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When you find someone who is not of the iTulip community and “gets it”, it is well worth the read. Although agreement and validation from a different source is reassuring, more importantly, it can clarify, offer a different perspective, with possible investment consquence.
Daniel R. Amerman, CFA
http://the-great-retirement-experiment.com/index.htm
Overview
As the financial crisis continues to deepen, many people are deeply concerned that collapsing credit availability will lead to powerful monetary deflation, much like it did during the US Great Depression of the 1930s. As compelling as these arguments seem to be – are they backed up by the actual historical evidence?
In this article we will:
1) Ask a crucial real world question about deflation theories;
2) Revisit the US Great Depression with a focus on 1933 rather than 1929;
3) Show that the central monetary lesson of the US Depression is not the unstoppable power of deflation, but rather, the historical proof of how a sufficiently determined government can smash monetary deflation and replace it with inflation – at will and almost instantly, even in the midst of a depression;
4) Examine two historical and logical fallacies that lead to the mistaken (albeit widespread) belief that the Depression proves the modern deflationary case, when it in fact proves the opposite; and
5) Briefly discuss the third logical fallacy that threatens many investors’ standards of living over the years to come, particularly those who are retired or investing for retirement.
The Six Fallacies
Let’s quickly review the six fallacies we have covered in Parts 1 & 2 of this article.
Fallacy One. The belief that a “dollar” is a “dollar” and that the deflationary history of gold standard currencies applies to symbolic currencies (an “apples to oranges” fallacy).
Fallacy Two. The belief that the US Great Depression proves the case for unstoppable monetary deflation during depressions, when it in fact proves that a sufficiently determined government can immediately break monetary deflation at will, even in the midst of depression.
Fallacy Three. The belief that inflation and deflation take wealth from all of us equally, when what they actually do is redistribute the wealth among us.
Fallacy Four. The widespread belief that Japan experienced powerful price deflation that the government was powerless to fight. It didn’t.
Fallacy Five. The fundamental mistake of thinking that “deflation” is “deflation”, which leads to confusing price deflation with asset deflation, and means missing the real lessons and dangers of what happened in Japan, which is the persistent asset deflation that has defeated all government interventions (another “apples to oranges” fallacy).
Fallacy Six. The dangerous belief that deflation protects you from inflation. More specifically, the vocabulary confusion that leads to the belief that asset deflation protects you from monetary inflation, or that the destruction of the value of your assets is somehow historically proven to protect the value of your money.
Puncturing Deflation Myths, Part 1
Inflation During The Great Depression
http://the-great-retirement-experiment.com/Products/Deflation%20Myths%20One.htm
False Lessons From Japan
Puncturing Deflation Myths, Part 2
http://the-great-retirement-experiment.com/Products/Deflation%20Myths%20Two.htm
Daniel R. Amerman, CFA
http://the-great-retirement-experiment.com/index.htm
Overview
As the financial crisis continues to deepen, many people are deeply concerned that collapsing credit availability will lead to powerful monetary deflation, much like it did during the US Great Depression of the 1930s. As compelling as these arguments seem to be – are they backed up by the actual historical evidence?
In this article we will:
1) Ask a crucial real world question about deflation theories;
2) Revisit the US Great Depression with a focus on 1933 rather than 1929;
3) Show that the central monetary lesson of the US Depression is not the unstoppable power of deflation, but rather, the historical proof of how a sufficiently determined government can smash monetary deflation and replace it with inflation – at will and almost instantly, even in the midst of a depression;
4) Examine two historical and logical fallacies that lead to the mistaken (albeit widespread) belief that the Depression proves the modern deflationary case, when it in fact proves the opposite; and
5) Briefly discuss the third logical fallacy that threatens many investors’ standards of living over the years to come, particularly those who are retired or investing for retirement.
The Six Fallacies
Let’s quickly review the six fallacies we have covered in Parts 1 & 2 of this article.
Fallacy One. The belief that a “dollar” is a “dollar” and that the deflationary history of gold standard currencies applies to symbolic currencies (an “apples to oranges” fallacy).
Fallacy Two. The belief that the US Great Depression proves the case for unstoppable monetary deflation during depressions, when it in fact proves that a sufficiently determined government can immediately break monetary deflation at will, even in the midst of depression.
Fallacy Three. The belief that inflation and deflation take wealth from all of us equally, when what they actually do is redistribute the wealth among us.
Fallacy Four. The widespread belief that Japan experienced powerful price deflation that the government was powerless to fight. It didn’t.
Fallacy Five. The fundamental mistake of thinking that “deflation” is “deflation”, which leads to confusing price deflation with asset deflation, and means missing the real lessons and dangers of what happened in Japan, which is the persistent asset deflation that has defeated all government interventions (another “apples to oranges” fallacy).
Fallacy Six. The dangerous belief that deflation protects you from inflation. More specifically, the vocabulary confusion that leads to the belief that asset deflation protects you from monetary inflation, or that the destruction of the value of your assets is somehow historically proven to protect the value of your money.
Puncturing Deflation Myths, Part 1
Inflation During The Great Depression
http://the-great-retirement-experiment.com/Products/Deflation%20Myths%20One.htm
False Lessons From Japan
Puncturing Deflation Myths, Part 2
http://the-great-retirement-experiment.com/Products/Deflation%20Myths%20Two.htm
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