I’m as baffled as you are. Good discussion going on.
Whether we ultimately fall into a deflationary depression or approach hyperinflation is the biggest question we face and the answer is unknowable. If I knew that answer, I would be poised to become very very rich in a very short amount of time.
IMHO, Southack is making the best points on the thread. We are not currently deflating. We are experiencing disinflation - a nearly zero rate of inflation, but not a negative inflation rate.
Everything I see on the horizon looks like a coming deflation to me and a repeat of the Great Depression. That is where it looks to me like we are heading. Southack seems right to me in that deflation will rule the day.
The problem is, you have to look past “today” and look toward the future more than a few years out. In 2004, if you looked at “today”, it was obvious to one and all that house prices were going up forever and would never return to the mean values related to history, incomes and rent prices. Those of us who study our history, had seen a houseing boom or two, and knew that home prices can never disregard historic long-term inflation rates, and current incomes and current house rental rates.
We knew that the “today” trend of ever rising house prices had to end, and house prices would collapse.
Southack is looking at “today” with the destruction of debt, bank failures, businiss bankruptcies, cost cutting, layoffs, tight credit, home foreclosures and he is projecting all this — along with knowing his history of the Great Depression and Japan’s lost decade of deflation (now 2 decades old) — he is calling a deflationary depression.
Again, in my opinion, I find his argument impossible to defend against.
But I do remind myself to think out of the box. Just because everything points to deflation today, does that really mean taht deflation must occur with a repeat of the Great Depression? I’m not able to embrace that conclusion.
There are so many differences today between the US’s current economic situation, USA during the Great Depression, and Japan’s lost decade, that I am not convinced the US today must deflate into a depression.
Fore example...
During the Great Depression we were on the gold standard and destroying the value of the currency was not so easy. The US Government has as it’s gold the short term severe devaluation of the dollar in order to “inflate” our way out of our debts and prevent catastropic deflation.
Japan’s yen is not a world reserve currency and their ability to debase the yen through massive debt spending may not have the outcome or impact that massive US debt spending of the dollar may have. They may yet make it possible for a 2020 dollar to be worth 1/5th of a 2010 dollar. If successful, cut all dollar-denominated debts by 80%, because that is the net efrect. During the Great Depression there was no fiat world currency - major currencies were all tied to gold or silver, so who knows what effect the massive monetezation of the world’s reserve currency will have on inflation vs. deflation?
I find Southack’s argument unassailable but even then, I am not convinced the US and world ecnomies will grind down into aninevitable reapeat of the Great Depression’s deflationary depression. I’m just not sure that has to happen. It seems the likely outcome. Yet I am not convinced that inflation is not possible by a successful effort of the US government to severely debase the dollar. History suggests it can’t happen as no nation has ever successfully inflated its way out of a coming deflationary depression (unless you count Weimar Germany, which I am not sure qualifies). So history is not on the side of the current economic crisis ending in inflation. History suggests a deflationary depression.
Finally, I agree with RegulatorCountry, disagree with Southack - credit destruction is deflationary, not the mere existence of debt. The housing bubble was massively inflationary and was funded with massive debt/credit. If the mere existence of debt is deflationary, then the huge banking debt incurred during the housing bubble would have deflated house prices rather than inflating them. I don’t want to twist Southacks words and I understand him to mean that when you have a huge unserviceable debt overhang, debt must be destroyed and that process is very deflationary. But he keeps stating the simmple maxim “debt is deflationar”, and I would beg to differ the opposite.
Unserviceable debt is deflationary.
Serviceable debt is inflatianry. But then maybe Southack is hotshot economist from NYU or something and being an idiot engineer layman with no formal econonic training or experience, my common sense may be misleading me. Of cousre, those brilliant formal economists are the ones who have created this depression in the first place by allowing debt to spiral out of control and in fact pushing for this to happen.
We are in a mild depression and experiencing disinflation. Deflation looks like it is going to be the outcome of Obama’s massive addition to our already catastrophic level of national public and private debt. But I am not convinced deflation is inevitable.
I am not ruling out the possibility that a motiviated government with an unlimited ability to print the world’s reserve currency for a protracted period of time can’t create a massive amount of inflation by devaluing the dollar to between 20% and 5% of its current value in short order.
Thank you very much, dear FRiend. You’ve given me and everyone else a lot to think about and digest.
You are confusing debt with credit. They are different.
Credit is what someone is willing to loan you in the future.
In contrast, debt is what you already owe.
The destruction of *credit* is deflationary...when lenders won't loan you new money, you can't have new spending...so money becomes more dear...more valuable.
But the destruction of *debt* is inflationary...when leaders default on government bonds, you get hyper-inflation. See: Zimbabwe.