Inflation VS Deflation

Miscellaneous Current Events
1

I’m tired of hearing everyone speak about inflation. This piece is not intended to appeal to the highly intelegent but to the everyday man to give him a better understanding in laymans terms what I see happening. I welcome any critique in my logic or if I am not seeing this write. I am not a student of economics or a professor by any means. Thanks Ryan

The misinformation and confusion circulated by financial newspapers and news programs is astounding. CNBC the main financial news program affectionately calls itself, ‘The best of the best’ or ‘The only business network that has the information and experience you need’. Every day on their program they have guests and panels of so called, ‘market mavens’ or ‘experts’ overwhelmingly pronouncing what is nothing more than self serving spin.

My personal favorite was a prediction CNBC made last December 2008. Larry Kudlow, one of their pundits said, ‘we are now officially in a recession and we know it began 1 year ago’. What? I almost fell out of my seat. Let me get this straight. Larry Kudlow as well as everyone else who works for CNBC, including 95% of their featured ‘experts’ were proclaiming we were avoiding recession and in some cases going higher for all of 2007 and 2008. All the while the Dow Jones Industrial Average decreased from 14,000 to 8,000 a loss of over 40% in just over a year. They call themselves, ‘the best of the best’ or ‘the only business network that has the information and experience you need’. That could be a line for a comedy routine. Actually Jon Stewart of Comedy central has done just that. Jim Crammer another CNBC pundit is the king of baloney and BS. He proclaimed that Bear Stearns was not only a hold, but a great buy at 60 dollars per share. This was one week before it went under. This brings me to the reason for this letter. I’d like to clear up a wide pervading misconception that most news sources, not only CNBC are getting DEAD WRONG. It’s astounding to me that there isn’t a single person anywhere on TV or in the Main Stream media that’s getting the inflation/deflation issue right. It almost makes me feel I’m in some sort of matrix. Perhaps the main problem is that most Americans have no idea how our money is created.

Let’s first look at few definitions.

Monetization

1. To establish as legal tender.

2. To coin (money).

3. To convert (government debt) from securities into currency that can be used to purchase goods and services

Inflation

1. The act of inflating or the state of being inflated.

2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

Deflation

1. The act of deflating or the condition of being deflated.

2. A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available currency and credit.

We can see by reading the definition that Monetization is creating money. This is exactly what took place over the past 10 years plus ending just a few years ago when the Federal Reserve, (a private banking cartel who will not tell us where our bailout money is going) increased the money supply by lowering lending rates at breakneck speed. At the same time lending standards became non-existent allowing everybody and their brother to borrow money to buy just about anything they wanted to from cars, homes, collectibles, jet skis, and so forth. What did that do? It pushed prices to the moon. Re-read the definition of inflation please. It’s interesting that today people are incessantly talking about ‘printing money’ and ‘inflation’. Where the heck was this discussion when inflation(reference definition) was actually happening? Did the properties in your neighborhood quadruple in ten years or did it just happen in mine? It’s interesting we hardly heard a peep about inflation when it was happening during the biggest housing, stock market, and commodity bubble in history yet now, when it’s over, we hear about it ad nauseam. See the attached chart on the money borrowed for homes to preview the bubble that was created(can’t attach it here, request from me if interested). This chart shows the true monetization of money and inflation, which IS NOT what is happening today as I’ll explain later.

Please now read the definition of Deflation. Is that, or is that not exactly what is happening now? I can hear the battle cries out there BUT, BUT, BUT we are printing more money and more debt than we ever have in history, we are going to have inflation! We may be printing, but where is that money going? Is it getting loaned out so people can buy goods and thus increase prices? Not in my neighborhood, are prices increasing for homes, cars, and collectibles in yours? NO, let’s at an example of why I see delfation and that this so called printing is baloney.

Say the year is 2000 and you borrowed $1,000,000 dollars to buy a house. This is a perfect example of monetization which created inflation(read definition). Another misconception is the notion of ‘printing money’. It was not printed, a paper loan was created. If that house is now worth $500,000 what happened to the other $500,000? It’s gone, that’s right, it’s gone, it doesn’t exist. It’s called debt destruction which is not inflationary, it’s deflationary, read definition of deflation. If they ‘print’ or ‘create more paper loans’ to replace that lost $500,000 how is that inflationary? It is the replacement of the paper loan that no longer exists? Furthermore that money IS NOT going into the hands of homeowners at anywhere near the pace it did in the past 10 years, which is why it is not monetization or inflationary. Let’s look at it this way.

