The Coming Deflation . . .

You guys have good arguments about booming deflation. But how do you square that with the likely biggest looser in a bad defationary scenario: the U.S. gov.

Nominal wages -down; tax receipts down.
Interest payments - fixed, maybe rising. The range for the last 25 years is 15.5% high, 3.6% low. Seems we are closer to the low than the high.

And then the whole mess of SS entitlement payments. Do you pay with deflated dollars (hey, go buy yourself a truckload of copper with this), or do you give them worthless dollars (hey, see if you can buy a loaf of bread with this)?

If I knew the answer, I'd have a beachfront on Maui.

Any responses are welcome.
 
i don't think the us gov is the biggest loser in a deflationary environment at all. other country's gov's are more at risk. furthermore, gov paper becomes a favored investment vehicle (japan in 90s, USA in 1930s). gov debt is safer than corporate. plus the government can just tax the rich. government doesn't really lose during deflation, banks and people that overextended themselves do.
 
Quote from countryBoy:

You guys have good arguments about booming deflation. But how do you square that with the likely biggest looser in a bad defationary scenario: the U.S. gov.

Nominal wages -down; tax receipts down.
Interest payments - fixed, maybe rising. The range for the last 25 years is 15.5% high, 3.6% low. Seems we are closer to the low than the high.

And then the whole mess of SS entitlement payments. Do you pay with deflated dollars (hey, go buy yourself a truckload of copper with this), or do you give them worthless dollars (hey, see if you can buy a loaf of bread with this)?

If I knew the answer, I'd have a beachfront on Maui.

Any responses are welcome.
More...

Chiming in...yeah...with all the debt we're carrying, I just don't see how we can have significant deflation. The U.S. has a strong temptation to devalue currency to make debt pay off easier. It just seems that they would be/are constantly monitoring the dollars value looking for any opportunity to speed up the printing presses. This is a bias towards inflation. Sort of like trying to get rid of a lot of slop through a garbage disposal...you put it in just as fast as it will take it without bogging down.

As for the inverted yield curve, the recent breather in the short term interest rate hikes was instituted long term rates aren't being "pushed" by short term rates as the FED would like. The Fed wants long term rates up so people will stop borrowing so much from their homes, since that stimulus isn't needed anymore and its just making the average American more in debt. The "conundrum" is that right now long term rates are guided by the awareness that the FED is moderating the short term rates well. As long as the concensus is that short rates are under control, long rates will stay where they are. So basically, the yield curve is inverted because the Fed tried to "push" the long term rates with the short term rates, but it didn't work. However, it was still enough to weaken the housing market a little bit, so I'm guessing we'll see the inversion go away slightly and it will tilt up in the right direction again. But, IMHO, until then it will be bad for doing business. I wonder if we might even see the Fed lower short term rates in the near future since the real estate market has begun to weaken as desired.

SM
 
Inflation is driven by expansion/contraction of the monetary base (mulitplied by credit creation) and is an increasingly global phenomenon.

China and India, to name two, are growing their monetary base near the 15-20% level, and credit creation in those countries is on the same order again.

This will drive inflation in things these emerging economies Buy, and deflation in the things they Make&Sell.

Add it up and it spells a breed of Stagflation for developed western countries.

But these things take years to play out and are typically acknowledged or universally recognized only well after the fact.
 
as long as the expansion/contraction of the monetary base meets the anticipated changes in velocity of money (spurred by, e.g., interest rates adjustments, but not only), there is no significant inflationary/deflationary impact... its just proper management of the money supply

as regards China's ability to properly compute the data in order to perform that sort of monitoring, there's more than ample room for doubt :D India's better, but barely... significant inflation in these countries will result in devaluation of their currencies, however in China's case whats looming is the burst of the gigantic NPL/RE bubble...
 
The arguments I've been reading are:


Deflation: A massive credit bubble has developed and is about to burst as evidenced by soaring rates of foreclosures and bankruptcies. People have taken on WAY more debt than they can handle and have agreed to terms that will make their debt loads even more unmanageable as time goes on. If the assets that collateralize these loans decline in value, many people will walk away and default. This will cause a huge contraction in the money supply that the Fed won't be able to stop because they won't be able to "push on a string." In other words, they can extend credit but they can't force people to borrow.

