Deflation? Inflation? You be the judge!

Discussion in 'Economics' started by Babak, Jan 3, 2003.

  1. Babak


    I found this really neat little article while prowling the web. It is from a small boutique research firm in Canada. They only do research (no investment banking, trading or other activities in the market).

    Pay special attention to the graphs in the article. Hope you find it as interesting as I did. :)
  2. gold is telling the story.
  3. m22au


    If interest rates were to rise as the writer of the research suggests, wouldn't that (negative for stocks) negate the positive of increased profitability (through inflation) ?
  4. Brutus


    I remember back in 1999 when the Fed was jacking up interest rates and the stock market was still going up. People back then were claiming that Fed interest rate changes didn't matter any more because of the "New Ecomonmy" whatever that was. Stocks would actually rally when interest rates went up. Well that "new economy" thinking went down with the stock market and the Fed had the last say.

    Now the deflationary folks are saying that the fed lowering interest rates will fail to spark expansion and that we will go into a period of deflation. While I am a believer in the strength of the economy I don't believe we are in for a great bull market anytime soon. On the other hand I don't believe any of the gloom and doom deflationary depression opinions that are out there.

    My 2 cents :)
  5. qdz



  6. Minime


    Interesting article. The S&P is overvalued due to the inflationary lag phenomenon, and is anticipating the large future corporate profits.

    The money supply is increased by increasing debt (lower interest rates). It's analogous to a rich individual who is land rich but cash poor. He therefore borrows money against his assets to make himself liquid. Being liquid it's possible he can expand his businesses and increase his inventories/services. Only problem is he needs demand for these things--leading to the chicken or egg dilemma.

    As a country (USA), we need to increase our net worth, not just our debt. We've had a negative trade balance for a long time, and it's eroding our net worth. Until we can become competitive as a country, and stop losing money each year, we can only turn to debt to solve our problems. This doesn't have a long-term good outcome. The question is how long the world will put up with our scheme.
  7. Is there any real surprise?

    you're a small businessman gambling in vegas after a two day convention. mesmerized by the dollar drinks and the bright shiny lights, you find yourself down five grand at the tables. you promised your wife you wouldn't lose more than $500. what do you do? you max out the emergency mastercard, lay another 5 g's on the line. after all, your luck's bound to turn. and if it doesn't, hey, you were screwed anyway right?

    the Fed's strategy is akin to doubling down deep in the hole.

    if the debtors go down in flames, Uncle Sam and the average consumer- the two behemoths- are both screwed. So screwing over all creditors (bondholders, foreign investors and savers in general) via massive reflation is a risk the fed is willing to take, especially considering this is the long term plan anyway. Greenspan is willing to light the fuse on a keg of TNT to blast us out of the hole- never mind the minor detail that we're sitting on it.

    I think we could be headed for the worst of both worlds- stagflation. Meaningless stuff like electronics and color TV's will be dirt cheap and keep getting cheaper, but necessities like medicine and food and gas for the car will eventually start getting outrageous. As things get tight, people will cut back to the necessities only- and so the cost of necessities will keep rising.

    And not long after the general mood of the public really hits the skids, there will probably be a dramatic escalation of class warfare rhetoric. America has long admired successful people mainly because it's a cornerstone of the American ethos that anyone can get rich in this country if they just work hard enough and smart enough. The middle class generally don't envy the rich because they see themselves becoming rich some day. Most people don't think about long term cycles and back room deals and the sheer dumb luck of right place / right time. Baby boomers aren't going to just sit back and say "gee, guess we got a bad break on the long term cycle, better luck for the next generation." They are going to get seriously angry. When the belief in equality of opportunity is eroded and the average joe finds himself upside down on his mortgage and the public embraces bitterness in a way that it hasn't yet, you are going to see the fit hit the shan. If I were one of those guys who made hundreds of millions from a dot com company that went bust, I would seriously contemplate moving to Costa Rica or Thailand or New Zealand.

    What did Locke say, something like a democracy can only last until the masses realize they can exploit majority rule for their own ends and extract largesse from the system. Not an exact quote, but it gets the gist of it I think. If earth is still around in five hundred years, maybe historians will deem America the second roman empire.
  8. m22au


    Minime - they've already stoppeed putting up with it. Just look at the charts of the Euro, Swiss Franc, NZ Dollar, Sterling, Aussie Dollar and gold over the past year.
  9. m22au


    Great post Darkhorse ... Adam Hamilton of Zeal LLC fame is another who believes that the basics will experience inflation while the luxuries, especially houses and cars, will experience deflation.
  10. Correction, it wasn't Locke, but Alexander Tyler:

    "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the Public Treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy always followed by dictatorship."

    If the biggest debtors are generally the most irresponsible over the long run, and the majority of the public are irresponsible over the long run, then you have a recipe for debtor friendly inflation being the ultimate end to any and all democratic entities unrestrained by virtue and self discipline. The temptation to steal- and that's what it is, really, from future generations if not the current one- becomes too great.

    Funny how morality always comes back to the fore on questions of long term importance.
    #10     Jan 3, 2003