Say you have $1,000,000 dollars in cash that gets burned up in a fire. That money is destroyed right? It’s not in the system anymore because it’s dust. Therefore if another $1,000,000 is printed to replace the ashy dollars is that inflationary? Of course not. Today we are not even replacing that million dollars. Another words we may be creating more money but it’s not going back into that house to replace that burnt money, it’s staying with the banks therefore it is NOT INFLATIONARY and NOT MONITIZATION!

In summary it amazes me how many seemingly smart people have no idea what their talking about. It’s amazing how many smart people READ from the same playbook. In summary inflation is what we had over the last 15 years. You can’t have people going broke, losing jobs, defaulting on loans, and having no extra cash and call that inflationary. Dollars are scarce, which is anything but inflationary. It’s the old concept of supply and demand. You have no cash, you have no demand, your prices drop.

Ryan

2

i think , if inflation is merely increasing the money supply, (which tends to have price increase effects), then, burning money on a fire and then printing new money, is an inflationary step, coming after a deflationary step. the two steps considered as single event is ambivalent, but if the deflation is a ‘natural’ bubble popping, and government response to this is to invent new money, they are inflating. artificially creating money to offset a market process of money destruction in order to keep the money supply at the same level that pertained prevviously, is inflationary. (i.e if the inflation step had not been chosen, deflation would obtain, and that would be no bad thing)

3

Inflation is an increase in the supply of money and credit. period.

price rise (misleading called price inflation - prices don’t inflate or expand, they rise) is a result of inflation.

deflation is the opposite of inflation.

4

But if currency is being created at a staggering enough rate, while credit is contracting, it can still lead to inflation (prices are increasing for three months at the moment, since january)

5

inflation can be the cause of price increases, but it is not price increase

6

Sure study history, no massive contraction goes from top to bottom. In market terms we call it a dead cat bounce as I’m sure you know. We are heading for another depression. Take a look at this and reference number 6-9, this where we are right now in our current cycle, this graph is awesome.

7

UM yea? What does that mean? That’s ludicrious. stop mincing words.

8

a punching motion can cause a facial injury, but a punching motion is not a facial injury.

a facial injury is not the cause of punching motions.

likewise

money supply inflation, can cause price increase, but money supply inflation is not price increase

price increase are not the cause of inflation.

cause causes effect. cause is not effect.

9

Nice, I get it, thanks. I would say I agree but that would assume one could disagree and this logic is debatable. Makes perfect sense, looks like the UK and US are screwed.

I especially like the ‘punching in the face’ anaology, a man after my own heart. [:D]

10

ha ha, no, im pretty meek and mild truth be told, but its just the metaphor that popped into my head.

an im laughing to myself because, now you have slightly different reasons to be upset about what you read in the press!

11

dead cat bounce.

Yea, the 29 crash had a bear market ralley and then she turned over and crashed again. I don’t think that is will necessarily happen this time. It may. But this time we’ve been off a gold standard for 37 years and the printing press has created massive money supply inflation. The stock market, priced in dollars, may stay where it is. But the market priced in gold (or real terms, real purchasing power) can crash. We may see one oz of gold buy the DJIA. I doubt the dow will fall to 1000. More likely gold will rise to $5000 usd and the dow fall to 5000. Bread may also cost $6/loaf.

As for price inflation, prices can be stable and yet there is inflation. During the 1920’s the US was in one of the most productive times it was ever in. Increased productivity and competition caused prices to fall (just as the price of computers of ball-point pens have fallen since invention), which was really an increase in purchasing power of the gold dollar due to increased wealth. Cartels and big businesses (Morgans & Rockerfellers) agitated for cartels and inflation to prevent prices from falling. All while the input costs of production were falling - so profit margins remained the same while all of society got wealthier. Business men that were friends of the Fed wanted this wealth so they expanded the money supply just enough so prices remained fixed. They didn’t rise. But they didn’t fall, because inflation was offset by the increase in number of goods being introduced to market. The inflation still created malinvestment, speculation and a boom that ended in the 1929 bust. So, you don’t need prices to rise to signal that you have inflation. Prices can remain flat and you still have inflation, if it’s offset by increased productivity. You still get the malinvestment and crash due to inflation.

12

Have you ever heard of something called stagflation? It’s when you have price inflation with people going broke, losing jobs, etc. (I think there was a bout of it back in the 70’s?–confused a buch of economists or something). If I didn’t know better, I’d think you were a confused Keynesian!

Oh, and by the way, have you happened to take a look at the MZM money supply lately?–>

http://research.stlouisfed.org/fred2/data/MZM_Max_630_378.png

It kinda looks like there’s a lot more money than there used to be, but hey, maybe I’m just losing my eyesight.

