hyperinflation vs deflation

[evokanivo]

I've seen people forecast both on these forums, sometimes even on the same thread, without anyone arguing the case for either possibility.

Could people from both sides (particularly the deflationary stance) explain why their opinion is more probable?

Inflation seems easy to digest: Fed prints money to finance bailouts and reduce "real" national debt; money is devalued, voila.

How would deflation occur? People buying only what they need, thus prices dropping for everything non-essential to survival?

[rose-colored-coolaid]

[Alan]

I think either deflation or hyperinflation is inevitable. However, I don't know which is more likely or by how much.

We may see deflation followed by hyperinflation.

[lamont]

The other thing is that the quantity of money is only half of the equation, you also need increased velocity of money in order to get hyperinflation.

If you get decreased velocity of money that can lead to decreased aggregate demand and decrased prices. Basically in this case the fed could be printing money, but if its just going to banks who aren't able to find investors to lend it to, it doesn't really matter how much quantity of money is out there. This is the problem that Japan has.

If you play a game where 5 out of 5 participants get $10/yr to spend on things then you'll see prices of goods adjust to a certain level. If you give one of those participants a million dollars now and that participant puts it all under their mattress, you won't see prices adjust much. But if you give all 5 participants $20/yr then you'll probably see prices eventually double.

But look around right now. The fed is printing up $100bn's for bailouts. But the mortgage crisis is destroying a sizable fraction of the $20tn mortgage market. The stock market is falling and destroying $100bn's in a day. Commodities are now falling, which is a deflationary sign. Interest rates on treasuries are also falling.

OTOH, the inflationists will be right again soon. We will pull out of this recession/crisis and then the inflationary dynamics and peak oil issues will take center stage again. The next recovery may be somewhat weak in the US since we'll be competing even more with BRIC for scarcer and scarcer resources.

I doubt hyperinflation, though. Although with a long enough timeframe that will eventually happen someday.

[WestSideBilly]

One other observation is that many times, when people are talking about inflation/deflation, they're talking about two different things. Some people will be talking about prices, while others will be talking about money supply. Typically they're related (for obvious reasons), but their causes and symptoms are different.

In my view, we're seeing deflation in both areas right now. The money supply is disappearing - when a bank writes off $10B in losses, that's $10B that basically disappears. But we're also in a recession, and a global one at that, so much of the price inflation we've seen will be reduced or eliminated. Gas/oil is a visible example, hurricanes notwithstanding.