Inflation vs. Deflation debate

[iamse7en]

Mises provided many solutions. This was merely a commentary on semantics.

[Jason]

Mises provided many solutions. This was merely a commentary on semantics.

I've read through a bit of their material and haven't been super impressed. That said it is leaps and bounds ahead of what is taught in school these days.

[robertdavis]

I am very glad to visit this informative post. Thanks......









stock market today

[Jason]

Americans Are Deleveraging, But Not Because They Want To

As comparisons between US and European debt to GDP levels and the finger-pointing of who is deleveraging more continues, McKinsey notes (in their quarterly Debt and Deleveraging article) that there may be a light at the end of the tunnel for the US as private-sector deleveraging has been rapid since 2008. However, reading on a little, we find that the light at the end of the tunnel may well be the front of the oncoming train of financial distress as some two-thirds of the 4% ($584bn) in US household debt deleveraging is from defaults on home-loans (and other consumer debt)!

From 1990 to 2008, US private-sector debt rose from 148 percent of GDP to 234 percent (Exhibit 5). Household debt rose by more than half, peaking at 98 percent of GDP in 2008. Debt of nonfinancial corporations rose to 79 percent of GDP, while debt of financial institutions reached 57 percent of GDP.

Since the end of 2008, all categories of US private-sector debt have fallen as a percent of GDP. The reduction by financial institutions has been most striking. By mid-2011 the ratio of financial-sector debt relative to GDP had fallen below where it stood in 2000. In dollar terms, it declined from $8 trillion to $6.1 trillion. Nearly $1 trillion of this decline can be attributed to the collapse of Lehman Brothers, JP Morgan Chase’s purchase of Bear Stearns, and the Bank of America-Merrill Lynch merger. Since 2008, banks also have been funding themselves with more deposits and less debt.

Among US households, debt has fallen by 4 percent in absolute terms, or $584 billion. Some two-thirds of that reduction is from defaults on home loans and other consumer debt. An estimated $254 billion of troubled mortgages remain in the foreclosure pipeline, suggesting the potential for several more percentage points of household debt reduction as these loans are discharged. A majority of defaults reflect financial distress: overextended homeowners who lost jobs or faced medical emergencies and found that they could not afford to keep up with payments.

We estimate that US households could face roughly two more years of deleveraging. As noted above, there is no accepted definition of the safe level of household debt, which might serve as a target for deleveraging. One possible goal is for the ratio of household debt relative to disposable income to return to its historic trend. Between 1952 and 2000, this ratio rose steadily—by about 1.5 percent annually—reflecting growing access to mortgages, consumer credit, student loans, and other forms of credit in the United States. After 2000, growth in household borrowing accelerated, and by 2008, growth in the ratio of household debt to income had climbed more than 30 percentage points above the trend line. By the second quarter of 2011, this ratio had fallen by 15 percentage points. At the current rate of deleveraging, it could return to trend by mid-2013 (Exhibit 7).

[Jason note: of course that's just to reach trendline....for every bump over trendline there is a corresponding dip of equal proportion. As you can see from the chart at the link we aren't even to the half way point - i.e. trendline (estimated at 2 more years)....]

In the wake of a highly destructive financial crisis, it is reasonable to ask whether a continuous upward trend in household borrowing is sustainable. A more conservative goal for US household deleveraging, then, might be to aim for a return to the ratio of debt relative to income of 2000, before the credit bubble. This would require a reduction of 22 percentage points from the ratio of mid-2011.

Another comparison is with Swedish households in the 1990s, which reduced household debt relative to income by 41 percentage points. By this measure, US households are a bit more than one-third of the way through deleveraging.

http://www.zerohedge.com/news/americans ... -they-want" onclick="window.open(this.href);return false;
http://www.mckinseyquarterly.com/Workin ... _debt_2914" onclick="window.open(this.href);return false;

....the Swiss measure looks much more accurate....

[Jason]

Inflation Or Deflation: Which Is The Greater Risk?

Measuring the Money Supply

The U.S. money supply is measured by M1, M2 and M3. M1 includes all cash, currency, checking and N.O.W. accounts. M2 includes M1 plus time deposits (CD’s), savings deposits and non-institutional money market funds. Hence, M2 is more broad. M3 includes M2 plus longer term deposits, however, as of 2006, the Fed no longer tracks M3. The money supply must keep pace with the increase in the population and the expansion of the economy. If the money supply were to rise too fast inflation can result. Conversely, if the increase in the money supply is not enough, deflation may occur. Therefore, keeping a close eye on the amount of money in the system is crucial.

http://www.forbes.com/sites/mikepatton/ ... expansion/" onclick="window.open(this.href);return false;

Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, we believe that we will see both.

The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get "financial whiplash" as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.

http://www.zerohedge.com/news/2013-05-2 ... rprise-you" onclick="window.open(this.href);return false;

I guess the easiest way to explain the future “inflation/deflation” debate depends on where the price of gold is set or trades at versus whatever new currencies come out. Set the price too low and very little gold will be pried loose, set it too high and gold will flood the streets. My guess is that the price will be set too low initially and not enough gold will flow for maybe 6 months or a year. New paper will seek gold until the “right level” (whatever that may be) is reached… and then we start the entire process all over again.

http://blog.milesfranklin.com/the-infla ... ion-debate" onclick="window.open(this.href);return false;

I am about to dust off a stack of books from the 1970's to investigate these sorts of implications, and I plan to seek out firsthand accounts and guidance from people who have lived, or are currently living in, high inflation countries.

http://www.peakprosperity.com/newslette ... comes-next" onclick="window.open(this.href);return false;


























The debate still continues...and lots of differing opinions...and my bet is still on deflation! Wondering if China won't be the trigger point with debt level that surpasses US and Japan combined.

