Deflation-stealth in '08 shows face in '10

Discussion in 'Economics' started by deadbroke, Aug 3, 2010.

  1. Judging from the threads on Deflation/Inflation its appropriate to ask ALL ET-ers, "Why aren't you in school? Do your parents know what you're doing?" :D


    let's get to it, then ....

    I'm an avid student of DEFLATION, a tough subject especially given that none of us experienced its last bout in the Great Depression of the 1930s. So we have no practical experience. But such experience is coming bigtime IN SPADES. Actually its been trickling in since 2005 but despite the real estate crash its hardly been easy to identify its presence ELSEWHERE. Its going to hurt even the ones who are prepared but the opportunity to learn will be huge.

    Of course body death will then cause the forgetter mechanism to kick in and all will be forgotten by the time I wake up sucking on a tit in some hospital in China, starting a new life hoping to then serendipitously find ET so I can revisit what I once knew and learned about Deflation IN THIS THREAD. :) :)

    One ET-er said that Deflation is a good thing because it means falling prices as in a market correction, so why is that a bad thing if we can then buy cheaper etc., etc., ?

    This and more will be answered and since this is an intense thought provoking thread esp. for me, its not likely anyone will ever state that Deflation is a good thing ever again.

    All are welcome, even that useless bum, Lucrum. :) :D :D
  2. Deflation defined: (I'm sticking with bobby's initial basic concepts because they are simply the very best)

    Webster's defines Deflation as a contraction in the volume of money and credit relative to available goods.

    When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall.

    The proper way to conceive of these changes is that the value of units of money is rising or falling, not the values of goods.

    The most common misunderstanding about inflation and deflation - echoed even by some renowned economists - is the idea that inflation is rising prices and deflation is falling prices. General price changes though are simply effects.

    The inflation of the 1970s induced dramatic price rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price increases in stocks and real estate.

    The price effects of DEFLATION are simpler. They tend to occur across the board, in goods and investment assets simultaneously.
  3. Retief


    Why is the stock market going up? Why is JPY so strong relative to USD?
  4. The primary precondition of Deflation

    Deflation requires a precondition: a major societal buildup in the extension of credit (and its flipside the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a hnadful of other economists, who today are mostly ignored. Bank credit and elliotwave expert, Hamilton Bolton, in a 1957 letter, summarized his observations this way:

    In reading a history of major depressions in the US from 1830 on, I was impressed with the following:

    (a) All were set off by a deflation of excess credit. This was the one factor in comon.

    (b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

    (c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

    (d) None was ever quite like the last, so that the public was always fooled thereby.

    (e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

    (f) Credit is credit, whether non-self-liquidating or self-liquidating.

    (g) Deflation of non-self-liquidating credit usually produces the greater slumps.
  5. Retief


    Don't care much about the theory. I'm only interested in practical application to trading: what assets to buy and sell.
  6. A non economist definition of deflation:

    It is when businesses sell inventory/services for whatever they can get just to get the cash they need to survive
  7. shorting everything is one way. have to be careful though to not get leveraged cause the market can grind up and stop you out and then collapse.

    in my opinion, CAD and AUD are the most overvalued currencies right now.

    conservatively you want to own USD and Yen. to protect against bank collapses the USD should be in short term treasuries.

    also, have a fair amount of physical USD notes for living expenses.
  8. it's good to plan ahead :)
  9. Retief, buy a huge stash of 'Marlboros.' They will be more usefull for trading, easier to make change, than gold coins.

    In terms of the market trading before feared Armegeddon, you need to consider that persistent deflation makes the cost of debt more expensive. You should short the enterprises and sovereign assets that have the most debt relative to insecure or declining revenue streams...clearly many sovereigns with crashing revenue streams are in this boat...but not CAD or AUD. Look for high debt and vulnerable revenue.

    Flip side is to stay in cash and look for favorable long positions in enterprise or sovereign assets that manifest secure base revenue and low debt. Stay away from banks even though deflation makes credits more valuable; the defaults caused by the increase burden on debtors overwhelms the increased value of the credits to the lender.

    An accurate way to look at the process of deflation is to understand it as a capital flow out of tangible assets into short term financial assets, money and money like substitutes. The process follows a credit collapse and is characterized by a responsive reduction in credit leverage ratios on both tangible and longer term financial assets. Because leverage ratio actually contributes to the value of assets, actually contributes to the increase of tangible values during a credit expansion, the reverse of the process as leverage ratio's decline, leads to the devaluation of collateral assets in a self reinforcing process. Once the process passess a tipping point the expectation of continued asset devaluation reduces leverage ratios and becomes self fullfilling. Contrary to the remedy proscribed by Fisher, once the process is established, it is not ameneable to correction by monetary means that would seek re-inflation becuase money supply expansion cannot move beyond the interbank system to the real economy if private credit is attempts to increase the money supply by interest rate and by quantitative easing will only result in a build up of excess reserves trapped in the banking system which will not have inflationary effect in the real economy. Remedy must be in re-establishing private credit expansion through fiscal incentives.

  10. Hey relax, man, all questions will be answered. :)

    Just let me build a base first with the definitions and premise.

    The thread is a learning thread for me - all in one place so I can re-read and connect events with the foundational principles of Deflation.

    The theory part should be ready in a few days, then thereafter its all application.

    I promise all questions will be resoundingly answered to your satisfaction. :) :D
    #10     Aug 4, 2010