. Are salaries going up?

On what basis do you make this statement?  I can give you zimbabwe, weimar germany, argentina in the past 20 years, and mexico as examples of very high excessive inflation without salaries going up... and with very high unemployment i might add.  

M3 is still 15% higher on a yoy basis.  Alternate CPI shows inflation higher than at any time since 1981 - which is also where the official numbers are starting to come from.

Your statement, while it may be logical, is not backed up by any facts, and in fact can be refuted by many many historical (and present!) examples of exactly the opposite.

 

 

On my next blog, you called me a liar and misrepresenting the facts. 

So... Doug, are you man enough for an apology?

BTW, a lot of people (I'd say the majority) had the same (wrong as it turns out) opinion on inflation at the time, but you attacked me in a personal way by calling me a liar.

 

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#3) On April 16, 2009 at 11:01 PM, Option1307 (30.71) wrote:

Speaking of Mish, did you happen to catch his piece on why the massive printing of money is not inflationary, yet...

It actually is linked in the original article you are talking about, but just wanted to point it out in case anyone missed it. It's a really good read and an interesting take on things.

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#4) On April 16, 2009 at 11:01 PM, WCWlooky (23.68) wrote:

I have heard of a call of deflation this week somewhere in Europe. I have been feeling very Bearish and feel this rally is a sucker for sure. I follow an advisor who is very bearish and claims that a steep drop is coming soon. I honestly must admit I do not know a whole lot, but am trying to learn. I would like to get in short on the coming fall, but am little chicken to bet it all.

I am in cash, but no gold yet, Wondering if high 800 gold is good price. I have always been told to be very careful with gold because the worlds governments hold so much. just rambling and looking for sincere advice, opinions, ideas and feedback

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#5) On April 16, 2009 at 11:47 PM, DemonDoug (99.67) wrote:

GeneralDemon, in your original post, you offered no specific facts to back up your statement.  Had you pointed out that Zimbabwe had given it's elected officials, government workers, and military personnel a 300% raise which started their hyperinflation, I may have recognized the deflation sooner.  Zimbabwe's unemployment rate at it's worst was 90%.  Are you telling me that 90% unemployment is "overemployment"?  While I agree that increasing salaries with decreasing or static production, you can still have a lot of people making little to no money and have high inflation.  Argentina is a great recent example of this.  Weimar hyperinflation was also not directly caused by overempolyment, the impetus for that hyperinflation came from other countries forcing germany to pay reparations for WWI.

I have admitted I was wrong.  Did I dishonor your family or something by disagreeing with you last year?  Didn't think so. And now coming around and challenging my manhood for an apology?  If that's how you really feel about it, I'll make sure to not have an opinion on any of your blogs or comments going forward.

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#6) On April 17, 2009 at 12:43 AM, kaskoosek (99.68) wrote:

I can give you an example of hyperinflation where salaries were lagging behind inflation.

It is Lebanon in the 1980s.

Another example would be iceland in the 2000s.

 

In both these cases the major reason behind the currency collapse was huge trade imbalances. Foreign holders of these currenies or assets tried to get out the door at the same time.

 

As long as the US economy is suffering from a negative balance, means it is still hemmoraging dollar to the outside world. As long as appetite for these IOUs is still there, the dollar keeps afloat. When sentiment changes again to the worse, I would expect the dollar to falter against other currencies and commodities.

 

We are talking about imported inflation rather than a higher money supply in the country itself. That is what was happening in 2008 and which in my oppinion willl happen again, because we are repeating the same blunder again.

 

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#7) On April 17, 2009 at 3:43 AM, hall9999 (99.64) wrote:

  If there's no inflation then why do candy bars now cost $1.00?

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#8) On April 17, 2009 at 4:14 AM, kaskoosek (99.68) wrote:

I would like to add one thing.

Paper currency is not money, because an infinite supply of it can be easily printed.

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#9) On April 17, 2009 at 6:37 AM, dwot (99.88) wrote:

Yep, I went 100% cash and bonds...

