Posted on 02/06/2009 9:10:18 AM PST by FocusNexus
There’s a Third Option: the world could turn into [Socialist] mush.
Steve Keen over at DebtDeflation just published a great article on credit expansion vs monetary policy that is essential reading for anyone who wishes to understand more about this complex interplay.
To summarize his main point, it doesn't matter what the Fed does. Their ability to manipulate base money is dwarfed, by orders of magnitude, by the private credit markets. In fact, for the Fed to have any effect on inflation, they would have to expand the money supply by 50x!
We are locked in the grip of a classic debt-deflation cycle so well described by Fischer back in 1933. Neither fiscal spending nor monetary actions will have any effect until asset prices return to a sustainable level of income/debt service.
The most objective measure is to track the Japanese CPI over time which does NOT show a 27 percent deflation. The fact that the Yen has appreciated or depreciated relative to another currency is not an objective measure.
That presumes that government CPI accurately reflects credit availability and the velocity of money...which Japan's CPI does *not* do.
If you want to see deflation in Japan, you can look at currency values (27% deflation in the last 10 years)...or you can look at the value of real-estate, say, for the past 20 years.
From 1989 to 2009, Japanese real-estate has deflated 50%.
Deflation.
Japan's Nikkei stock market average has also deflated over the past two decades.
Deflation.
Japan's velocity of money has likewise deflated over the past two decades. Deflation.
Deflation. Deflation. Deflation.
But...if you support Schiff's efforts that have cost his investment clients so dearly over the past several years (more than 30% losses), you are pretty well limited to arguing that Japan somehow didn't see any deflation and that the U.S. didn't see any deflation when FDR was spending so much New Deal money back in the 1930's.
That's a sad side of History to be on, however. Schiff is clueless. He's cost a lot of people a lot of money, and he's been wrong about every economic downturn in History except the one inflationary 1972-1973 recession.
You're shifting ground now. Just about everybody, except apparently you, agree that the most objective yardstick to measure the rate of price deflation is consumer price index. That measure in Japan does NOT show 27 percent deflation.
The fact that some prices fell (or rose) is beside the point, at least if you are claiming overall deflation (are you?) Some price declines in particular goods, even during the 1970s, have always declined and, of course vice versa. A credit shortage does not necessarily equal deflation. If you don't believe me, try borrowing money in Zimbabwe.
Your original post did not specify deflation in real estate prices. It was general statement about deflation in Japan as a whole with no, ifs, ands, or buts. Do you stand by your original post or don't you?
Schiff can't explain U.S. deflation during the 1990-1991 recession.
For that matter, the terms themselves alude to deflation. Depression refers to a slight indention or hole in the ground, and "recession" similarly implies a decline or regression.
Schiff can't explain the fall in Japanese real-estate and stock prices over the past 20 years...even as Japan printed record amounts of Yen to fund massive public works projects.
And Schiff isn't correctly predicting the future of the world today, either.
The reason *why* Schiff keeps failing...truly epic fails...is that Schiff doesn't understand the impact of the destruction of credit on credit-based, fiat economies.
As for you, you could save a lot of typing by simply saying that you will forever disagree with anything that runs contrary to Schiff's failed track record.
Let me know after this giant spending package porks its way through Congress when we'll see Weimar here in the U.S. ... because I've got a simple fact for you to keep in mind (secretly so as not to upset your own personal worldview): unless the pork re-establishes credit, we'll keep seeing deflation.
Cheers!
“Definition of deflation: increase in value of fiat currency.”
Deflation is a real decrease in the money supply.
Comparing two paper currencies backed by nothing is useless.
As was your post.
They are not alone. Eric Janszen of iTulip probably makes the best case for inflation. There is no consensus among very intelligent people over this discussion. Not even among them on this board. It will be fascinating in a stomach-dropping way, to see which ultimately wins out. I’m leaning toward “inflation” but I have no clue. If these bright minds can’t agree, then I’m just flat lost.
I think we’ll see 1-3 years of deflation, then wild inflation.
You keep throwing around the term “deflation” but never define it. My definition would a decline in the CPI over a sustained period of time. What is your definition? Please be precise. I have been.
I’m leaning that way but haven’t yet ruled out the “deflate to years of stagnation” quite yet. But the inflationistas are making the better argument to me right now. I tend to agree we see a few years, maybe even up to 5 years of deflation, before... POW!
Lead to one?
The stimulus [sic] bill IS an unmitigated disaster.
We all need to be flexible and ready for anything, up to 1917 type scearios.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.