Weekend Wars: Inflation vs. Deflation

With the New Year no longer so nascent and the recovery drum beating itself and all of us silly...

Perhaps it's a good time for a good debate on prices?

Specifically, the inflationary and deflationary dangers which still hover around our heads like mosquitoes in the summer.

From time to time I like to give a plug to non-household name sources of info.

Today, it is Monty Pelerin's World, a place where classic liberals and unabashed econ geeks can call home. Rejoice and check out some recent pricing figures, boys.

But before getting into the debate, let me humor you guys with the textbook definitions of tonight's players...

Inflation



The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. In other words, with inflation rising, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

Deflation

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.


Even by looking at the preceding definitions we can decipher that the linear train of thought looks to evade deflation at all costs.

Keynesians and centralized economy types would scoff at the notion of a comparison... precisely why I find it to be warranted.

As we (supposedly) emerge from the recession, asset prices are still unpredictable.

Once again there's a host of theories as to why this will undoubtedly lead to that but this time around, fewer and fewer people are buying.

The stories coming out of the financial press are far different from those everyday folks are seeing at the pump, the grocery store and upon the arrival of their utility bills.

Curious to hear what your thoughts are...Are inflation and deflation both subtly occurring as we speak?

Better yet, how likely are we to see one of the two beasts become a standard stalwart in our public lexicon in the coming months and years.

The sugar high of QE2 is set to start wearing off...

Take one of my favorite quotes for the road on your contemplative journey:

Alexis de Tocqueville:
It is not an endlessly expanding list of rights ??? The “right” to an education; the “right” to health care; the “right” to food and housing. That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery – hay and a barn for human cattle.
 

Well it's interesting that inflation was defined as an expansion of the monetary base prior to 1991...haha so we have a lot of "inflation" now. Also the quote you listed is by PJ O'Rourke, a CATO Institute fellow, still good though...

<span class=keyword_link><a href=/company/piper-jaffray>PJ O</a></span>'Rourke:
Freedom is not empowerment. Empowerment is what the Serbs have in Bosnia. Anybody can grab a gun and be empowered. It's not entitlement. An entitlement is what people on welfare get, and how free are they? It's not an endlessly expanding list of rights -- the "right" to education, the "right" to health care, the "right" to food and housing. That's not freedom, that's dependency. Those aren't rights, those are the rations of slavery -- hay and a barn for human cattle.
Reality hits you hard, bro...
 

Midas excellent post as always but had to disagree on Alexis de Tocqueville quote. Coming from a third world country where people have no "right" to health care, education, food and housing ; I saw most of my countrymen crippled by the vicious cycle of poverty. If in a country like America if you cant have access to education, health care and shelter then where my brother?

The logic is simple, if you get lucky in the genetic lottery than congrats to you and be on your merry way to private schooling,--- ivy, exclusive clubs etc. But if you are not so lucky then you're probably stuck in poverty because education becomes your lowest priority. If a state can guarantee shelter, health care and education than I dont think its socialism. I believe its the right thing.

 

The USA already provides food, shelter, health care and money to the poor.

Socialism is taking from those who work and giving to those whodo not, entirely because a group of people think it is right. Just because you think it is right doesn't make it so.

I tend to think Deflation is nastier than inflation.

 

I love it when people come from 3rd worlds and then try and fundamentally alter the USA. Almost all of Africa is socialist and look at it. Shit hole capital of the world.

When your poor, jealousy motivates you to think socialism is the answer. It polutes your thinking. Socialism is a cancer that feeds on jealousy and manipulation.

 
ANT:
I love it when people come from 3rd worlds and then try and fundamentally alter the USA. Almost all of Africa is socialist and look at it. Shit hole capital of the world.

When your poor, jealousy motivates you to think socialism is the answer. It polutes your thinking. Socialism is a cancer that feeds on jealousy and manipulation.

I do not adhere to any economic system per se. Socialism has its ills and so does capitalism. Living in 3rd world is no joke.

 

Deflation is worse in the way it will impact our economy- with its ever expanding monetary base. The natural tendency of $ is deflation. MV=PQ, the problem is that Freidman wants M to increase in tandem with Q (aka the monetary base expanding with GDP expansion) so we tend to have low inflation rather than "good" deflation. That mean that when we get delation, it is in a spiraling tendency and destroys borrowers, rather than "good" which does little but encourage a higher savings rate- not a bad thing unless you go Japan crazy.

Reality hits you hard, bro...
 

We are going to see inflation on the horizon. Price levels are purely synthetic and subject to the direct control of the fed. Of course the rate of inflation/deflation is more than simply a function of the money supply and takes into consideration some uncontrollable elements such as the velocity of money, but ultimately if the Fed puts enough cash into circulation, their will be inflation. Combine the fact that inflation is purely synthetic with the fact that the guy in the monetary policy driving chair, bernanke, is (rightfully) committed to inflation and you get undoubtable inflation on the horizon.

and ANT is right, deflation is much nastier than inflation because deflation incentivizes waiting on purchases and inflation incentivizes purchasing sooner rather than later.

 
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