hyperinflation vs deflation
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?
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?
Comments
Sure, deflation is easy. Let's assume there are X real dollars out there. That's what the Fed prints. But, we have a combination of factional banking and lending going on.
Here's a simple example to see how fractional banking creates money. Consider two banks A and B. A gets $100 in deposits, it is required to keep some small percent on the books (5% maybe), but it lends the rest to bank B. Now, A has $100 book value and B has $95 book value...they act like they have $195 combined but that's obviously not true. Of course, things like this can form crazy undocumented loops as A loans to B loans to C loans to D loans to A...
So, that's bad enough...but what about leverage? Leverage is when you borrow money to buy a house. You might put 0% down. If you borrowed 100% of a $90 house from bank B to buy your house, we have the following situation.
A has $100 book value, B has $95 book value, and you think your house is worth $90. Now, let's assume your home loses 10%...it's now worth $81. So, B downgrades its total value from $95 to $86, but A realizes it created a bad loan, and it needs to downgrade itself from $100 book value to $91. So, losing $9 in a house can cause the economy at large to lose much more than that.
What exacerbates this is that banks losing money might now have less on hand than is required by the fractional reserve system. This can be a catalyst for more mark-downs. Additionally, consumption has been driven by borrowing. That plasma TV, stainless steel refrigerator, or new SUV was probably purchased with credit...credit that may not be available or desirable to use now.
Someone correct me if I've messed this up, but the gist is that leverage can amplify gains and amplify losses and since we were acting like some of those gains were part of our total money supply, losing them will decrease the supply.
We may see deflation followed by 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.
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.