Inflation vs Deflation

[meanreversion]

This is without doubt the biggest debate in economics right now, and frequently crops up on threads in t2w.

On one side, there is the popular school of thought that the US printing press is "running at full speed". "Helicopter" Ben won't allow deflation and by definition an unbacked (fiat) money system always ends with hyperinflation and destruction of said money system.

On the other, there are commentators such as Ambrose Evans-Pritchard (Daily Telegraph) who point to the collapse in money supply in the US, and believe that money printing "a l'outrance" (his favourite expression) is just around the corner.

So.. what's your view? I think it's very easy to point at the QE experiments in the US and the UK a year ago and say "printing money .. leads to inflation .. blah blah". BUT let's look at Japan. They printed money until it hurt, yet are stuck in some slow death deflationary spiral.

Come on then, I want to hear your thoughts. My own opinion is that fractional reserve banking/fiat money REQUIRES continual creation of new money, either through loans from banks, or simple printing from the central bank. Thus deflation is a real danger in a fragile economy, given that consumers in the West no longer have an appetite to borrow (the opposite - they are paying back loans = destruction of money).

Anyway, the floor is open ..

 

[scose-no-doubt]

*Sits back and waits for the chaos to ensue*

 

[BSD]

Off to the gym in a sec so just a quick reply, imo two of the best things that happened to us was that the Bundesbank (our Central Bank) had one mandate only, and that was to maintain the stability and value of our money by keeping inflation at bay.

Ie that apart no intereference from the central bankers in how our economy was run.

Second best thing, almost none of our political leaders - and none of our Chancellors, ie our top dogs - was an economist, and recommendations of our 5 governmental advisory economic think tanks regularly got ignored by the political leadership.

Ludwig Erhard famously remarked that the successs relevant ingredients of a successful economy are 50% psychology and 50% clever work, and that in our social market economy the state should only create the regulatory framework to keep excesses and inbalances in rein, but beyond that let business do it's thing.

Ever since him - the first business minister and later Chancellor post war - our economy was essentially run like a family business with the understanding that to prosper one must invest, but also with the most basic common denominator being that a family company cannot afford to live beyond it's means indefinitely, that you can't keep spending more than you take in.

As simple as that sounds but that was the deep conviction of not only most of our Chancellors but that's sthg that's actually deeply ingrained in most of the population as well in the management of thei private households.

See ya later !

 

[meanreversion]

Germany as a country is quite indebted though (even allowing for a larger population)

http://blogs.telegraph.co.uk/financ...which-is-the-most-indebted-country-in-europe/

What will the ECB or Bundesbank do if inflation falls to zero, is there any mandate to try to bring it back up?

 

[N Rothschild]

why dont people formulate there own theory instead of reading someone elses, parroting it out or just flat out posting a link.

 

[scose-no-doubt]

Aren't you a German, BSD? You'd be well in the 5hit if people didn't like your overpriced cars.

 

[MrGecko]

I'm just going to come out and say that I haven't got a scooby doo. There are bods far smarter than I arguing both sides of the coin, so the liklihood of me coming up with some infallible position is pretty slim.

I guess the key point is the one you have outlined: Is the money injected into the system (circa $1.75 trillion so far... Monster QE?) enough to compensate for the desctrucion of money through paying off debt (look at consumer credit for e.g.) / bank balance sheet reductions.

Well look, I dunno. Somethings to bear in mind:

* The Fed has a dual mandate for price stability and low unemployment, and v. low unemployments is/was a factor over in Japan.

* The Yuans appreciation and the effect that is going to have on American import prices

* Can you have sustainable price inflation without wage inflation? Because you could argue that wage inflation is a long way off by looking at capacity utilisation

 

[meanreversion]

Agree with that last point. I think the recent inflationary pressure in the UK is temporary .. once the cuts start to bite, people will feel even more insecure and thus spend less.

In the limit, if the central banks produce tens of trillions of new dollars/pounds/euros, there won't be deflation, but there isn't the will to do this. There are hawks inside the Fed who are pushing for rates to rise sooner rather than later.. they won't stand for this.

The BoE QE was £200bio - this number always struck me as so completely arbitrary. Why not 100, or 1,000? It's just guesswork, but my bet is they'll always do too little rather than too much.

 

[robster970]

It all depends on how you measure inflation.

If you take the conventional measure which shows it's been reducing for the last 20 years, it doesn't include the mammoth asset price inflation (namely housing stock) that has occurred, commensurate with this period of history.

You put it all together, and it's all continue to inflate regardless of how people try and cut the figures. It's a consequence of printing more money and having higher levels of leverage on assets acting as security for cheap money.

 

[montmorencyt2w]

This is probably a pointless argument because both are possible, possibly even at the same time (so-called "biflation" according to one article on ZH a while back, or the classic "stagflation").

