Paradoxical Deflation coming?

Quote from piezoe:

That's starting to make some sense to me. Also, Morganist, can you restate that first sentence. I'm having a little trouble understanding it. Something about prices not reaching equilibrium fast enough during QE??
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Prices of goods are pushed up by QE. It creates an artificial demand. In the UK they are creating low interest rates through providing funds through QE to make cheap debt available. That makes the price of houses higher than it would be if the QE and low interest rates were not there.

Normally in a recession there is natural compensation for the lack of income, in that the decrease in income reduces demand for housing and house prices fall. Because of the QE and the way they have gone about it (namely though mortgage debt, in the UK at least) the natural compensation has not happened and the cost of housing and rent does not reflect the populations ability to afford it.

This means the homes owners are still rich in comparison through this artificial compensation. However when the QE stops it will collapse. If you look at the statistics in the UK the homeless levels have rocketed. In a recession house prices should fall. They haven't this is not a natural recession and the intervention in by the Central Bank is like a political tool to keep the home owners rich at the expense of everyone else.

I wrote an article about this.

http://morganisteconomics.blogspot.co.uk/2011/11/artificially-low-interest-rates-are.html
 
Quote from piezoe:

Swan, That's starting to make some sense to me. Also, Morganist, can you restate that first sentence. I'm having a little trouble understanding it. Something about prices not reaching equilibrium fast enough during QE??

edit: Morganist, I did not understand decrease in money supply causing prices to inflate. I thought a decrease in money supply generally made money more valuable so wouldn't that, all other things being equal, in general have the effect of lowering prices? Or doesn't it work that way?
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Not necesssarily. There are lots of things that impact prices the main thing is actually international. Even the US is susceptible to price changes out of their control from supply shocks and things like disasters.

Remember the money supply does not necessarily reflect prices. Prices are down to output and the availability of the market to attain those goods. The price is as much supply as demand and the international demand will impact on the availability of your economy to attain those goods. It is very complicated. What you are saying is equivalent to saying that only the demand in one country will impact on prices.

Do you see my point? Perhaps you could see it as internationl competition through currency prices?
 
I'm taking about increased unemployment, falling wages and collapsing prices even as the money supply expands but the velocity decreases violently. I'm talking about people not only not buying new cars but passing on the morning Starbucks. I'm talking about mothers cutting the kids hair and fathers mowing their own lawn and fixing their own roof.

I'm talking deep recession that spurs the printers of fiat currency to drive us out the other side of the envelope to hyperinflation but to no better effect.

I am talking about chickens coming home to roost and our political leaders/clowns faced with a range of options from bad to worse inventing new levels of absurd. Where we are is serious and except for Christine Lagarde there does not seem to be even a single serious player on the world stage.

The Western world is in a war against our past excesses and we have generals with the skills of captains and the courage of deserters. It is a sick joke.


QUOTE]Quote from morganist:

Are you talking about deflation as a reduction in money supply or an decrease in prices. There is a difference. A reduction in money suppy can increase prices and thus make inflation. Which are you claiming? [/QUOTE]
 
Quote from KINGOFSHORTS:

I posted a while back. Expect deflation then a sudden bout of hyperinflation once all that cash sitting on those reserves get pushed out on the open markets.
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While I can easily see double digit inflation, actual inflation in every thing except construction/real estate is almost there now, I'm having trouble seeing runaway hyperinflation unless sovereign banks around the globe no longer have an interest in supporting the dollar, and confidence in the dollar is lost. Then I can see it. I don't think that is too likely at this juncture. I'm expecting the Europeans, if they are serious about holding the EU together, to eventually give in and just follow the model of the U.S. Fed. Thus I would expect the Euro to continue to weaken and the dollar strengthen relative to the Euro. I won't be too surprised to see parity at some point down the road.

Swan has me a little worried. The picture he has painted is not a rosy one.
 
This is not about who has the best pile of shit this is about the fact that fiat currencies ARE piles of shit. The whole process has been stretched beyond the absurd.

