Deflation vs Inflation debate: Part XXXVI - Final

[jacobdcoates]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Forgive for me for being a bit confused about weather we are going to have a deflation or inflation.


But i think this is where mish is coming from

money=debt
debt=deflating
_______________________
money=deflating

more formally

A=B
B=C
___
A=C


if inflation is to happen then one of the premises must be incorrect. Either money does not equal debt or a debt deflation must not actually be happening. if a debt deflation is not happening then where is all the new debt being created at a rate to exceed the destruction of current debts?


P.S. sorry if it is confusing but I've had a bit of wine tonight.

[FRED]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Forgive for me for being a bit confused about weather we are going to have a deflation or inflation.


But i think this is where mish is coming from

money=debt
debt=deflating
_______________________
money=deflating

more formally

A=B
B=C
___
A=C


if inflation is to happen then one of the premises must be incorrect. Either money does not equal debt or a debt deflation must not actually be happening. if a debt deflation is not happening then where is all the new debt being created at a rate to exceed the destruction of current debts?


P.S. sorry if it is confusing but I've had a bit of wine tonight.

Two reasons we've given up arguing with Mish. One, when we point him to any standard definition of any term used in economics, he rejects it and insists on inventing and using his own. The result is like playing a game with Calvin of Calvin and Hobbs where the rules change constantly during the game. Two, he sees only two variables that determine inflation, money supply and demand, and ignores the other two variables, goods supply and demand.

For background, we recommend two articles on the subject by Mike Moffatt at About.com.

Cost-Push Inflation vs. Demand-Pull Inflation
What is deflation and how can it be prevented?

There are four variables at work that determine inflation rates:

1. The supply of money
2. The supply of other goods
3. Demand for money
4. Demand for goods

Below we offer the simple case of an economy growing in balance with 100 units each of goods supply/demand and money supply/demand resulting in an inflation rate of 3.3%.

Our model is designed to show the relationship between changes in the four factors of inflation, not the actual extent of changes in inflation relative to the factors within the US economy during economic contraction. In other words, a 10% increase in the broad money supply in the model may cause inflation to rise more or less than 0.4%. The actual extent of inflation responses to inflation factors depends on many factors of the US economy and monetary system that are too complex for our super simple model.

We break our scenarios up into two series: Growth Cases and Contraction Steps.

Four Growth Cases, we demonstrate the relationship between the four variables by increasing one while holding the others constant.

Growth Case 1: Raising goods supply causes inflation to fall

Growth Case 2: Raising goods demand causes inflation to rise

Growth Case 3: Raising money supply causes inflation to rise

Growth Case 4: Raising money demand causes inflation to fall

Walking through the Contraction Steps, we start with both goods supply and demand, and money supply falling equally as money demand falls even more. The result is a moderate increase in inflation.

Step 5 is the circumstance of very high goods supply (over-capacity) combined with a severe 50% decline in demand, a severe 50% decline in the money supply, and a doubling in demand for money. The result is that inflation falls to 1.1%. In real life, of course, such drastic reductions in goods demand and the money supply will likely have a much more severe impact on inflation. Again, the idea is to show the relationships.

For a real life example, when we last interviewed Jim Rogers a few months ago when oil was at $100, we asked him why falling demand was not going to push down prices. He replied, "You are assuming that producers are going to maintain supply. They will cut supply to maintain prices, and that will continue to drive inflation for the US or any country tied to the dollar. They are not going to exchange precious oil for weak dollars."

Relationship among prices of imported and non-imported goods and services.

What happens as the dollar weakens and the dollar price of US imports rises? Think back to when TVs and apparel were more expensive. What did we do? We bought fewer of them, that's what. Life goes on.

On the weak dollar, just because we are willing to pay each other $230,000 for a house that was thrown together in a few days doesn't mean a European is willing to pay as much. In fact, they are paying about $120,000. When it comes to oil, we don't get to decide how much the oil costs in dollars, the suppliers do.

