“I think this chart tells the real story- that we’ve more than doubled our monetary base in the last couple of years. How can anyone really believe that we’re headed towards deflation? “
I think we are in fact dealing with deflation due to the outrageous bubble that formed in the housing market and its associated industries. The inflation of the cost of houses has to be set back to reality. The fact of the matter is, is that we have way more houses than we need. More supply and less demand equals lower costs = deflation.
The one thing about M3 is that it does not include the amount of money held in the bank’s vaults that is not being used. That is why we are experiencing deflation despite the massive amount of money being pumped out by the central banks. Because no one wants or can get access to that money. Its just sitting there and its not counted in M3.
What i find insane, is that they are going to eventually succeed in creating hyper-inflation because they are not taking this money off the street. They are doing everything they can to try to put it on the street and get it moving. If they succeed, hello hyperinflation.
Historically, hyperinflation is the path central banks/governments choose to get out of massive debt. So this handles two short-term goals of those in power (politicians and the central banks), keep the people burning money and make your debt cost less.
I agree that short term deflation is a possibility, but in the long run hyperinflation looks like it’s a certainty.
What about Japan? Declining population, and long-term deflation pressure, which will be spreading elsewhere. Demand is simply not going to match what it is now.
The Fed is fighting the market right now to keep inflating money away to stave off a deflationary spiral.
What are their options?
1, print money.
2, loan money through bailouts. Short-term inflationary pressure, long term deflationary pressure, as the debts hamstring further bailouts.
3, increase taxes. Short term deflationary pressure.
Their biggest tool against deflation is rate cuts, and that’s all spent. They can only borrow so much, before they start hitting the deflationary power of debt. They will borrow to the point, 100 percent, 200 percent of existing US GDP. That gives them a buffer of about 14 trillion dollars or so, given a deficit of about 1.4 trillion a year, that gives them 10 years.
Raising taxes, that hurts them short term, and undoes the purpose of the stimulus.
There aren’t really any good choice out there for Obama to deal with this structural deflation.