Not one person has given a decent argument for a long term deflation so far. Should I be surprised?
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Who buys the "Long term deflationary spiral"?
- Thread starter scriabinop23
- Start date
Nope.Quote from scriabinop23:
Not one person has given a decent argument for a long term deflation so far. Should I be surprised?
1) Consumer prices are still high and are mostly unchanged from their July 2008 highs.
2) Only gas is cheaper right now.
3) Buying power has eroded more than prices.
The most relevant data point is the yield curve and its recent behaviour. On long-term timeframes (5-30 years) it is saying we will have either negligible or negative rates of inflation. Its recent behaviour has been to become more and more convinced of this fact.
It's quite possible it is wrong, of course. But that currently represents the "best guess" of profit-incentivised players worldwide, so it is worthy of a certain amount of respect.
It's quite possible it is wrong, of course. But that currently represents the "best guess" of profit-incentivised players worldwide, so it is worthy of a certain amount of respect.
Quote from scriabinop23:
I am interested to see if anyone can come up with a convincing thesis from anything more substantial than an emotional gloom point of view that tends to self reinforce in times like this. ie if you assert credit will never recover, give examples in the past where credit issuance languished for long periods.
Here are some potential reasons:
1) systematic de-leveraging, brought about by declining risk-appetites/animal spirits, and capital destruction in the financial sector (see 1930s USA, 1990s Japan for past examples)
2) de-leveraging caused by government legislation/regulation
3) capital destruction due to greater government intervention in the economy (taking $1 trillion from productive taxpayers, and paying it to unskilled long-term unemployed to build white elephant "holes in the ground" will permanently destroy the capital in question; ditto for increased trade barriers)
4) lower returns to entrepreneurship in the new political environment, thus reducing the rate of economic growth (which will in turn reduce the demand for and thus the supply of credit)
Quote from harkm:
Here is a quote from Bananke's Deflation Speech in 2002
Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
It appears Bernanke would rather have the alternative. He will print money until deflation is reversed.
Printing dollars will only reverse the deflation in nominal terms. But if the dollar falls even further on the forex market than local US prices inflate in dollar terms, then in non-dollars (e.g. Euros, Yen, gold or other stable currencies) US assets will *deflate even faster*.
In other words, printing money to excess, causing domestic hyperinflation, actually causes *more* deflation.
You can see this effect in Zimbabwe now, or Germany in the 1920s. Local prices soared in the hyperinflating DM or Zimbabwean dollars. But prices of local goods *collapsed* when measured in foreign currency or gold terms. The reason was that expectations of future inflation soared, leading to dramatic capital flight. Capital shortage is highly deflationary.
The hyperinflation cure is basically worse than the deflationary disease.
Quote from scriabinop23:
All points to a great treasuries short regardless (as a long term fundamental trade). I think 3 months from now, when fiscal stimulus is starting, and the Fed has already shown their hand with treasury/agency buying and money printing, is probably is the best time to take the trade. Too many programs to start in 09 that will continue injecting money.
People used similar logic to short JGBs in the early to mid 90s, and got their asses handed to them. 10 years after, the yield was *lower* and eventually hit 0.5% in the early 2000s.
Ditto with US treasuries. If you shorted them in 1932 at the depths of the depression (compared to now, only 6 months or so into recession), you *lost money*. Treasury yields made their low in 1941-42, more than a decade after the start of the Great Depression.
The short treasuries trade is by no means the one-way bet that you seem to think. Not only might you not be right, you could be on the wrong end of a once in a generation bubble. Work out the implied futures price for a 30 year bond yield of 1% - that's how much you have at risk with this trade.
Cutten....good points....
When summarized....
One believes deflation effects do not outweigh inflationary effects
because there are basically no examples of permanently reversing the printing of money....
Simple example....
Total currency float previously.....$10 Trillion
Total currency float afterwards....$70 Trillion
Money velocity at $30 Trillion.....very low....
Money velocity at $70 Trillion....increasing
One questions....for deflation to have longevity....
What vehicle permanently vacuums the increased
currency float ?
This is why many hard assets have reliably increased in value....because of the printing press....
..................................................................................
So the next question comes....
Fiat currency comparables....
If the top 10 currencies are making the same adjustments....then which economy fares better ?
The question being ....do the 10 floating boats rise and fall with the tide ?
........................................................................
Cash and credit
It is no secret that the advanced economies were "advanced" because of credit....
Even today....there are many countries where few people have or use credit cards....and there are basically no long term loans of any kind.....and for some that do have credit cards....the rate could be usury versus the advanced economies....
Cash and credit.....determines tide levels for the boats......
When summarized....
One believes deflation effects do not outweigh inflationary effects
because there are basically no examples of permanently reversing the printing of money....
Simple example....
Total currency float previously.....$10 Trillion
Total currency float afterwards....$70 Trillion
Money velocity at $30 Trillion.....very low....
Money velocity at $70 Trillion....increasing
One questions....for deflation to have longevity....
What vehicle permanently vacuums the increased
currency float ?
This is why many hard assets have reliably increased in value....because of the printing press....
..................................................................................
So the next question comes....
Fiat currency comparables....
If the top 10 currencies are making the same adjustments....then which economy fares better ?
The question being ....do the 10 floating boats rise and fall with the tide ?
........................................................................
Cash and credit
It is no secret that the advanced economies were "advanced" because of credit....
Even today....there are many countries where few people have or use credit cards....and there are basically no long term loans of any kind.....and for some that do have credit cards....the rate could be usury versus the advanced economies....
Cash and credit.....determines tide levels for the boats......
Quote from Cutten:
Another possible reason: the socio-political culture of the USA may not accept high levels of stimulus (e.g. printing money and throwing it out of helicopters), therefore the main tool to guarantee an avoidance of deflation will not be used.
" socio-political culture of the USA " are pretty words.
average person and average politicians are clueless in economic matters.
I think it's important to point out the difference between deflation and disinflation. Given that deflation is a decrease in the money supply, no we haven't had that. And once the banks that have been given these gobs of cash actually start letting it loose, look out.
What we have had is deleveraging and disinflation, or a retreat of inflation, but interestingly only in certain areas. Housing and energy have certainly collapsed, but they did so from bubble levels they never should have been at to begin with.
And while some discretionary consumer goods have fallen in price and demand (electronics, appliances, vehicles), there are a whole host of necessary goods and services where prices have never retreated, and if anything are at all time highs. Food, health care, education, to name a few. If we had a true deflation, they too would be collapsing in price as well.
The other important factor to consider is that it usually takes 6-9 months for the inflationary effects of monetary policy and fiscal stimulus to show up. Since the Fed and government started in earnest a couple months ago, by late spring I wouldn't at all be surprised to see inflation with a vengeance. Time will tell...
What we have had is deleveraging and disinflation, or a retreat of inflation, but interestingly only in certain areas. Housing and energy have certainly collapsed, but they did so from bubble levels they never should have been at to begin with.
And while some discretionary consumer goods have fallen in price and demand (electronics, appliances, vehicles), there are a whole host of necessary goods and services where prices have never retreated, and if anything are at all time highs. Food, health care, education, to name a few. If we had a true deflation, they too would be collapsing in price as well.
The other important factor to consider is that it usually takes 6-9 months for the inflationary effects of monetary policy and fiscal stimulus to show up. Since the Fed and government started in earnest a couple months ago, by late spring I wouldn't at all be surprised to see inflation with a vengeance. Time will tell...