[grapejelly]

Re: Deflation vs Inflation debate: Part XXXVI - Final

I disagree on the reason for these very smart folks such as Mish and Rick seeing deflation everywhere, contrary to all the evidence.

I think the misunderstanding amongst Mish and Rick involves the fact that it is hard to distinguish between assets and liabilities when it comes to instruments of indebtedness such as bonds.

If you own a bond worth $100,000, you own an asset that is also a corresponding liability of someone else.

If you own $100,000 worth of gold, on the other extreme, you own an asset that is not a liability of anyone.

The value of your indebtedness asset, e.g. bonds, depends mostly or entirely upon expectations for the future -- namely, two expectations:

1. You will be paid back as promised
2. The value of the currency you receive (i.e. expectations for future inflation)

What happens in a time like today, is that the expectations for the above are changing rapidly. This results in widening credit spreads, and higher yields (so far for non-sovereign debt).

Higher yields of course are lower prices for instruments of indebtedness.

When Rick and Mish see prices of all paper indebtedness assets falling, they see deflation.

They are correct in a way.

But in a way they are wrong.

Remember, you hold the bond worth $100,000. You were under the illusion that you had $100,000 in assets. Now your "asset" is worth $50,000. So your power to liquidate your asset, that is, convert it to cash, is halved.

Your future buying power and investment power is halved.

But loss of future buying power is not the same as deflation. It may or may not lead to future deflation but it is not at all the same as deflation.

So when all indebtedness instruments are declining precipitously in value, as they are today, central banks can respond by new borrowing which creates new money and this can be used to purchase instruments of indebtedness, maintaining high inflation.

This is quite normal.

Then what happens is people with real wealth increasingly flee indebtedness. They get into oil and commodities. They don't get into real estate because that depends upon new credit and credit is suddenly quite expensive and hard to get.

As more people flee instruments of indebtedness, Mish and Rick see more deflation, but what is really happening is that the ability to create future indebtedness is limited.

The central banks make up for this though, leading to still more flight and higher commodity (tangibles) prices.

And of course, within a country's self contained currency there is inflation, very high inflation. But compared to external measures, namely other currencies (if they are not inflating as much, but they are), and really gold and oil, there is very high inflation.

So you have:

1. growing money supply
2. higher prices on all tangibles
3. increasing credit spreads and increasing interest rates

Deflation and inflation at the same time, depending upon how you measure. And a decline in the future borrowing and buying power of holders of indebtedness.

[FRED]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Our working hypothesis since 1999 is that when debt deflation eventually occurred we'd see deflating prices of financial assets purchased with debt and inflating all-goods prices purchased with cash as the dollar weakened. A Next Bubble, a new asset price inflation in a new area of the economy, not tech stocks nor property, is in the formation stage. We shall see if it develops into a full blown bubble or if the bubble system is now permanently broken. Hudson thinks it is. We have underestimated the System before. We incorrectly assumed that the Fed would not allow a housing bubble to develop, resulting in the 2002 to 2006 debt deflation detour and even more extreme levels of debt to deflate.

[jacobdcoates]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Fred- changing definitions while arguing is indeed infuriating. Just to be clear I am using debt deflation to mean a reduction in the total amount of debt/money within a given monetary system.

"Our working hypothesis since 1999 is that when debt deflation eventually occurred we'd see deflating prices of financial assets purchased with debt and inflating all-goods prices purchased with cash as the dollar weakened"

-The weakening of the dollar then must be caused by the lack of faith in the fiat money, not by any actual reduction in the total amount of fiat money in the system. I agree that having a lack of faith in fiat money is probably very good for ones financial well being It also assumes that all goods are purchased only with cash, if debt was involved, then it would limit the rise in the prices inflation due to be at least being partially caught up in the debt deflation.

"Step 5 is the circumstance of very high goods supply (over-capacity) combined with a severe 50% decline in demand, a severe 50% decline in the money supply, and a doubling in demand for money. The result is that inflation falls to 1.1%. In real life, of course, such drastic reductions in goods demand and the money supply will likely have a much more severe impact on inflation. Again, the idea is to show the relationships."- emphasis added

- Step 5 it seems to me is where we actually are, but the difference between .4% inflation and a .4% deflation is a very big difference.