But I am buying a house in two weeks so soon I will have the traditional "most important" investment again.  

The numbers work out that it will cost me a little less to own then to rent and I will be ahead if I have a roommate, which is likely given it is a 4 bedroom house.  I might even convert it to a 2 bedroom upstairs and a 3 bedroom unit downstairs, and then I would have an extra income flow of about $1k per month.  Not sure how much it would cost me to convert.

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#10) On April 17, 2009 at 7:26 AM, outoffocus (26.88) wrote:

Wow so Alstry is finally admitting there will be inflation at some point.  Thats the main problem I had with the "inflation vs deflation" argument. Most people would say its either hyperinflation or deflation. I've always said we're going to have deflation first then inflation; mainly because Bernanke is going to overshoot the "economic recovery" by a long shot (at least a year) and he wont be able to raise interest rates in time.

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#11) On April 17, 2009 at 12:40 PM, DemonDoug (99.67) wrote:

Hall:

Candy bars at my local drug store are way cheaper.  In vending machines and in ballparks/themeparks they are a dollar due to inflation that has occurred over the past 94 years, not the past 6 months.

Kaskoosek:

Money is a medium of exchange outside of direct barter and trade.  Paper currency very well fits this definition because you can trade that paper for goods and services.  If there comes a day you cannot, at that point you can say it's no longer money.  The old peso, the old german mark, the zimbabwean dollar are not money. 

1: something generally accepted as a medium of exchange, a measure of value, or a means of payment.

At various times in certain places, things like seashells were used as money and fit this definition.

Nice try tho to make a simplistic argument about a very complex issue.

deb-

Why on earth would you buy such a big house?  I can definitely understand you buying a house, based on your work, financial, social, and living situation, I could easily see where a house would make sense for you, even with 25-50% downside in the home price, but I'm just thinking, why would you want the hassle of a huge home and the hassle of roommates?  I mean you could get a 2-3 bedroom house and still have roommates... or maybe you like the idea of a big house?  Heh I guess I'm so used to living solo in an apartment a big house to me just seems like a big hassle and expense.

outoffocus -

I think you are mischaracterizing "most people."  Most people are clueless.  Most economists or analysts believe that we will either have continued sustained deflation for years (ala Japan), or they believe like you do, that the Fed will overshoot and we will have high (not hyper) inflation for a number of years ala the US in the 1970s.

At this point, from my perspective it's hard to tell the 5 year outlook of inflation/deflation.  It could really go either way, but if the current policies remain in place, I could very easily see sustained deflation, due to the fact that our policies are mirroring Japan almost step-by-step.  On the other hand, there are of course serious risks that the Fed/Treasury/Congress will go even further, and do something like double all government salaries while doubling the minimum wage all in one fell swoop, causing high inflation and unemployment.

 L.A. Unified moves to cut 5000 teachers and others signals to me that the government is not going to that drastic step at this point, because the first such move would be to come out and say they are going to print money (no loans, just straight out handing money) to states and counties to first pay their workers, and then to hire more.

Regarding Iceland, it was way more highly leveraged than the US is.  We may yet end up being like Iceland, but the current figures do not match up with that specific situation.  (Also remember, Iceland bonds in krona were well north of 10% for the past few years before the krona went belly-up... so we're quite aways off from that happening in the US.)

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#12) On April 17, 2009 at 12:52 PM, kaskoosek (99.68) wrote:

Demon

Thanks for the response, but do you have a rebuttal to the "trade balance" issue?

 

This is not an inflation/deflation debate in the US, but rather a currency issue. Foreigners each day have an increase in supply of dollars.

At what point would assume this Ponzi scheme will collapse? Or is it not a ponzi scheme, because I am pretty sure American are not able to pay back their debt without a significant amount of inflation or outwright default.

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#13) On April 17, 2009 at 1:02 PM, GeneralDemon (74.50) wrote:

Doug, many people have challenged my opinions on economics, that's the best part of CAPS. I welcome a debate.

