Deflation is winning – Piggington's Econo-Almanac

This topic has 255 replies, 14 voices, and was last updated 16 years ago by Carl Veritas.

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October 22, 2008 at 3:47 PM #14263

barnaby33
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Currently in the battle between inflation and deflation, deflation is winning. I like being on the winning team! Most of you on the board know I’m a deflationist, but I keep having people ask me (mostly in the real world) what is deflation?

Its quite simple, a decrease in the money supply is a deflation. It has all sorts of corollary’s ergo falling prices, but those are effects not cause.

The reason I’m re-posting this is not to beat a dead horse but rather because there is a specific symptom of deflation from which I am currently benefiting that appears extremely strange to lots of folks. I’m working in Sydney for the next couple of months and the US dollar has strengthened considerably against the Aussie dollar since I’ve been here. This makes no sense for several reasons. The first is that their recession is just barely starting. The second is that the Aussie govt, has a surplus and zero foreign debt. Why then is their currency weakening?

The answer is of course deflation (and debt)! Most international debts are denominated in dollars. When people and institutions panic, they sell whatever assets they have, good bad and ugly to pay off debt. In this process the seller in many cases is attempting to acquire US dollars, to then pay down debt. This shrinks the money supply in two ways, one fundamental, one technical. Fundamentally when debt is paid in a fiat system, money is destroyed and the pool of available money shrinks. This isn’t normally a problem as lenders are constantly making new money via loans. That isn’t happening right now. Technically, people are trying to acquire dollars and they are in shorter supply (because of demand for them) they become a commodity unto themselves and respond to that scarcity.

Even though our economy is going to shit our currency is strengthening, for now. The Treasury and Fed are trying like hell to keep this from happening, but ultimately they can’t make banks lend (without nationalizing them). Even worse they can’t force you to borrow. Oh wait yes they can, its called stimulus. For right now though deflation is winning. Its anyone’s guess when the course will be reversed.

Think happy thoughts!
Josh

October 22, 2008 at 3:59 PM #291221

sdduuuude
Participant

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can’t seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

October 22, 2008 at 3:59 PM #291539

sdduuuude
Participant

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can’t seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

October 22, 2008 at 3:59 PM #291572

sdduuuude
Participant

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can’t seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

October 22, 2008 at 3:59 PM #291578

sdduuuude
Participant

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can’t seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

October 22, 2008 at 3:59 PM #291616

sdduuuude
Participant

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can’t seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

October 22, 2008 at 4:04 PM #291231

kewp
Participant

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I’m going to move somewhere with a sensible economy, like Iceland or Argentina.

October 22, 2008 at 4:04 PM #291549

kewp
Participant

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I’m going to move somewhere with a sensible economy, like Iceland or Argentina.

October 22, 2008 at 4:04 PM #291582

kewp
Participant

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I’m going to move somewhere with a sensible economy, like Iceland or Argentina.

October 22, 2008 at 4:04 PM #291588

kewp
Participant

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I’m going to move somewhere with a sensible economy, like Iceland or Argentina.

October 22, 2008 at 4:04 PM #291626

kewp
Participant

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I’m going to move somewhere with a sensible economy, like Iceland or Argentina.

October 22, 2008 at 4:29 PM #291241

peterb
Participant

From what I can tell, most people on this site have been waiting for things to come down so that they could buy. Well, it’s happening. If you’ve been responsible with your money and saved, etc…stuffs getting way cheaper than it has been. Seems like a great thing to me! Gas, food, homes. Most goods. I’m liking it! But it’s going to come down more in 2009 and the unemployment part is really going to suck. Sit back and enjoy the show. Dont spend yet.

October 22, 2008 at 4:29 PM #291559

peterb
Participant

From what I can tell, most people on this site have been waiting for things to come down so that they could buy. Well, it’s happening. If you’ve been responsible with your money and saved, etc…stuffs getting way cheaper than it has been. Seems like a great thing to me! Gas, food, homes. Most goods. I’m liking it! But it’s going to come down more in 2009 and the unemployment part is really going to suck. Sit back and enjoy the show. Dont spend yet.

October 22, 2008 at 4:29 PM #291593

peterb
Participant

From what I can tell, most people on this site have been waiting for things to come down so that they could buy. Well, it’s happening. If you’ve been responsible with your money and saved, etc…stuffs getting way cheaper than it has been. Seems like a great thing to me! Gas, food, homes. Most goods. I’m liking it! But it’s going to come down more in 2009 and the unemployment part is really going to suck. Sit back and enjoy the show. Dont spend yet.

October 22, 2008 at 4:29 PM #291597

peterb
Participant

From what I can tell, most people on this site have been waiting for things to come down so that they could buy. Well, it’s happening. If you’ve been responsible with your money and saved, etc…stuffs getting way cheaper than it has been. Seems like a great thing to me! Gas, food, homes. Most goods. I’m liking it! But it’s going to come down more in 2009 and the unemployment part is really going to suck. Sit back and enjoy the show. Dont spend yet.
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