One thing I would add to BSD's note about Germany: It is interesting the difference in emphasis between the BoE and the ECB. The BoE actually has an inflation target of 2%. This is not meant to be a maximum, but a maximum and a minimum, i.e. slow, gradual inflation is designed into the system. I have never quite understood this, but I think it ties in with another idea that the permanent growth model is a bit of a con. It seems it can only be done at the expense of your currency's integrity.

Let's face it, for a long, long time, the £ has been a leaky, flabby currency, happily devaluing away. Look at £/Euro now, after 7 months of continual weakness of the Euro against the USD, and the pound is still really only a few pence above parity. That must say something, considering it's not that long ago it was of the order of 1.40-1.50 (but supposedly "overvalued" - ha!).

The DM and the CHF were the macho currencies of Europe; the CHF still is, and the DM still would be.


Having said all that, as someone else has pointed out, Germany still has a lot of debt, and may yet turn out to have some dodgy banks.

 

[glyder]

Good question, there are polarised view on this at the moment.
Especially amongst the cleverest economists!!

My best theory is deflation first, followed in a few years by galloping inflation (but maybe not hyperflation).

Broadly Why?
1. reduction of stimulus cash , govts cannot provide more money to the economy at the moment they need to cut back to save themselves = less cash in the system. Some may default. Some currencies may collapse at some point.

2. Banks are also still in save themselves mode, a reduction of govt cash in the economy won't tempt banks to lend to businesses who's returns are likely to be diminshing across the board.
The banks are also regulatory obliged to hold more capital and disinclined to lend what they have
left.

3. Connected to 2 is the fact that the derivative based asset backed securitisation market which put credit (wealth?) creation into the hand of the investment banks rather than central banks is over now. Any market that remains is massively diminished and will be for a long time. Besides with assets deflating who want to buy ?

That deals with the deflation part.

Inflation will follow because when govts see an insoluble problem with the economy they print money. Once one does it they all will. I think we are as yet a few steps away from the serious printing press ovedrive, the deflationary steps need to kick in first.

Why will it be different to Japan's deflationary period where stimulus did not work?
Because the US will be in a fight for survival by that time it will print $ without a damn about what China thinks. It will have a very unhappy population and will bring down the national debt by debasing its currency...not good for long term savers. This is when gold will come back into fashion and form a real bubble.

Also Japan had a double whammy - its banking system was hit and the deflation was aggravated by being situated next to the Chinese growth effect which stole Japans industrial miracle's thunder whilst flooding them with ever cheaper goods.

Thats my thoughts. Time will tell what happens. Something will - this don't seem like a standard 'muddle through' period of economic difficulty.

I'll be interested to see what others think

 

[BSD]

Germany as a country is quite indebted though (even allowing for a larger population)

A lot of that is basically down to re-unification, the costs of that were and are mind boggling.

 

[scose-no-doubt]

Let's face it, for a long, long time, the £ has been a leaky, flabby currency, happily devaluing away. Look at £/Euro now, after 7 months of continual weakness of the Euro against the USD, and the pound is still really only a few pence above parity. That must say something, considering it's not that long ago it was of the order of 1.40-1.50 (but supposedly "overvalued" - ha!).

GBP isn't a safe haven currency.

Also:
http://www.mortgages.co.uk/interest-rates/interest-rate-history.html
http://www.whatsthecost.com/historic.cpi.aspx


http://www.ecb.int/stats/monetary/rates/html/index.en.html
Couldnt find ecb historical inf but I bet its lower too.

 

[meanreversion]

GBP is a weak currency, and we seem to like it that way. If deflationary pressures exist, keeping the cost of imported goods down, we should stick with a weak currency as it encourages mad middle eastern folk to spend large amounts of cash on building sites in Chelsea or football teams oop north.

BSD, interesting point about re-unificaiton, any idea what the debt:GDP (in W Germany) was prior to that happening?

 

[scose-no-doubt]

Its not about being weak the strength of the £ is in the ability to set UK fiscal policy. If you can't and your economy is balls then you end up like Greece.

 

[meanreversion]

Sorry, I meant "competitive" currency, not weak. After all, who wants a "strong" currency these days. The Swiss certainly aren't chuffed with EUR/CHF at "these" levels.

 

[scose-no-doubt]

I've been expecting intervention since 140 and didnt have the stones to trade it lol. I've been sitting on my hands since 14th May lol.

 

[Martinghoul]

Deflation, or, to use the politically correct term, disinflation... No signs of anything resembling inflation in the developed world.

 

[meanreversion]

Deflation, like a balloon slowly letting out air.

 

[cr6196]

anyone have any good ideas for how to measure the amount of deflation currently priced in?

i was pretty convinced by the deflation leads to hyperinflation but i'm not too sure anymore. i don't think Japan is a relevant example of what happens under deflation either, all those $ lead to funny stuff in the money supply and the govts role complicates things more. if the world economy rebalances i think stuff will turn out alrite i.e US exporting, RMB revaluing, China domestic demand etc etc but it might (probablly) won't and this may be where inflation comes in...altho if the economy is ****ed, its ****ed.