[Jason]

Bump...

[John Adams]

Anything new going on with this debate heading into 2015?

[msurkan]

I find it interesting that almost NO ONE is predicting outright deflation. Curiously, both bulls and bears seem to agree on a future of inflation, the only difference is the degree. Bulls think we will experience benign, controlled, inflation, with rising asset prices but no run-away price increases for consumer goods. The bears think we will experience a hyper-inflation type future where the dollar becomes worthless.

It is interesting that neither the bears or bulls seem to be able to explain the current scenario where commodity prices are falling and the dollar rising. The dropping T-bill yields clearly show there are plenty of investors who feel the dollar is MUCH safer than almost any other form of investment.

In my own view, I expect out and out deflation with collapsing asset prices (commodities, real-estate, stocks, etc) and an appreciating dollar. Ironically, this will largely be caused by the vast quantities of PRIVATE debt that have accumulated. We are getting in a vicious cycle where dropping asset prices will force people (and companies) to sell assets to pay down debt. Lenders will require that loans be repayed as the value of collateral declines.

This rush for cash (and a general liquidation of assets) creates demand for dollars which in turn drives up the value of the dollar relative to everything else.

Unfortunately, the central banks can't do much. They have pretty much shot all the arrows they have in a vain attempt to keep things going. They can't drop interest rates any more and quantitative easing has already been done.

This is a classic bubble scenario. You reach a point where debt can't keep increasing to drive asset prices higher.

[John Adams]

Of course cliche, but definitely no longer a matter of if, but only of when.

[caddis]

I find it interesting that almost NO ONE is predicting outright deflation. Curiously, both bulls and bears seem to agree on a future of inflation, the only difference is the degree. Bulls think we will experience benign, controlled, inflation, with rising asset prices but no run-away price increases for consumer goods. The bears think we will experience a hyper-inflation type future where the dollar becomes worthless.

It is interesting that neither the bears or bulls seem to be able to explain the current scenario where commodity prices are falling and the dollar rising. The dropping T-bill yields clearly show there are plenty of investors who feel the dollar is MUCH safer than almost any other form of investment.

In my own view, I expect out and out deflation with collapsing asset prices (commodities, real-estate, stocks, etc) and an appreciating dollar. Ironically, this will largely be caused by the vast quantities of PRIVATE debt that have accumulated. We are getting in a vicious cycle where dropping asset prices will force people (and companies) to sell assets to pay down debt. Lenders will require that loans be repayed as the value of collateral declines.

This rush for cash (and a general liquidation of assets) creates demand for dollars which in turn drives up the value of the dollar relative to everything else.

Unfortunately, the central banks can't do much. They have pretty much shot all the arrows they have in a vain attempt to keep things going. They can't drop interest rates any more and quantitative easing has already been done.

This is a classic bubble scenario. You reach a point where debt can't keep increasing to drive asset prices higher.

Karl Denninger at the market ticker.org has been saying this very thing for a few years now. I'm in his camp (and yours) on this. The out of control inflation is happening and has been for years. College tuition, medical costs, housing, you name it has had unsustainable growth over the past 30 years. All that debt will need to be paid back in dollars creating a huge demand for them.

[Jason]

Europe is bleeding really bad again for US dollars...

[Original_Intent]

Good to see you, Legion, wish you posted more. Always felt like you provided a well-informed and logical presentation of your thoughts.

[Jason]

Thank you! Life has been crazy and then with the changes in the forum over the past couple of years its gotten to where I only drop by every couple of months.

Miss the old timers!!! Glad to see a number of you still participating!

[Jason]

Silver is humming along at $16....
http://www.kitco.com/charts/livesilver.html" onclick="window.open(this.href);return false;

Everything is pretty flat...except food. Of course with 10% of the egg laying population wiped out in a matter of months. Prior to that the pork population...prior to that beef. Not to mention energy costs in food...weather vacillation and extremity with subsequent crop damage...etc etc etc

Thoughts???

[Sirocco]

Silver is humming along at $16....
http://www.kitco.com/charts/livesilver.html" onclick="window.open(this.href);return false;

Everything is pretty flat...except food. Of course with 10% of the egg laying population wiped out in a matter of months. Prior to that the pork population...prior to that beef. Not to mention energy costs in food...weather vacillation and extremity with subsequent crop damage...etc etc etc

Thoughts???

Our usage of chemicals with no regards to anything is catching up to us?

[Jason]

ya...and force fed cannibalism probably isn't a good thing either...

[Sirocco]

ya...and force fed cannibalism probably isn't a good thing either...

Yeah our poor choices are coming back to bite us, so it would seem less chemicals and better treatment of our food animals will be the future

[Jason]

Take care of the soil microbes and they will take care of you!

[Sirocco]

That's the kind of stuff my pretend church (which is a humorous front for my actual belief system) says!

[Jason]

I dig'em...well actually try to feed them. But I'm a nube....

[Sirocco]

I dig'em...well actually try to feed them. But I'm a nube....

I think it's spelled "noob"

[Jason]

I dig'em...well actually try to feed them. But I'm a nube....

I think it's spelled "noob"

It's all perspective

[Sirocco]

I dig'em...well actually try to feed them. But I'm a nube....

I think it's spelled "noob"

It's all perspective

No noob is gamer linguo, spelled only that way, or N00b

[Jason]

I dig'em...well actually try to feed them. But I'm a nube....

I think it's spelled "noob"

It's all perspective

No noob is gamer linguo, spelled only that way, or N00b

Thank you for clarifying the perspective...

[Jason]

Anything new going on with this debate heading into 2015?

more than halfway through...thoughts?

Silver is under $15.... Foreign dollar denominated debt at all time highs and 3 trillion over 2008...