Grapejelly- I think we all agree that debt is money in the current financial system, if not please correct me.

"So when all indebtedness instruments are declining precipitously in value, as they are today, central banks can respond by new borrowing which creates new money and this can be used to purchase instruments of indebtedness, maintaining high inflation."

-This would seem to contend that debt deflation is not happening, that the central banks are replacing at a 1:1 ratio, the debt already in the current system, there by maintaining the current overall price structure. But the overall level of debt money in the system is, quite simply staggering. It does not seem a forgone conclusion that the central banks can maintain the overall level of debt in the system While the price of housing and other financial instruments are deflating we would and are, seeing the corresponding increase in other "assets"-oil,gold,iron ore and such, that did not benefit from the previous debt induce inflation. This seems to be a temporary fix in maintaining the current overall price structure, as it is just money/ debt being moved around not being created. Since the central banks it seem could not create new debt forever without a continued increase in the demand for new debt from the general public and/or financial system. Which seems to be the Achilles heal of the fraction reserve system, that when overall debt does not increase as old debts come due then system collapses.

"But in a way they are wrong.

Remember, you hold the bond worth $100,000. You were under the illusion that you had $100,000 in assets. Now your "asset" is worth $50,000. So your power to liquidate your asset, that is, convert it to cash, is halved.

Your future buying power and investment power is halved.

But loss of future buying power is not the same as deflation. It may or may not lead to future deflation but it is not at all the same as deflation."

-How so? the bond is a debt owed to you by someone else, if falls in value to $50,000 dollars then that is a reduction in the overall money supply by $50,000. Weather you cash it out or hold on to it, in the long term it would be irrelevant.The illusion is on the side of the owner in thinking that a 50% reduction hasn't occurred, when it in fact has. I can buy that bond now or in the future for $50,000. My future/current buying power or investment power to buy that bond from that "owner" of that "asset" would have doubled, not have been halved. Since, I can get 2 bonds for the price of 1. If I had either cash or new debt to purchase it, and new debt to purchase old debt instruments seems to be harder to come buy these days in general. That would seem to fit deflation,because in the case of a mortgage bond there is a real asset(namely a house) attached to that bond(reduction in the money supply, and price deflation) or any other debt instrument tied to a tangible asset.

-It would seem that there is a limit to the theoretically price increase of commodities. Namely the price at which the finished product can be sold for. I will admit that the price of the materials can exceed the price of the finished product for a short while, but the Russian proved that it is not sustainable economy, I'm referring to the famous example of Russian shoes being worth less than the materials it took to make them, if this occurred in aggregate then the economy eventually collapses. The price of the finished product would have to rise or the price of the materials would have to fall in order to achieve a reconcilement of the price differences or the 3rd option is that no shoes would be produced. Since all tangible assets require inputs of raw materials one of the three options must occur for every tangible asset, weather it is houses, power tools, cars, or anything else that isn't a financial product. If option one occurred then there would be a reduction in demand and hence a reduction in price or a lid on the price of the raw materials if they are to be produced. If option two then market price of the finished product would reflect the underlying value of the raw materials. If option three, then there is mass unemployment and aggregate demand and production collapse, i.e the end of the world as we now know it.

I'm just try to fit all of this into some logical framework so that it is understandable to me, there are some very complex concepts that I am sure I do not fully understand and am try to get and handle.

[c1ue]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Mish is tunnel vision focused on the monetary definition of inflation/deflation.

Money supply measures are not increasing, therefore there cannot be inflation.

Of course, that's what happens when you believe Friedman.

In real life, the units of the graph also change proportionate to each other - that's what we're seeing now. The money supply graphs also fail to take into account money supply outside of 'daily circulation' vs. in 'daily circulation'.

'Daily circulation' is probably not the right term, but what I mean is the supply of dollars sitting outside the US.