In summary, it’s amazing how you can have the gull to accuse others of not knowing what they’re talking about, especially when you throw out a bunch of nonesense ostensibly based on your “feelings”. Next time be a little bit more courteous, and a little less confident.

13

Myself, I’ve given up on this semantic battle. Inflationists want to define inflation as price rises, so that they can excuse “price stabilizing” monetary expansion as non-inflationary. That sucks, but I’ve got bigger fish to fry than semantic debates. So I let them define inflation, and focus my argument on the effect that “monetary expansion”/ “easy money” has on interest rates (regardless of the price level of goods) and how that causes the business cycle.

14

Edward,

Maybe you should take the tampon out of your pants, Edward. I was referring to the people on CNBC as I detailed in my letter, maybe you should read it again. I was humbly asking the advice from people that perhaps aren’t unread TV watching morons. By the way, it’s spelled gaul I believe Edward, not gull. On a lessor note it’s ‘bunch’ not buch.( It seems it would be somewhat hard to misspell words with a built in spell check yet your critizing me for my intelegence??). Is it not true by watching the mainstream media that most educated people are lost? Pull your head out guy. I assume your one of them but by the lack of your spelling ability and your claim about the U.S. being in a stagflation, I would say you are one of the morons or over educated mokes. Furthermore I’ve seen this chart and perhaps there is something YOU don’t understand. Just because the money supply is increasing does not mean it’s being monetized. Do you know what that word means edward? It kinda(using another one of your misspellings, I’m thinking you’re about 20 years old now) looks like the price of everything is decreasing Edward, so fast one can’t keep up. Are you one of those brainy guys with a lots of books and no money who can’t get out of his own way? I’d bet dollars to donuts I’m right.

I had a few intellgente people set me straight on my facts, thanks for your imput and don’t forget about your tampon.

.

15

Your “humbleness” is quite subtle, to say the least. And I got that you were referring to the people on CNBC, but I also took your post as a criticism against anyone who tends to think we’re setting the stage for prolonged stagflation. Fair?

From now on, I’ll check an extra time just for you;). But please, could ew stop CRITIZING my INTELEGENCE it herts my fealings:(.

I don’t recall arguing with your first sentence. In fact, I couldn’t agree more.

Wait a second, are you one of those people who’s lost? Why didn’t you say so?! It’s alright, everyone’s in the dark now and again.

Oh, and I didn’t mean to give the impression that I think we’re in the midst of a stagflation (price stagflation). Rather, I think we’re setting the stage for stagflation, and that it has likely just begun (in terms of price).

Hmmm, is monetization “To convert (government debt) from securities into currency that can be used to purchase goods and services”? Well, if that’s the case, then aren’t open market operations, and the recent decision by the fed to purchase billions in treasuries and mortgage securities “monetization”? Further, don’t all of these firms now have money to buy things with, whether it be mainting their labor force, or paying off debt? Hmmm, am I missing something? And if the increase in the base by the fed is being offset by an even greater destruction of money elsewhere, would’t the MZM money supply be shrinking? But wait a second, it’s increasing!

You know, the MZM is different from the base (of course you know this!). While the base doesn’t necessarily reflect more money floating around, so long as banks hold it, the MZM DOES.

Now, that doesn’t necessarily translate into rising prices. If the demand for money rises, that is, people hold more cash, this can offset the increase in the money supply. But for how long will this last? When people begin to see that the price falls they’ve been waiting for aren’t happening they’ll begin to unload some of those holdings, which will cause prices to begin rising a bit more dramatically (especially since production will have fallen–meaning less goods for the money to chase). Because of this, and the large amount of money floating around, the price increases will become even more visible, causing others to join in. Unfortunately, spending more doesn’t translate into greater profits, which means many companies will continue to go under, i.e., we will experience stagflation. I am fully convinced this is the path we’re on. Bernanke is fully committed to printing as much money as possible and he overestimates the ability of the Fed to operate with any degree of precision (THE FATAL CONCEIT!).

Actually I’m 12, I have 7 books, and a $10/week allowance. Oh, and the CPI actually rose slightly in January --.3% and in February --.4% (and according to the older CPI it was even greater). There’s certainly downward pressure on prices, but Bernanke has at his disposal a powerful tool: the printing press in an era of fiat money. I give the edge to the latter, not the former.

But thanks for the INTELLGENTE IMPUT, it was very refreshing. For your own sake, I hope those mispellings were part of your retort. If they weren’t, well, I think you’ve got some serious issues. I really don’t think I can dignify any more of your responses with a reply–it’s simply not fair. Oh, and I use a pad, not a tampon, they’re much more comfortable.