Inflation Vs Deflation in Context to what is Happening Now

[JWM in SD]

Found a good description of what is happening right now in terms of Deflation / Inflation from one of the posts on the recent Mish article about Alt-A delinquincies.

Here it is:

 Black Swan – If you define inflation as increase in prices and deflation as decrease in prices, we are getting both of those now. Most peoples biggest assets, their Homes and SUVs, are cratering in value, while commodoties are rising.

If you instead believe inflation is an increase in the money supply (which is the literal definition of inflation) and deflation as a decrease in the money supply, we are at the end of many years of an increase in the money supply due to fractional reserve lending.

The increase in money supply has been the root cause of bubbles in tech stocks, homes and now commodities. However, a general rise in prices are a lagging effect of an increase in the money supply. Decreases in prices are also a lagging indicator of a decrease in the money supply.

Inflation in the money supply may now be history. Not due to the feds unwillingness to print, but because of prices being higher than average consumers can pay. Once this realization sets in, there will be no incentive to borrow, because businesses will realize that consumers are tapped out. Fractional reserve lending will go in reverse. Japan shows us that you can lower interest rates to zero and not spur economic growth and inflation if no one wants to borrow. Once inflation has run it's course, and prices get beyond what people can pay, or are willing to pay (e.g. McMansions and SUVs today) prices will decline. The same thing will happen with other items. When prices get beyond an ability to pay for them, demand drops and prices fall. Right now, the masses are in debt up to their eyeballs and have maxed out the credit cards. They will have to pull back in a meaningful way. The only way for prices to keep rising is if the rest of the world is ready to replace Americans as the buyer of last resort. If not, prices will fall as demand from the overextended U.S. consumer falls. That is the thing about prices. Higher prices has the dual role of increasing production and decreasing demand. That is why economists say that the cure for higher prices, is high prices.

This is at the heart of the "credit crunch" that will continue to play out over time.

[JWM in SD]

Ah, once again no interest in the real reason why we are in this mess. Hey, I’m trying to get people to understand the big picture a little better. If you are not interested, then don’t say you weren’t warned.

[JWM in SD]

Ah, once again no interest in the real reason why we are in this mess. Hey, I’m trying to get people to understand the big picture a little better. If you are not interested, then don’t say you weren’t warned.

[JWM in SD]

Ah, once again no interest in the real reason why we are in this mess. Hey, I’m trying to get people to understand the big picture a little better. If you are not interested, then don’t say you weren’t warned.

[JWM in SD]

Ah, once again no interest in the real reason why we are in this mess. Hey, I’m trying to get people to understand the big picture a little better. If you are not interested, then don’t say you weren’t warned.

[JWM in SD]

Ah, once again no interest in the real reason why we are in this mess. Hey, I’m trying to get people to understand the big picture a little better. If you are not interested, then don’t say you weren’t warned.

[Arraya]

Yeah, this self-reinforcing downward spiral is just getting started. It’s almost funny to that people think we can even be close to bottom in housing.

One problem you econ-types can’t wrap your head around is oil depletion. Somehow you think oil market fundamentals has nothing to do with prices increases. This is a foolish mistake.

[Arraya]

Yeah, this self-reinforcing downward spiral is just getting started. It’s almost funny to that people think we can even be close to bottom in housing.

One problem you econ-types can’t wrap your head around is oil depletion. Somehow you think oil market fundamentals has nothing to do with prices increases. This is a foolish mistake.

[Arraya]

Yeah, this self-reinforcing downward spiral is just getting started. It’s almost funny to that people think we can even be close to bottom in housing.

One problem you econ-types can’t wrap your head around is oil depletion. Somehow you think oil market fundamentals has nothing to do with prices increases. This is a foolish mistake.

[Arraya]

Yeah, this self-reinforcing downward spiral is just getting started. It’s almost funny to that people think we can even be close to bottom in housing.

One problem you econ-types can’t wrap your head around is oil depletion. Somehow you think oil market fundamentals has nothing to do with prices increases. This is a foolish mistake.

[Arraya]

Yeah, this self-reinforcing downward spiral is just getting started. It’s almost funny to that people think we can even be close to bottom in housing.

One problem you econ-types can’t wrap your head around is oil depletion. Somehow you think oil market fundamentals has nothing to do with prices increases. This is a foolish mistake.

[denverite]

First off, IMHO the majority of posts/articles on this site are thoughtful and without peer. There is also severe review, so very little rubbish is accepted. That being said, the primary focus is on local RE topics. My perspective, is a bit different. The local trends are valuable, but being a conceptually oriented person, macro economic evaluations provide much more intellectual stimulation, leading to even more macro/mid-level analysis. If economics is your bag, please consider Dr. Ravi Batra (prof @ MSU). He links macro economics with subordinate components.

I found the short article posted here most interesting and emailed a few friends.

Thanks,
Denverite

[denverite]

First off, IMHO the majority of posts/articles on this site are thoughtful and without peer. There is also severe review, so very little rubbish is accepted. That being said, the primary focus is on local RE topics. My perspective, is a bit different. The local trends are valuable, but being a conceptually oriented person, macro economic evaluations provide much more intellectual stimulation, leading to even more macro/mid-level analysis. If economics is your bag, please consider Dr. Ravi Batra (prof @ MSU). He links macro economics with subordinate components.

I found the short article posted here most interesting and emailed a few friends.

Thanks,
Denverite

[denverite]

First off, IMHO the majority of posts/articles on this site are thoughtful and without peer. There is also severe review, so very little rubbish is accepted. That being said, the primary focus is on local RE topics. My perspective, is a bit different. The local trends are valuable, but being a conceptually oriented person, macro economic evaluations provide much more intellectual stimulation, leading to even more macro/mid-level analysis. If economics is your bag, please consider Dr. Ravi Batra (prof @ MSU). He links macro economics with subordinate components.

I found the short article posted here most interesting and emailed a few friends.

Thanks,
Denverite

[denverite]

First off, IMHO the majority of posts/articles on this site are thoughtful and without peer. There is also severe review, so very little rubbish is accepted. That being said, the primary focus is on local RE topics. My perspective, is a bit different. The local trends are valuable, but being a conceptually oriented person, macro economic evaluations provide much more intellectual stimulation, leading to even more macro/mid-level analysis. If economics is your bag, please consider Dr. Ravi Batra (prof @ MSU). He links macro economics with subordinate components.

I found the short article posted here most interesting and emailed a few friends.

Thanks,
Denverite

[Author]

Posts