Money Supply

[cr]

I’ve read Mish’s argument for deflation, and I don’t fully agree.

For one, I don’t think we have seen the full extent of CPI inflation as result of the Fed’s slashing of rates, weak dollar, commodity and raw material prices increases etc.

I also know that retailers are only starting to pass on price increases, and I think later this year, early next we will see those effects.

Mish’s argument is people will spend less and drive prices down, but that only goes so far, because you can’t exactly put off buying food.

The most important factor in getting the US out this recession will be job creation.

The only area I see providing that will be the retiring of baby boomers over the next decade, but that of course has it’s own implications.

Delfation will only come once our Government has thrown every good dollar they can print at the problem and still not clean up the mess, and is forced to raise rates.

Though all of those could suddenly turn for the better and we’d still be a society based on debt, and I question how long that can last.

[ltokuda]

Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.

One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.

On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.

Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.

[ltokuda]

Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.

One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.

On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.

Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.

[ltokuda]

Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.

One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.

On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.

Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.

[ltokuda]

Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.

One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.

On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.

Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.

[ltokuda]

Just to clarify, Mish argues that “money supply” is basically defined as: cash + credit. Inflation is the increase of money supply.

One possible effect of inflation is “price inflation”. But the price of any particular item is affected by many factors. Due to globalization, the price of many products have been kept down. So even though we’ve experienced a lot of inflation over the last decade, we haven’t seen much of its effects in the CPI.

On the other hand, we have seen serious price inflation in other areas. Housing, education, and health care costs are some examples of that. Until recently, it seemed like stock prices were also experiencing price inflation. The DJIA and S&P had sustained P/E ratios that were significantly higher than their historical averages.

Inflation helped to fuel the housing bubble and the housing bubble helped to fuel inflation (via loose lending standards). As housing prices decrease and lending standards tighten, we’re seeing a contraction of credit as well. That results in deflation.

[peterb]

Itokuda – I agree completely. The Austrian school definition of inflation is what Mish talks about. Money available to be utilized in some manner. And we’ve definately had lots of it since 2002. But it does not always translate into “price inflation”.

Many consumer items produced in Asia over the last 10 years were very inexpensive due to very low costs of production and high volumes of production.

I’ve always favored that “price inflation” is too much money chasing too few goods or assets. The key word here is “chase”. There has to be adequate demand (Availability of money and desire to spend it) and restricted asset supply, in order to drive up a price.

If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction. Even when the supply is reduced, employment is decreased and the demand destruction continues. Deflationary cycles are very destructive in this way.

The prime position to be in right now is to have liquid assets and a steady income. As credit is constricted more every month and unemployment is increased, many people will be in a dire financial position if they did not prepare for this situation properly. If you’ve been living on the financial edge, you will be falling off the cliff sometime in 2009.

Even if we experience price inflation in some consumer goods, it’s nothing compared to the asset deflation taking place right now and for most of 2008! I think that from 2010 to 2015 there will some absolutely amazing deals on assets.

Why risk the craziness in the markets right now?! Time is your friend right now if you’re positioned correctly. For those people that are in liquid assets and employed, there will be opportunities that may be once-in-a-lifetime.

I’ve parked my money in US$ and gold. If history repeats itself….after a huge credit bubble bursts, senior currency and gold rise in value for a few years, these are the places to be.

Check out Bob Hoye and Marc Faber as well as Steve Keen for other ideas. They have great track records and always lean towards safety rather than risk. This is how wealth is built, IMO.

[peterb]

Itokuda – I agree completely. The Austrian school definition of inflation is what Mish talks about. Money available to be utilized in some manner. And we’ve definately had lots of it since 2002. But it does not always translate into “price inflation”.

Many consumer items produced in Asia over the last 10 years were very inexpensive due to very low costs of production and high volumes of production.

I’ve always favored that “price inflation” is too much money chasing too few goods or assets. The key word here is “chase”. There has to be adequate demand (Availability of money and desire to spend it) and restricted asset supply, in order to drive up a price.

If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction. Even when the supply is reduced, employment is decreased and the demand destruction continues. Deflationary cycles are very destructive in this way.

The prime position to be in right now is to have liquid assets and a steady income. As credit is constricted more every month and unemployment is increased, many people will be in a dire financial position if they did not prepare for this situation properly. If you’ve been living on the financial edge, you will be falling off the cliff sometime in 2009.

Even if we experience price inflation in some consumer goods, it’s nothing compared to the asset deflation taking place right now and for most of 2008! I think that from 2010 to 2015 there will some absolutely amazing deals on assets.

Why risk the craziness in the markets right now?! Time is your friend right now if you’re positioned correctly. For those people that are in liquid assets and employed, there will be opportunities that may be once-in-a-lifetime.

I’ve parked my money in US$ and gold. If history repeats itself….after a huge credit bubble bursts, senior currency and gold rise in value for a few years, these are the places to be.

Check out Bob Hoye and Marc Faber as well as Steve Keen for other ideas. They have great track records and always lean towards safety rather than risk. This is how wealth is built, IMO.