Inflation: The US gov't is the biggest debtor in history. They've accumulated this debt via current account and fiscal deficits. A slowing economy may alleviate the current account deficit somewhat but will make the fiscal deficit much worse because of declining tax revenues. There's no reason to believe that the US government's propensity to borrow will change anytime soon. The rest of the world has gone along with this arrangement for a long time becuase it enabled us to buy their exports. If this accumulation of debt continues but shifts from consumer spending to government spending, the rest of the world will almost certainly lose interest in funding this spending spree. This will force the Fed to take over. As the Fed "prints" money to buy the treasuries that foreigners no longer want, it will more than counteract the destruction of consumer debt that is occuring thereby causing the money supply to grow and prices to rise. Plus, if they Fed can't stoke the slow economy by extending credit to consumers, they'll switch to trying to extend it to the US gov't to fund tax cuts and spending increases.

I can't decide which of these two arguments is more likely to be true. Ideas?
 
Quote from flier6:

The arguments I've been reading are:


Deflation: A massive credit bubble has developed and is about to burst as evidenced by soaring rates of foreclosures and bankruptcies. People have taken on WAY more debt than they can handle and have agreed to terms that will make their debt loads even more unmanageable as time goes on. If the assets that collateralize these loans decline in value, many people will walk away and default. This will cause a huge contraction in the money supply that the Fed won't be able to stop because they won't be able to "push on a string." In other words, they can extend credit but they can't force people to borrow.

Inflation: The US gov't is the biggest debtor in history. They've accumulated this debt via current account and fiscal deficits. A slowing economy may alleviate the current account deficit somewhat but will make the fiscal deficit much worse because of declining tax revenues. There's no reason to believe that the US government's propensity to borrow will change anytime soon. The rest of the world has gone along with this arrangement for a long time becuase it enabled us to buy their exports. If this accumulation of debt continues but shifts from consumer spending to government spending, the rest of the world will almost certainly lose interest in funding this spending spree. This will force the Fed to take over. As the Fed "prints" money to buy the treasuries that foreigners no longer want, it will more than counteract the destruction of consumer debt that is occuring thereby causing the money supply to grow and prices to rise. Plus, if they Fed can't stoke the slow economy by extending credit to consumers, they'll switch to trying to extend it to the US gov't to fund tax cuts and spending increases.

I can't decide which of these two arguments is more likely to be true. Ideas?
More...


we deflate first and then try to inflate our way out is my best guess.
 
drsteph,

Here's a reply from the guy who manages some of my $$ regarding the possibility of deflation:


"Deflation will not occur as the Fed will print money to replace the dollars destroyed in credit defaults. Plus the weakening economy will cause foreigners to sell dollars, sending domestic money supply through the roof. Even if there is deflation, the dollar will still fall. I can not envision any scenario in which the dollar gains value."
 
Quote from flier6:

The arguments I've been reading are:


Deflation: A massive credit bubble has developed and is about to burst as evidenced by soaring rates of foreclosures and bankruptcies. People have taken on WAY more debt than they can handle and have agreed to terms that will make their debt loads even more unmanageable as time goes on. If the assets that collateralize these loans decline in value, many people will walk away and default. This will cause a huge contraction in the money supply that the Fed won't be able to stop because they won't be able to "push on a string." In other words, they can extend credit but they can't force people to borrow.

Inflation: The US gov't is the biggest debtor in history. They've accumulated this debt via current account and fiscal deficits. A slowing economy may alleviate the current account deficit somewhat but will make the fiscal deficit much worse because of declining tax revenues. There's no reason to believe that the US government's propensity to borrow will change anytime soon. The rest of the world has gone along with this arrangement for a long time becuase it enabled us to buy their exports. If this accumulation of debt continues but shifts from consumer spending to government spending, the rest of the world will almost certainly lose interest in funding this spending spree. This will force the Fed to take over. As the Fed "prints" money to buy the treasuries that foreigners no longer want, it will more than counteract the destruction of consumer debt that is occuring thereby causing the money supply to grow and prices to rise. Plus, if they Fed can't stoke the slow economy by extending credit to consumers, they'll switch to trying to extend it to the US gov't to fund tax cuts and spending increases.

I can't decide which of these two arguments is more likely to be true. Ideas?
More...

First argument, clearly deflationary. Second not obviously inflationary I think. If US government’s propensity to borrow continues, and the Fed are forced to take over because the rest of the world lose interest, long rates increases? Will foreign bond dumping put more upward pressure on long rates than the new printed money has downward pressure? Will a weakening dollar spur more dumping? If so, higher mortgage rates and less business spending --> deflationary in the short run?, but probably inflationary in the long. And as the fiscal deficits worsen as the borrowing continues, surely there will be more pressure to cut spending or increase taxes? Witch is also deflationary. I think im contradicting myself, but can’t see how I can avoid it.
 
If Fed could print enough money to pay off the national debt without triggering inflation, that would be wonderful. It's just too good to be true. We should be concerned about inflation instead of deflation.
 
You must log in or register to reply here.
Back
Top