by lamont » Fri Jul 25, 2008 12:55 pm
I've been waiting for deflation to win for some time now.
it seems like the inflation that we currently have is unsustainable, because wages are not rising to keep up. The housing market was fueling inflation in a vicious cycle because people were using their house appreciation as an ATM machine which then went out and created consumer demand. Now with housing falling that cycle should work in reverse and consumer demand should slow.
Also, assuming Obama is elected and the Iraq war winds down that will also be deflationary (or, the Iraq war has been inflationary).
Gold peaked at slightly over $1,000/oz and then broke down and looks to have now failed to rally back up to that level and looks to be failing. Oil is pulling back hard after failing to hit $150/bbl and domestic consumption of oil is actually pulling back.
Credit in general is also clearly pulling back, which is deflationary.
That all points towards further deflation to me. Although, clearly the Fed is going to try to re-inflate and congress will continue to bail out the system. At some point though their efforts may backfire and result in higher interest rates.
It isn't totally decided yet, though. I'm still strongly considering that I may be calling this several years too early, but most of the signs are pointing in a deflationary direction. Commodities would really need to pull back more sharply, unemployment would need to get worse, GDP would need to post actual losses, Iraq would need to wind down and the actions of the Fed to increase money supply and the Congress to bailout the system would need to start more clearly looking like 'pushing on a string'.
I'm also still kind of worried that Congress and Fed might actually manage to create a panic in the dollar, which would be hugely inflationary and might kick off a wage-price spiral. There is a lot of resiliency in our system so I'm very skeptical of the claims that this kind of hyperinflation is just around the corner, but there has to be a limit at some point to how far the dollar can be pushed.