Quote from piezoe:

While I can easily see double digit inflation, actual inflation in every thing except construction/real estate is almost there now, I'm having trouble seeing runaway hyperinflation unless sovereign banks around the globe no longer have an interest in supporting the dollar, and confidence in the dollar is lost. Then I can see it. I don't think that is too likely at this juncture. I'm expecting the Europeans, if they are serious about holding the EU together, to eventually give in and just follow the model of the U.S. Fed. Thus I would expect the Euro to continue to weaken and the dollar strengthen relative to the Euro. I won't be too surprised to see parity at some point down the road.
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Swan, you have me worried. I guess it's only reasonable that at some point the war to see who can out cheapen their currency will have to end badly. And then we will have no choice other than to bring our consumption into line with our productivity.
 
Quote from piezoe:

perhaps I am wrong. I liked Trefoils nice example, however, so far at least deflation in one sector, real estate, has been balanced out, or even exceeded, by inflation in other sectors.

The inflation I understand, but I'm having trouble seeing where deflation in the overall economy is going to come from, other than very small amounts for very brief periods, with a Fed that can create money out of thin air and a government that can spend it almost as fast as it's created.

Perhaps there is an external restriction that i'm not taking into account.
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Let me turn your question around a bit. Real estate has been balanced by other sectors. I think that is largely true. However, if I had told you in 2007, that deficit spending would increase by as much as it had, that interest rates would be effectively zero, that student loans had increased like that, that money had been pumped and goosed like it had, wouldn't you have said that inflation AND GDP would have absolutely EXPLODED upwards?

But since it hasn't, then just as you said what could counteract those effects in the same ratio? Solve that and you will solve your mystery. I think Gentle Ben knows that he has failed BTW. He likely spends more time in church these days, and right beside him are all the elites.

One knows these answers by observation and thought. Why is gold acting like it is? Why are currencies acting like they are? Why are the little fish doing what they are doing? Why are the big fish doing what they are doing?

I think that the correct rate of balloon expansion is the honest population/GDP/efficiency numbers. One can pump up the balloon and hope that the others catchup. Or, one can bite the bullet, knowing that the others will catchup, or one can regurgitate media nonsense like printing money is always inflationary and inflation means rising prices etc., or one can talk one's book.

Even many pros do not seem to understand this concept. Many politicians deliberately will not understand it. Many ordinary people are afraid to understand it. No word from the clowns yet - LOL.

I sure like the quality of the replies in this thread. There appears to be lots of intelligent life on this forum after all. LOL
 
Quote from Swan Noir:

I'm taking about increased unemployment, falling wages and collapsing prices even as the money supply expands but the velocity decreases violently. I'm talking about people not only not buying new cars but passing on the morning Starbucks. I'm talking about mothers cutting the kids hair and fathers mowing their own lawn and fixing their own roof.

I'm talking deep recession that spurs the printers of fiat currency to drive us out the other side of the envelope to hyperinflation but to no better effect.

I am talking about chickens coming home to roost and our political leaders/clowns faced with a range of options from bad to worse inventing new levels of absurd. Where we are is serious and except for Christine Lagarde there does not seem to be even a single serious player on the world stage.

The Western world is in a war against our past excesses and we have generals with the skills of captains and the courage of deserters. It is a sick joke.


QUOTE]Quote from morganist:

Are you talking about deflation as a reduction in money supply or an decrease in prices. There is a difference. A reduction in money suppy can increase prices and thus make inflation. Which are you claiming?
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[/QUOTE]

That is not necessarily deflation. In fact it could be inflation as the prices start to rise. It is a contraction of money supply.
 
I have not described a contraction of the money supply but rather a dramatic reduction in velocity. Eventually the gobs and gobs of fiat money will drive the value of paper to ... well, the value of paper. But in between here and there deflation of wages, prices and spirit are a real possibility. I believe round 15 will be in the midst of currencies becoming worthless but that may have little to do with rounds 10 or 12.

Quote from morganist:

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That is not necessarily deflation. In fact it could be inflation as the prices start to rise. It is a contraction of money supply. [/B][/QUOTE]
 
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