[peterb]

Itokuda – I agree completely. The Austrian school definition of inflation is what Mish talks about. Money available to be utilized in some manner. And we’ve definately had lots of it since 2002. But it does not always translate into “price inflation”.

Many consumer items produced in Asia over the last 10 years were very inexpensive due to very low costs of production and high volumes of production.

I’ve always favored that “price inflation” is too much money chasing too few goods or assets. The key word here is “chase”. There has to be adequate demand (Availability of money and desire to spend it) and restricted asset supply, in order to drive up a price.

If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction. Even when the supply is reduced, employment is decreased and the demand destruction continues. Deflationary cycles are very destructive in this way.

The prime position to be in right now is to have liquid assets and a steady income. As credit is constricted more every month and unemployment is increased, many people will be in a dire financial position if they did not prepare for this situation properly. If you’ve been living on the financial edge, you will be falling off the cliff sometime in 2009.

Even if we experience price inflation in some consumer goods, it’s nothing compared to the asset deflation taking place right now and for most of 2008! I think that from 2010 to 2015 there will some absolutely amazing deals on assets.

Why risk the craziness in the markets right now?! Time is your friend right now if you’re positioned correctly. For those people that are in liquid assets and employed, there will be opportunities that may be once-in-a-lifetime.

I’ve parked my money in US$ and gold. If history repeats itself….after a huge credit bubble bursts, senior currency and gold rise in value for a few years, these are the places to be.

Check out Bob Hoye and Marc Faber as well as Steve Keen for other ideas. They have great track records and always lean towards safety rather than risk. This is how wealth is built, IMO.

[peterb]

Itokuda – I agree completely. The Austrian school definition of inflation is what Mish talks about. Money available to be utilized in some manner. And we’ve definately had lots of it since 2002. But it does not always translate into “price inflation”.

Many consumer items produced in Asia over the last 10 years were very inexpensive due to very low costs of production and high volumes of production.

I’ve always favored that “price inflation” is too much money chasing too few goods or assets. The key word here is “chase”. There has to be adequate demand (Availability of money and desire to spend it) and restricted asset supply, in order to drive up a price.

If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction. Even when the supply is reduced, employment is decreased and the demand destruction continues. Deflationary cycles are very destructive in this way.

The prime position to be in right now is to have liquid assets and a steady income. As credit is constricted more every month and unemployment is increased, many people will be in a dire financial position if they did not prepare for this situation properly. If you’ve been living on the financial edge, you will be falling off the cliff sometime in 2009.

Even if we experience price inflation in some consumer goods, it’s nothing compared to the asset deflation taking place right now and for most of 2008! I think that from 2010 to 2015 there will some absolutely amazing deals on assets.

Why risk the craziness in the markets right now?! Time is your friend right now if you’re positioned correctly. For those people that are in liquid assets and employed, there will be opportunities that may be once-in-a-lifetime.

I’ve parked my money in US$ and gold. If history repeats itself….after a huge credit bubble bursts, senior currency and gold rise in value for a few years, these are the places to be.

Check out Bob Hoye and Marc Faber as well as Steve Keen for other ideas. They have great track records and always lean towards safety rather than risk. This is how wealth is built, IMO.

[peterb]

Itokuda – I agree completely. The Austrian school definition of inflation is what Mish talks about. Money available to be utilized in some manner. And we’ve definately had lots of it since 2002. But it does not always translate into “price inflation”.

Many consumer items produced in Asia over the last 10 years were very inexpensive due to very low costs of production and high volumes of production.

I’ve always favored that “price inflation” is too much money chasing too few goods or assets. The key word here is “chase”. There has to be adequate demand (Availability of money and desire to spend it) and restricted asset supply, in order to drive up a price.

If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction. Even when the supply is reduced, employment is decreased and the demand destruction continues. Deflationary cycles are very destructive in this way.

The prime position to be in right now is to have liquid assets and a steady income. As credit is constricted more every month and unemployment is increased, many people will be in a dire financial position if they did not prepare for this situation properly. If you’ve been living on the financial edge, you will be falling off the cliff sometime in 2009.

Even if we experience price inflation in some consumer goods, it’s nothing compared to the asset deflation taking place right now and for most of 2008! I think that from 2010 to 2015 there will some absolutely amazing deals on assets.

Why risk the craziness in the markets right now?! Time is your friend right now if you’re positioned correctly. For those people that are in liquid assets and employed, there will be opportunities that may be once-in-a-lifetime.

I’ve parked my money in US$ and gold. If history repeats itself….after a huge credit bubble bursts, senior currency and gold rise in value for a few years, these are the places to be.

Check out Bob Hoye and Marc Faber as well as Steve Keen for other ideas. They have great track records and always lean towards safety rather than risk. This is how wealth is built, IMO.

[underdose]

I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.

Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.

“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”

I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.

Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.

Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.

[underdose]

I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.

Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.

“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”

I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.

Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.

Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.

[underdose]

I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.

Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.

“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”

I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.

Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.

Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.

[underdose]

I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.

Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.

“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”

I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.

Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.

Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.

[Author]

Posts