You were the only one who made it a personal attack.

I offered my references (Zimmerman, Shultz, and even Wikipedia) - but rather than confront and revisit your own (misguided) argument, you found it more convenient to claim on other's blogs that I was either a liar or intentionally misrepresenting the facts.

And yes, some of us still live by a code of honor. 

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#14) On April 17, 2009 at 1:11 PM, Londamania (62.91) wrote:

There are so many different factors in play right now claiming the fundamentals support one side or the other is dubious at best.  Fundamentals are all over the place pointing in different directions depending on what you choose to look at.

"The inflationary forces of increased hiring on the federal level will be not be enough to overcome the deflationary forces of the local, county, and state layoffs that are happening all over the country."

The whole crux of your argument and assumptions comes down to this statement, which is put out there without any support.  I think there are pages and pages of material that could be written or debated looking at this specific statement.  And that's just the US....throw in the world including emerging markets - who can say?  It can't be clear there are just too many variables in play here.  And then you are also assuming that even if the government programs fail to stop deflation that the government will just stand their, shrug their shoulders, and say "oh well we tried I guess we are just screwed now."  They won't.  They will print more money in more inventive ways until deflation stops.  Yes this will screw us later but they are smart enough to realize that they need to put out the first fire first.

Their is no denying we are deflating...the effects though remain difficult to predict.  The big stocks just went through earning season this week and it wasn't that bad, generally better than expected.  You also lump all stocks into one category as if picking out the ones that are run by good management teams with low debt won't just crush even more as their weaker competitors get dragged down by the forces you describe.  Avoiding the traditionally defensive sectors which have lots of stocks to compare favorably over the last 6 months, take a look at Intel.  You mentioned the head fake sucker rally between Nov and Jan but if you bought Intel at 14 in October of last year you could have sold it between 15 or 16 at 4 different times between then and now.  My point is - all this market action does is make picking good stocks all the more important.  Low debt, good management market leaders will do very well in the environment you describe and will profit from it as their competition gets crushed.  A good well run company that is benefiting from market culling forces - is as good as gold.  It's even better.  And from where we sit today, the price depreciation in these otherwise stong well run market leader companies from the last 12+ months of recession is already in the price - they had their run down, the bears won.  Next game on.  A company like Intel took their lumps last year and has been slugging it out with the market forces you describe for the past 6 months - and done just fine. 

I also think their is plenty of room between trading (meaing in your terms I presume day or near day trading) and LTBH.  How about LTB and Monitor?  So you pick up if the winds are changing and limit the damage. 

Take GE, which I bough near the bottom at under 7 and is now trading over 12 - I am up over 80% and haven't sold.  And I watch it every day, and I keep tabs on those great charts over in the good vibe lounge.  Am I worried about a big correction down?  Not really - if it starts to happen I will lose some of the top and get out with a healthy profit.  And I know to expect this action if it happpens real soon - since I am out their keeping tabs on things and monitoring.  I think the chances that GE drops down to at or below my purchase price in two days is near zero - which is what it would take for me to lose that gain.  Compared to the risk that the market will continue to do other unpredictable things because the waters are so murky and the differening indicators are confusing if you start to take them all in.  Like keep going up week after week which it just has continued to do.  Since I like GE to climb back into the 20s over the next year barring a complete economic collapse, I am happy to ride out shorter term ups and downs and scanning for something more ominous upon which I will sell and if I give up even half of my gain on a steep correction - I still made 40% in 1-2 months! 

Anyone who is sure they know what this market will do - is making a mistake, their are too many complexities interacting with each other right now.  And it's costing them money.  All you can do right now is take it week to week with an eye on the resistance points where it is probably a good idea to have near term positions in cash and long term positions with an itchy trigger finger.  My guess - we will zig zag rise to some point (maybe not too far away could be around SP 900 somewhere) and begin a very very very long L.  The headfake sucker rally happened already this is the post mortem recovery period. But who can say?