Normal circulation has some function in US daily life as people buy/sell stuff. Dollars residing in a foreign CB, however, has zero function but does have potential function.

What's been happening for years is the foreign CBs have been storing up dollars and increasing their dollar potential function, but in the meantime the normal impact of said dollars was 'sterilized'.

Well, as the US depreciates the dollars, these CBs are now seeing their 'potential' decline precipitously. Not only will this potential be used before much more losses occur, but simultaneously the previous 'storage' is now ending.

The more I think on it, the more it seems clear that the US will undergo what the Scandinavian countries went through 2 decades ago: a transfer from -6% CAD to +6% CAD. The fiscal impact of this on their economies was enormous, and this was even with massive exports of commodities relative to population size and significant social safety nets.

For a nation of 330M people who consume 25% of the world's oil (and other resources), this would be a monstrous shift which will collapse many (if not all) other economies like the domino scene in 'V for Vendetta'.

Again, it isn't going to be Mad Max or even Mogadishu, but it can very well be the Soviet collapse in its effects on the average person.

[grapejelly]

Re: Deflation vs Inflation debate: Part XXXVI - Final

jacobdcoates, when you hold a $100,000 bond, you do not hold $100,000 in money.

That's my point.

A failure to differentiate between money and money-like things.

There is the *illusion* that you have $100,000 when you hold the bond but you don't. If there is a run on that bond's issuer, your $100,000 bond could be worth $0 in a hurry.

So let's say lots of people were holding those bonds and suffered from a loss of their value.

Is this deflationary?

My answer is, no it is not.

Mish and Rick say, yes it is.

I say it is not because they were never money to begin with.

Yes, such an insolvency event affects the future willingness to borrow.

Yes, such an insolvency event affects the future spending plans of the owners of those bonds.

But the loss of value in the bonds has nothing directly to do with the money supply.

Nothing.

[FRED]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Fred- changing definitions while arguing is indeed infuriating. Just to be clear I am using debt deflation to mean a reduction in the total amount of debt/money within a given monetary system.

But money once created never goes away but merely changes forms. Borow $100 into existence by buying two bags of groceries at Whole Foods. Now Whole Foods has the $100 in its accounts. It spends some of it on diesel from Exxon to fuel a delivery truck, so some goes to Exxon, some to pay taxes that goes to the Treasury, some to 100 others who in turn spend it. Round and round it goes, changing hands and forms, never disappearing. The velocity of money refers to the rate and number of these transactions in aggregate in the economy. What if the $100 credit card debt is never paid? Did the money dissappear then? No. It is still circulating around in the economy. If enough $100 debts are not paid by enough credit card holders, then the rate of increase of money slows. If the rate falls below the capacity of the economy, the economy is said to be in a depression. Technically, Japan has been in a depression for many years because it is operating below its capacity to generate output. The US is in a recession but this fact is concealed by inflation; money is being generated in excess of the economy's productive capacity.

"Our working hypothesis since 1999 is that when debt deflation eventually occurred we'd see deflating prices of financial assets purchased with debt and inflating all-goods prices purchased with cash as the dollar weakened"

-The weakening of the dollar then must be caused by the lack of faith in the fiat money, not by any actual reduction in the total amount of fiat money in the system. I agree that having a lack of faith in fiat money is probably very good for ones financial well being It also assumes that all goods are purchased only with cash, if debt was involved, then it would limit the rise in the prices inflation due to be at least being partially caught up in the debt deflation.

Ka-Poom Theory is based on the idea that all of the dollars ever needed to create a major inflation in the US have already been created and reside outside the US.

"Step 5 is the circumstance of very high goods supply (over-capacity) combined with a severe 50% decline in demand, a severe 50% decline in the money supply, and a doubling in demand for money. The result is that inflation falls to 1.1%. In real life, of course, such drastic reductions in goods demand and the money supply will likely have a much more severe impact on inflation. Again, the idea is to show the relationships."- emphasis added

- Step 5 it seems to me is where we actually are, but the difference between .4% inflation and a .4% deflation is a very big difference.

