[quote=kev374]Here is the interesting thing… if the price of goods increases (inflation) and the wages do not keep up with it then i’m guessing essential goods will be prioritized by people and there will be severe cutbacks in non-essential goods.
So, in essence demand for non-essential goods will drop like a rock causing deflation in those asset classes…correct?
Now, given that our economy is 70% spending there will be a sharp overall contraction in GDP due to pullbacks. A hike in inflation may be brief and overcome with serious deflationary forces. What do you think?
So, you say the government comes in and dumps money… however, what could the government do? Lending money to the banks isn’t going to change much as banks are unwilling to lend money to people in the first place and if sentiment is low and employment is shaky.. people will not want to borrow in any case. Unless the govermnet throws money from helicopters which is unlikely I don’t see how “printing money” actually would work.
The only other scenario is extreme where the government effectively cancels everyones debt…which seems to be what the government is attempting to do indirectly. Acquire toxic assets through FNM/FRE/FHA and then bail them out. Also let people declare BK on their credit cards and then shore up the balance sheets of the banks…of course that has the exact same problem as above.
The government cannot pursue bailouts without increasing the national debt/deficit… therefore to overcome these deficits somewhere down the road there has to be increase in taxes or austerity measures. These will once again result in a severe recession, unemployment, deflationary forces etc. BACK TO SQUARE ONE except it has only DELAYED THE INEVITABLE 🙂
Comments?[/quote]
You have a point but its not quite that mechanical.
There are 3 primary types of inflation.
Demand side:
In most major inflationary events, there is a manic printing of money. Literal printing of paper currency (eg: Weimar, Zimbabwe, Mexico).
That puts more nominal cash in peoples pockets and causes prices to rise (basically a demand pull).
In our case, “printing” means lending a crap load of money to, and buying bonds from, troubled firms.
That does not directly put cash in people’s hands.
It does go a good distance toward making skittish firms less reactive.
Supply side:
Most inflationary events in the US have been due to supply shocks of consumables or commodities.
Supply shocks tend to cause destructive demand and lead to remedies at the end user level.
So, for example gas prices increased dramatically between 2005 and 2011 but that lead to a modification of vehicle consumption and lifestyle.
Overall prices did not shoot up (even though most everything uses gas to get to market).
Confidence:
If a country (eg: Iceland or Greece) carries a huge load of debt in a currency it cannot print or control, then it can cause the currency they use to become worthless. For example if the US owed China 5Trillion denominated in RMB (instead of Dollars), then either the Chinese government or just the market could double that debtload overnight just by changing the exchange rate.
For us to have a big (like really big) inflationary event (or like what you described), we would have to see strong components of all three coupled with a very weak domestic economy and probably a big food production break down (like the dustbowl).
Remember we grow more food per capita than most of the planet.
That really creates a limit on how broke we can get.
This means its almost always unlikely you will starve in the US (unless you are in the Carpenters).
And again, you are right because if that perfect storm happened (as it sort of did in the 1930s), the anemic consumption would drive down prices (as it did int he 1930s).