 

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#15) On April 17, 2009 at 5:06 PM, DemonDoug (99.67) wrote:

Please point out what specific phrase was a personal attack.  Where I specifically called you a liar.  Claiming that you are skewing facts is not a personal attack.  At this point we may be arguing semantics, but you claimed overemployment as a cause of hyperinflation; I would draw a distinction between straight government handouts to employees and officials and overemployment.

There are times I make arguments with a bit of fervor and conviction.  I can withstand the intensity becuase I understand it.  You want a personal attack?  Here is one: You are a thin-skinned attention seeker who happened to be right with some rather dubious representation of past and recent history, and instead of adding discourse to a logical debate, you are acting like a bratty 14 year old girl who cries when Daddy won't buy her Malibu Barbie's pink convertible.  Which parts of that phrase is a personal attack?  The part where I call you a "thin-skinned attention seeker" and the whole part about you being a whiny chick.  The rest of that sentence is a judgment call on your now-proven-correct thesis.  Due to the fact that you are a whiny brat, I now feel I have just cause to personally attack you, because if you cannot handle the heat of the intensity of my arguments, then just ignore me.

I'm willing to bet most people reading what I just wrote think now I'm being catty, and while they probably saw you as being a whiny brat, they probably now see me as a bit of a jerk for bashing you.  And they would be right to.  Because I am a complete jerk to people who would invoke "man"hood and "honor code"s in an attempt to guilt me into apologizing for a logical disagreement.

So there you have it GeneralD.  I have now personally insulted you.  You have my persmission to cry to your mommy about how the big bad CAPS man hurt your feelings and you can't let it go. 

Londamania:

And then you are also assuming that even if the government programs fail to stop deflation that the government will just stand their, shrug their shoulders, and say "oh well we tried I guess we are just screwed now."  They won't.  They will print more money in more inventive ways until deflation stops.  Yes this will screw us later but they are smart enough to realize that they need to put out the first fire first.

One of the things I've looked carefully at are the historical antecedents.  The most recent that I can see is Japan.  I have bolded the most important sentence above.  Because you see, Japan has been doing just that for almost 2 decades now, and is still in deflation.  Government programs on top of government programs.  Bank bailouts.  Huge infrastructure projects.  Look, I'm not so closed minded as to think we are Japan, and that our next 20 years will track exactly how Japan's did from the last 20.  But the similarities are so striking, and the market and govenrmental forces out there are so similar, it is very hard for me to pull away from the comparison.  The yield on japanese bonds has been below .5% for what, a decade now?  The argument Geithner and the current administration made is that Japan didn't too enough fast enough.  I don't see how that is possible.  To me it seems like a failed policy just being carried out on a grander scale.

The big stocks just went through earning season this week and it wasn't that bad, generally better than expected. 

I can't agree.  The "good" earnings from banks are all fantasies, and the way I view it most of them should be thrown in jail for fraud, embezzlement, racketeering, and treason, for basically raping the earnings from all other US taxpayers.  Mark to fantasy modeling is back and here to hurt us even more in the near and long term future.

You mentioned the head fake sucker rally between Nov and Jan but if you bought Intel at 14 in October of last year you could have sold it between 15 or 16 at 4 different times between then and now. My point is - all this market action does is make picking good stocks all the more important.

I addressed this in my second point under what does well in deflation:  "I could also cite EverdayInvestor (who documented his trading profits in a post late last year) because in deflation markets tend to be wildly volatile, and volatility = profits for people who know how to trade markets."

What you have described is extreme volatility.  I myself made a small profit last november on trading an oil stock.  While I tend to agree with the sentiment, in general I'm having a hard time finding any stock actually "cheap," although for caps purposes I certainly see a stock or two out there that have underperformed the SPY and should rise against it.

How about LTB and Monitor?  So you pick up if the winds are changing and limit the damage. 

While I would like to think this would be a legitimate strategy, I just have a hard time envisioning the average stock investor doing well with this.  Even more sophisticated investors, I wouldn't recommend this, unless they were a trader like Top Fool Reaper.

