Posted on 12/17/2002 4:58:17 PM PST by rohry
Understanding Inflation and Deflation
Once asset prices start falling, I do not believe the Fed can stop them. No one can. Pyramid schemes collapse, they do not continue in perpetuity. There is no evidence in history that it can be done. Our own Nasdaq experience shows they were unable to do it there. A weak dollar policy will create plenty of it's own problems which Mr. "You Mean I'm Not Supposed To Talk This Way In Public?" Bernanke doesn't even mention. Will foreigners just sit there and say 'thank you' as they get shafted? Might they move their savings to another currency or gold? What percentage of our assets do they own currently? Isn't it a lot?
If the Fed manages to keep housing prices levitated for a while longer, it will only mean more pain and suffering in the end. The way things have worked this time, falling asset prices may actually cause deflation, as people swear off debt. Or, people may do what this Fed has conditioned them to do: chase the asset that is rising in price. Paying down debt or moving on to the next speculation may interfere with the plans of Mr. "We're Gonna Start Buying Crap Off eBay If We Have To" Bernanke. A sated consumer, saddled with debt, who is worried about losing his job, may not cooperate with Mr. Bernanke's campaign to increase demand.
The Fed will certainly try to continue to inflate. And certainly the prices of some things may go up in value. But my guess is the Fed doesn't have as much power as they think they do. Even if they are successful, it will only take us closer to serious, serious systemic problems. But I do not believe housing prices can be propped up much longer. And when that goes, the real pain will begin. The sooner we take the pain, the sooner we can get back to reality and a healthy economy.
I don't think this guy was out doing his best impression of a lunatic without the "show" having been planned and scripted. Some people may read it as a tough FED that is going to fight deflation and win. I read it as a desperate FED that is near, if not in, full panic.
Richard W.
The terms "inflation" and "deflation" are used to describe a phenomenon that is the consequence of monetary policy--the result of the money supply and the federal reserve money system. The usual concept is that when money supply increases (or when transaction velocity goes up), without a commensurate increase in the supply of goods, we have inflation--the same quantity of money buys fewer goods; prices are up because the goods are being chased by more money.
There are other kinds of price increases and decreases which have nothing whatever to do with monetary policy--oil goes up because OPEC controls the available supply on the market; that is a price increase that results from structural supply demand market factors, not inflation.
It is very important for the careful reader to understand the distinction--before you can make any effective economic decisions, you need to consider the monetary environment and many will be misled by the current media commentary. We don't have inflation; price increase in the price of gold; CRB Index increase; and CPI increase have nothing to do with inflation and monetary policy; all result from the inclusion in the indexes of commodities which are affected by structural market conditions. Gold is going to go up because it is super money--even though we are in a period of deflation.
Gold is going to go up because it is super money--even though we are in a period of deflation.
Looks like you've disconnected your 1:1 relationship. Gold couldn't go up in a time of deflation.
My viewpoint has been that gold can go up because it has many many factors that disconnect it from the in-de-flation discussion. To wit, it's manipulated on the production side (a la oil), it has emotional, historical, many different uses, financial and monetary factors. It's manipulated in the financial & monetary arenas, al la leases at 1-2%, cartels, hedging, derivitives, supply & demand, central banks have separate individual policies, ad infinitum. And, besides being carried around on your wrist or in your mouth, it gets horded. These factors can go on forever.
So most of all it has been taken from and in fact hidden from view & purview. Now that all markets are being heavily analyzed it is naturally beginning to take its rightful place in the financial & monetary arenas.
Just this attention alone will raise it from its slumber. Just wait until it really starts getting ATTENTION.
And then finally it will get attention in the financial & monetary arenas. This hasn't happened yet and in fact these disciplines are still pooh poohing it and treating it as pretty much an unrelated surprise and a maybe this & that.
Ho ho ho, Merry Christmas to all.
Had that going on 2 years thanks to the miracle of the Internet. And commodities other than gold. Every minute. 15 minute delay unless you buy the subscription.
Live like there's no tomorrow and remember the economy is consumer-driven.
What else? Oh, yeah, if interest rates ever go back up, there won't be a tomorrow.
You're right about radio. They tell us only a few times a day how stocks and gold are doing. I don't know about TV, takes too much viewer effort for so little content to be worth the time.
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