The challenge is to understand is that we are talking about relative rates of change in four variables, with varying lags, which are not independent of each other but effect each other.

Grapejelly- I think we all agree that debt is money in the current financial system, if not please correct me.

"So when all indebtedness instruments are declining precipitously in value, as they are today, central banks can respond by new borrowing which creates new money and this can be used to purchase instruments of indebtedness, maintaining high inflation."

-This would seem to contend that debt deflation is not happening, that the central banks are replacing at a 1:1 ratio, the debt already in the current system, there by maintaining the current overall price structure. But the overall level of debt money in the system is, quite simply staggering. It does not seem a forgone conclusion that the central banks can maintain the overall level of debt in the system While the price of housing and other financial instruments are deflating we would and are, seeing the corresponding increase in other "assets"-oil,gold,iron ore and such, that did not benefit from the previous debt induce inflation. This seems to be a temporary fix in maintaining the current overall price structure, as it is just money/ debt being moved around not being created. Since the central banks it seem could not create new debt forever without a continued increase in the demand for new debt from the general public and/or financial system. Which seems to be the Achilles heal of the fraction reserve system, that when overall debt does not increase as old debts come due then system collapses.

"But in a way they are wrong.

Remember, you hold the bond worth $100,000. You were under the illusion that you had $100,000 in assets. Now your "asset" is worth $50,000. So your power to liquidate your asset, that is, convert it to cash, is halved.

Your future buying power and investment power is halved.

But loss of future buying power is not the same as deflation. It may or may not lead to future deflation but it is not at all the same as deflation."

-How so? the bond is a debt owed to you by someone else, if falls in value to $50,000 dollars then that is a reduction in the overall money supply by $50,000. Weather you cash it out or hold on to it, in the long term it would be irrelevant.The illusion is on the side of the owner in thinking that a 50% reduction hasn't occurred, when it in fact has. I can buy that bond now or in the future for $50,000. My future/current buying power or investment power to buy that bond from that "owner" of that "asset" would have doubled, not have been halved. Since, I can get 2 bonds for the price of 1. If I had either cash or new debt to purchase it, and new debt to purchase old debt instruments seems to be harder to come buy these days in general. That would seem to fit deflation,because in the case of a mortgage bond there is a real asset(namely a house) attached to that bond(reduction in the money supply, and price deflation) or any other debt instrument tied to a tangible asset.

-It would seem that there is a limit to the theoretically price increase of commodities. Namely the price at which the finished product can be sold for. I will admit that the price of the materials can exceed the price of the finished product for a short while, but the Russian proved that it is not sustainable economy, I'm referring to the famous example of Russian shoes being worth less than the materials it took to make them, if this occurred in aggregate then the economy eventually collapses. The price of the finished product would have to rise or the price of the materials would have to fall in order to achieve a reconcilement of the price differences or the 3rd option is that no shoes would be produced. Since all tangible assets require inputs of raw materials one of the three options must occur for every tangible asset, weather it is houses, power tools, cars, or anything else that isn't a financial product. If option one occurred then there would be a reduction in demand and hence a reduction in price or a lid on the price of the raw materials if they are to be produced. If option two then market price of the finished product would reflect the underlying value of the raw materials. If option three, then there is mass unemployment and aggregate demand and production collapse, i.e the end of the world as we now know it.

I'm just try to fit all of this into some logical framework so that it is understandable to me, there are some very complex concepts that I am sure I do not fully understand and am try to get and handle.

It is important to distinguish between asset price deflation and commodities price deflation. This is where Mish and Rick get lost. They have no concepts that allow them to distinguish between the FIRE Economy and the P/C Economy which are managed independently from a monetary policy standpoint. Clearly, assets - stocks, bonds, property – are deflating. However, as Grapejelly correctly points out, asset prices can deflate with no direct impact on the money supply. In fact, the efforts by the Fed to halt asset priced deflation by keeping interest rates above the zero bound, is contributing to inflation in the P/C Economy.

