Can you say "stagflation"?

[blazespinnaker]

http://www.bloomberg.com/apps/news?p...Pjo&refer=home

[rj1]

Re: Can you say "stagflation"?

So what Bernanke seems to be saying is that there will be little chance of deflation (or disinflation) due to the global economy. Does that mean the Fed would not be able to justify an interest rate cut, even if they want one for the U.S. economy?

[Finster]

Re: Can you say "stagflation"?

Can you say "stagflation"?

I can say "stagflation" all right, but I don't want to. I don't like the word "stagflation", because it assumes that somehow simultaneous economic weakness and inflation is unusual and therefore deserving of a special name. The classic Keynesian-Phillips Curve-NAIRU theory that assumes a tradeoff between economic growth and inflation. To which I say, poppycock and balderdash. The 1970s, 1990s, and everything in between prove otherwise.

To understand how deflation fits in with inflation, you need to appreciate there are different meanings of the terms in use. Sometimes "deflation" is used to refer to a contraction of money and credit and other times a rising value of the currency (evidenced by falling prices). You can even further subdivide the first case into a contraction of nominal money credit and a contraction of the real volume of money and credit.

Depending on which of the three meanings of deflation is being used, the environment can look very different. Usually a contraction in the volume of money and credit is associated with a rising value of the currency. Less money supply naturally goes with the money being more valuable, which we notice in the form of lower prices. In this circumstance, it doesn't matter much whether you're using the term deflation to refer to money contraction or rising currency, because they go together like hand and glove.

Suppose, though, that the nominal amount of money and credit grows, but that the value of the currency falls even faster, such that the total real value of money and credit is actually falling. In this case you have rising prices (inflation) at the same time as the real supply of money and credit is falling (deflation).

Sound confusing? Unlikely?

Maybe so, but it is an extremely important phenomenon. As alluded to above, this is what happened in the 1970s. It also happened in 1933-1949. In both cases, the Federal Reserve sought to counter the effects of a real deflation with nominal inflation. In fact, what is called "inflation" usually happens in a period of real deflation.

Many analysts make this same mistake. They fail to distinguish between the pre-1933 and post-1933 periods of the deflationary 1930s, which were polar opposites in terms of currency value even while both were the same in terms of the contraction of real money and credit. The pre-1933 period - which is what most people think of as "deflationary" (in all three of the above senses), was characterized by falling prices and a rising value of the dollar. Gold prices held up only because gold and the dollar were tethered to each other by the government. The prices of silver and other commodities, fell, and so would those of gold were it not for this government enforced peg. After that link was severed in 1933, however, the thirties much more closely resembled the 1970s, and gold prices (where it was freely traded) rose in dollar terms as the dollar lost value.

In the sense of the term used by most market commentators and understood by most investors, however, "deflation" means falling prices and a rising currency. This is most certainly NOT a tailwind to gold prices, and in fact the last time we had such an experience - in the twin deflations of 1997-1998 and 2000-2001 - gold prices fell. Right along with those of most other commodities.

So-called "stagflation" is nothing more than what you get when the Federal Reserve tries to counter the effects of a real deflation with nominal inflation.

[blazespinnaker]

Re: Can you say "stagflation"?

CPI up -

http://www.bloomberg.com/apps/news?p...Ki4&refer=home

Poor Ben! And he's got Greenspan sniping from the sidelines too. Fun fun fun.

[grapejelly]

Re: Can you say "stagflation"?

I would say further that deflation isn't falling prices.

It's a contraction of the money supply.

Not easy to define necessarily but prices are a symptom.

The trouble with defining deflation using prices is, which prices?

As we have discussed here, people are similarly misled now that inflation is low because the prices they look at are CPI inflation.

When the stock and real estate markets go up it's a bull market, rather than inflation, to most folks.

I don't think we've any true deflation in the US since 1933.

I think it's not possible to have sustained deflation in the US absent a gold standard or some other real throttle on money supply expansion. Even in the Volcker era I don't think we had true deflation.

Sure, money supply can collapse from defaults and people paying back loans. This would be true deflation.

But then money supply will be expanded as rapidly or more rapidly via fiscal and monetary policies that can effectively replace privately initiated monetary contraction. And that is what has happened so far and will continue to happen. The CBs don't wait anymore for this to happen...when they sniff it out as possible in the near future, they begin to increase the money supply pre-emptively.

[Finster]

Re: Can you say "stagflation"?

I would say further that deflation isn't falling prices.

It's a contraction of the money supply.

Ahhh ... but which money?

Not easy to define necessarily but prices are a symptom.

The trouble with defining deflation using prices is, which prices?

As we have discussed here, people are similarly misled now that inflation is low because the prices they look at are CPI inflation.

When the stock and real estate markets go up it's a bull market, rather than inflation, to most folks.

I don't think we've any true deflation in the US since 1933.

I think it's not possible to have sustained deflation in the US absent a gold standard or some other real throttle on money supply expansion. Even in the Volcker era I don't think we had true deflation.

Sure, money supply can collapse from defaults and people paying back loans. This would be true deflation.

Deflation is not an economic condition. It is nothing more than an increase in the value of the monetary unit. Critical thinking makes this clear - depending on which monetary unit you are using, the very same economic circumstance may be viewed as inflation or deflation.

Take the 1970s, for example. Did we have inflation or deflation? You sure can't say so based on money supply ... what kind of money is it whose supply you are counting?

In the 1970’s price rose dramatically in terms of USD. If you price the same goods, services, and capital in ounce of gold, however, prices fell just as dramatically, if no more so.

Were the 1970’s inflationary … or deflationary?

We report … you decide.

[blazespinnaker]

Re: Can you say "stagflation"?

http://www.federalreserve.gov/boardd...2007/20070321/

"Recent indicators have been mixed and the adjustment in the housing sector is ongoing" .. "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected"

Ie, economy is sucking wind from housing but inflation is a big concern. This should get interesting.