Anyone who is sure they know what this market will do - is making a mistake, their are too many complexities interacting with each other right now. 

We do our best to predict it.  I agree with your sentiment, although it is still apparent to me we have a lot more pain to go through.  I also disagree with your assessment of GE.  I believe they are also lying and that their financial services division is going to absolutely blow up that company in a bad way.

This is probably a big difference of opinion between the bulls and the bears.  The bulls believe that the earnings are real.  The bears think it's all smoke and mirrors, and the same type of shenanigans that got us into this mess with book-cooking accounting and straight out lies on the 10Q's.  Please refer to Dear Partygoers on the way to Candy Mountain... for a more in-depth look at my feelings on this issue.  I basically think they are lying, just like I thought Bernanke was lying (and/or incompetent) when he said the economy was strong in 2007.

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#16) On April 17, 2009 at 8:51 PM, SuperPicks (30.18) wrote:

Nice.

DemonDoug promotes discussion & debate, & furthermore is not a vengeful individual...:

And now coming around and challenging my manhood for an apology?  If that's how you really feel about it, I'll make sure to not have an opinion on any of your blogs or comments going forward.

LOL

so much negative karma

keep on the spirit of debate dude & keep it classy. 

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#17) On April 17, 2009 at 9:28 PM, GeneralDemon (74.50) wrote:

Doug, you asked where you called me a liar - you might want to re-read your responces to my blog post of 9.29.08:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=92256&t=01007023367243968855

You will note that the first responce to my post is you calling me a liar. BTW, all three of my points turned out to be correct. You only agreed with one of them.

I am assuming you are young. I was young once and made similar brash statements when I should have tried to gleen fresh insight from an divergent viewpoint. It is not a indellible trait - Abraham Lincoln and myself overcame it - you can too.

I have had some wonderful experiences in my career - from being an invited guest inside Greenspan's private office at the FED to knowing BOD decisions that even the CEO was not privy.

Instead of trying to eludicate yourself with the wisdom of an old timer, you choose to disrespect me. My only reason for blogging is to spread what I believe will come to bear from my experience. So far, I have been dead on.

You at the time were continously calling for sustained moderate inflation using charts of M3. I knew that from the early 70's, M3 had been proven by Foseback and others to not be a leading indicator at all. You probably cost some people money if they listened to you and acted on your advice.

With regards to honor, you obviously have no clue what the concept means. You are free to challenge a person's arguments, but if you attack a person with untruths, you should expect what comes your way.

Here is my best advice for you. Read a bio of Robert E. Lee.

 

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#18) On April 18, 2009 at 1:53 AM, darroj (98.31) wrote:

Demon,
I'm going to stay out of the arguement in this post, but on the whole, things have been cheaper recently. I've noticed my milk, groceries, and even my rent (moving due to a short sale on my current place) is cheaper. 

As far as best tickers on MF, everyone plays with them (my recent blog post was ID,E,AZ) but you have certainly done a good job :)

Thanks for your contributions here on MF. I enjoy your blogs and your inputs on lots of subjects. Thanks for your input on my recent post.

-darroj

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#19) On April 18, 2009 at 11:33 AM, kaskoosek (99.68) wrote:

"Yes this will screw us later but they are smart enough to realize that they need to put out the first fire first."

 

So the logical reason that we will not have hyper inflation is that they are smart enough.

The only way to stop high inflation is to ramp up interest rates. This is too costly and can only be done when significant debasement has already occured, because both the government and the private sector are already underwater.

Paying intest on the debt by monetizing debt or "printing money" does not work.

The total debt of the country needs to go down in some form or another and the only accepted solution is depreciation.

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#20) On April 18, 2009 at 10:45 PM, DemonDoug (99.67) wrote:

the bottom line is that neither zimbabwe nor argentina had "overemployment."

