Discussion in 'Economics' started by qdog, Jan 3, 2006.

  1. qdog


    Can anyone here make an argument that the U.S. faces a deflationary risk?

  2. I would tell ya to ask the Weimar fans or the "crash the bond market" people, but they don't post their idiotic garbage anymore.
  3. qdog


    I am familiar with that kind of stuff.

    There are ways to present an argument without attaching some wierd agenda.

    Lets seperate arguments from entertainment.

  4. There are some deflationary influences in the economy at present which are keeping the long bond yields lower than they probably should be.

    1. The "China Price" and wal-martization of america which causes consumer goods to be cheaper. (which may be a good deflation)

    2. Aging demographics of the USA and most other industrialized nations ex the emerging markets (which is a bad deflation)

    3. Bretton woods ][ influences of China,Japan, everyone else buying US treasuries like mad to keep their dollar reserves up to avoid the asian financial crisis of '97 redux.

    4. Worsening employment situation in the USA and europe (definitely bad deflation)

    After some research into the subject, I think that while there are definitely deflationary influences in the economy, the likelihood of a deflationary collapse is pretty slim, particularly after the oil run-up recently, which (artificially) created inflation.

    I have said it before and will say it again, Bernake is a DEFLATION hawk, not an inflation hawk. He will not allow it. Go search the web and do your own due diligence on this one if you don't believe me.

    Economy faced massive deflationary pressures in 2002. Things have evened off somewhat.

    If you are worried about deflation, may I suggest something? Purchase TIPS and hold to maturity. Inflation rises, you get compensated. Deflation happens, you get 2% and your principal is guaranteed. You can buy long term treasury zeroes, but that play is about 600 basis points too late, imho.
  5. qdog


    I am not yet worried about deflation.
    I do question some cherished assumptions that are made in economics.

    One, is the idea that all money that is available will be borrowed. Although it has worked out that way so far. In our current economic situation, one exception could be a big problem.

    Inflation with respect to goods and services has been very modest.

    The values of financial assets including real estate are another story.

    The growth of liquidity worldwide has not slowed. M1 growth has slowed but M3 is still increasing at a breakneck speed. New debt seems to be going into the financial markets and not inflating consumer prices.

    I see nothing wrong with creating debt in pursuit of any number of economic goals.

    The question I have is whether we are safe in assuming that the willingness to borrow has no limit?

    If it turns out that by chance, this time honored assumption does have a limit, given such a huge amount of debt being offered, then deflation will be a problem. I am not saying there is a certainty that it will turn out that way, but I do see an element of risk.

  6. While what you are saying is of interest from an academic standpoint, from the perspective of the populous, they will always borrow if credit is loose enough. Why wait until tomorrow for what you can have today?

    That's human nature.

    And don't worry about the incredible growth of M3. It is about to not be reported any more. Therefore, it can't grow, right?
  7. Banjo


    "And don't worry about the incredible growth of M3. It is about to not be reported any more. Therefore, it can't grow, right?"

    The masters of the game know how to keep it rolling, eh.
  8. dont forget about:

    housing bubble
    aging (wealthier) population
    doubling min CC monthly payments
    bankruptcy law changes

  9. hans37


    Well not with a straight face.

    Yes the deflation of computer and consumer electronics prices has been devastating . Boy I sure lament deciding not to buy the $700 dvd player and getting the 35$ one last year.

    Think about it a little. As long as money is printed on paper the only things likely to deflate will be low value added products or where technology supercharges productivity.

    This will likely be the case up until the point where the value of the paper is worth more than the currency, for example 1920's germany it was more rational to burn marks in the furnace than to purchase coal or wood with the same notes.
  10. zdreg


    "And the money kept rolling in(and out)":D
    #10     Jan 4, 2006