[zmas28]

Re: Deflation vs Inflation debate: Part XXXVI - Final

jacobdcoates, when you hold a $100,000 bond, you do not hold $100,000 in money.

That's my point.

A failure to differentiate between money and money-like things.

There is the *illusion* that you have $100,000 when you hold the bond but you don't. If there is a run on that bond's issuer, your $100,000 bond could be worth $0 in a hurry.

So let's say lots of people were holding those bonds and suffered from a loss of their value.

Is this deflationary?

My answer is, no it is not.

Mish and Rick say, yes it is.

I say it is not because they were never money to begin with.

Yes, such an insolvency event affects the future willingness to borrow.

Yes, such an insolvency event affects the future spending plans of the owners of those bonds.

But the loss of value in the bonds has nothing directly to do with the money supply.

Nothing.

Hi GrapeJelly,

I see this a little differently. I think the bond, being a tradeable security, is like money (fungible?). I think the issuance of the bond represents addition to the money supply, because I can sell the bond to someone else and receive value for it. Agreed that the price of the bond might go up or go down, but thats true of everything. Its true of the dollar when measured against the euro, for example. Both the bond and the dollar are fiat, one issued by the bond issuer and the other by the US government.

So if the price of a bond goes down, it seems to me that now there is less (generic) money available to chase tangible assets, so this would imply deflation. Taken to an extreme, if bond values for a specific company were to collapse to zero, that would represent the destruction of a debt security, would lower the financial assets of the creditors and be highly deflationary.

Mortgage "bonds" should be somewhat different, because they are backed by collateral, i.e., the house. But even here, since the mortgages have now been securitized, it seems to me that termination of the mortgage either due to default or repayment, destroys the security, and effectively exchanges a tradable security for a relatively illiquid asset, the house. So again deflationary.

This is the view of someone who has very little knowledge of economics so I would welcome enlightenment if this line of thinking is flawed.

(Just to clarify, I'm thinking the above effects are deflationary. I do buy into the thesis that we are being hit with inflation in asset prices through ties to the global economy and excess liquidity from the CBs).

[jacobdcoates]

Re: Deflation vs Inflation debate: Part XXXVI - Final

jacobdcoates, when you hold a $100,000 bond, you do not hold $100,000 in money.

That's my point.

A failure to differentiate between money and money-like things.

There is the *illusion* that you have $100,000 when you hold the bond but you don't. If there is a run on that bond's issuer, your $100,000 bond could be worth $0 in a hurry.

So let's say lots of people were holding those bonds and suffered from a loss of their value.

Is this deflationary?

My answer is, no it is not.

Mish and Rick say, yes it is.

I say it is not because they were never money to begin with.

Yes, such an insolvency event affects the future willingness to borrow.

Yes, such an insolvency event affects the future spending plans of the owners of those bonds.

But the loss of value in the bonds has nothing directly to do with the
money supply.

Nothing.

Grapejelly,

You are right I do fail to see the distinction between money and money-like, what are the differences? If it acts like money and is used like money it must be money in my thinking. Money-like could become not money, I'll grant you, especially if the value falls to 0. it would cease being a medium of exchange. If it was a medium of exchange before and then was not, how did the amount of "stuff" available as a medium of exchange not change? but EVEN money can become not money, if it cannot be used as a medium of exchange or have value.

How are negative impacts to willingness to borrow and spend not deflationary?

Also, why count bonds as assets then? why not liabilities?

Fred and Grapejelly,

If that bond is only worth $50,0000 when I bought it at $100,0000, then why would I have to take FRN or their digital equivalents and writedown the value of the bond. Say for example I was a company that owned that 100k bond that fell in value to 50K. I would have to take 50k FRN's that I had received from my customers(profits) and write down that bond and those 50k FRN would not be available to be spent or lent on other items in the economy and hence be destroyed as far as the money supply is concerned. Their velocity and value would be zero since they could not be spent. That would seem to shrink the available money supply wouldn't it? and if not where would those 50k FRN go and why writedown the bond at all??