Instead of relaying your argument, you have chosen to be a whiny brat.  Your age or mine doesn't matter.  While you have proven to be right about M3, the fact of the matter is I have even layed out a scenario where we could still attain a high inflation rate (the example of the US government straight out printing money for LAUSD schoolteachers instead of going through the debt-based system they continue on.

You probably cost some people money if they listened to you and acted on your advice

And to those people I truly am sorry.  Anyone who bought a gold, oil, or other resource based stock last summer based even in part on my analysis, I do feel bad for and apologize to.  But I'm not going to apologize to a blind squirrel finding a acorn when I believed there was no way it could have found said acorn.

I know what honor is supposed to be, but what it does is end up being a regimented unit of control, an excuse for people to attack either physically or otherwise.  Similar to institutions of marriage and religion.  I choose to be ethical and moral, which oftentimes go against what might be "honorable."  I have no ethical or moral obligation to apologize to you, I do to anyone who may have lost money based on my advice.

Paying intest on the debt by monetizing debt or "printing money" does not work.

It can "work," but there are a great many negative consequences of an action like this, to the point where we haven't had the federal government discuss this type of deal.

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#21) On April 19, 2009 at 7:49 AM, TopAustrianFool (95.65) wrote:

Yeah, well... what a surprise. Deflation is what the government has been fighting all along. They have been telling you, "if houses go on foreclosure around your neighborhood, the value of your home will drop too..." Who cares?! Those house prices are inflated anyway. Deflation is a good thing since margins, profits and salaries have been going down too. Fighting deflation only prolongs the depresion and may lead to stagflation, and will delay recovery.

You don't need to ramp up interest rate to avoid inflation. Money is a commodity like any other and should be subjected to free market forces. How do you avoid the mistake of the last 10+ yrs, namely artifactually low interest rate. You auction the loans/cash to banks at the interest rates they are willing to borrow and the Fed is willing to lend to. Wow... What a genious. Goes to show you that these guys in govt have no clue what they are doing. And I am a little tired of hearing, "economist agree..." and I rarely see an economist on TV saying all those things they agree to.

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#22) On April 19, 2009 at 6:48 PM, SuperPicks (30.18) wrote:

Good reply DemonDoug.  And good discussion here.

On an aggregate level, I'm not sure who has a clue on if we will see mainly a deflationary environment or inflationary environment the next 3-5 years. 

Looking at the macroperspective, unemployment direction, household savings rates, debt levels, etc it seems like deflation is here & will likely stay unless if battled with another force. 

That other force ofcourse as mentioned is the Govt's ability to ask the Fed to print money & distribute that money outside of the banking realm. 

But even with the question of 'will there be deflation or inflation', there will be strong deflationary/inflationary pressures on certain things in either scenario IMO:

-because of the govt/banking/public sentiment of keeping house prices high, there will likely be continued pressure to inflate these prices & is likely to be relatively strong

-because of debt acting as a parasite at all levels & sectors, many jobs have been lost not only in the past year, but also will be lost for the remainder of '09...even if we were to return to the same unemployment level 3 years ago, it will be deflationary because its almost guaranteed all those jobs regained will be at lower wage/salary levels (because the private sector/govt sector can getaway with paying less and they can't afford more)

-as the combination of the two pressures mentioned above, other sectors of the economy will suffer as a result as there will be likely less money/credit leftover for spending on other goods/servcies & thus will likely experience relatively more deflationary pressure

Just my thoughts.

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#23) On May 31, 2009 at 11:46 AM, FourthAxis (24.18) wrote:

Damn, where have I been?!?! You're in the deflation camp!  I'm getting ready to work on a post called Domestic Deflation, International Inflation.  But, I wanted to stop off at your blog for some insight, and I see this post near the top of the heap.  I'll have to dig around some more to see what else I can find.

I gotta say, you killed me on the points side, but you should have listened earlier.  With your reasoning ability, you could have made a killing while gold, oil, etc. fell from the sky.  I think the decoupling will relflate most internationally traded items.  Prices of homes, boats, cars, and wages will still be flat to down I think.  Cheers!

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