[jacobdcoates]

Re: Deflation vs Inflation debate: Part XXXVI - Final

"They have no concepts that allow them to distinguish between the FIRE Economy and the P/C Economy which are managed independently from a monetary policy standpoint."

I don't either. I would seem that almost everything in the FIRE economy is in someway dependent on something in existence in the P/C economy. Please explain how they are manage differently?

[FRED]

Re: Deflation vs Inflation debate: Part XXXVI - Final

"They have no concepts that allow them to distinguish between the FIRE Economy and the P/C Economy which are managed independently from a monetary policy standpoint."

I don't either. I would seem that almost everything in the FIRE economy is in someway dependent on something in existence in the P/C economy. Please explain how they are manage differently?

See: Saving, Asset-Price Inflation, and Debt-Induced Deflation

[metalman]

Re: Deflation vs Inflation debate: Part XXXVI - Final

See: Saving, Asset-Price Inflation, and Debt-Induced Deflation

hudson's analysis... aaa+

hudson's solutions... d-

[jacobdcoates]

Re: Deflation vs Inflation debate: Part XXXVI - Final

Fred,

Thanks for the link to the thread.

It seems through the inflation/depression question was not resolved there either. The FIRE economy managed by interest rates, rents and capital gains. Which if left unchecked will choke off the P/C economy, resulting in a financial crisis that will only be final resolved by some political solution. Either the government bails out the creditors(reinflate) or debtor default on their debts(depression), Is it a forgone conclusion that the fed can reinflate, given that debt is fast becoming a 4 letter word? How is reinflation possible when the propensity to borrow is reduced from previous level? Since, according to the article ever greater levels of borrowing are need to keep the FIRE economy stable and the P/C economy from faltering?

Ka poom theory is premised as per you previous post, that all the dollars need to create inflation have already been recreated and are the one residing outside the U.S. Will that happen if all those sovereign wealth funds are not allowed to spend there dollars here in the U.S. If not which seems like it is happening. that would and is causing commodity price inflation as we are seeing right now. There does seem to be a limit to how high commodity price can go if incomes are not increasing with those commodity prices. At least in the U.S. they do not seem to be keeping pace. So which of the 3 options occurs- finished products price increases= less overall consumption and employment??, 2) commodity prices fall to match the price of the finished products or 3 no production at all?

[metalman]

Re: Deflation vs Inflation debate: Part IVXXX - Final

Eric:

Many thanks for the comic relief and thought-provoking analysis. Comment and questions for you (and all Itulipers):

First, I'm not Roman, but is it IVXXX or XXXIV?

Second, I'm also not an economist, but is it possible, despite negative real interest rates set by the Federal Reserve, that massive nationwide house deflation (nominal prices), which causes massive write downs of RMBS, which causes forced sales of such securities, which causes further write-downs and sales, which causes more than one major US bank failure, which causes a 1991 Nikkei style decline of the S&P 500, all of which cause a sufficient shock to the US economy and extreme recession that the asset, credit and debt deflation spread to the commodities, food markets and other currently inflationary markets and thereby create a general decline in prices, i.e., price deflation? (sorry for the run-on sentence.)

In short, one difference between the inflation and deflation argument seems to be that deflationists believe the Fed and our federal government, despite keeping real interest rates negative, will not succeed in adding credit and liquidity to the monetary base and reflate the economy because the crashing housing market and related asset crashes and bank failures (or balance sheet decline and associated inability to supply credit) will totally overwhelm any attempt to keep general prices positive.

If anyone can comment, a non-Roman, non-economist would like to know your thoughts. Thanks.

these guys have wasted millions of words to avoid answering a question that sir isaac newton asked hundreds of years ago when asked by a sleazy gov't to debase the brit currency: 'what is your unit?'

if that ain't enough, here it is:

100 x nothing = nothing. 10,000 x nothing = nothing.

100 x slightly less than nothing = slightly less than nothing.

100,000 x slightly less than nothing = slightly more than 100 x nothing.

that is all.