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  • You're not going to believe this: Inflation/deflation debate still alive?

    You're not going to believe this: Inflation/deflation debate still alive?

    I was just CC'd on an email from my friend Rick Ackerman to his co-conspirator in deflation prognostication Mike (Mish) Shedlock. I don't know if Mike has given up yet on his now four year old "inflation is just around the corner" forecast, but it appears Rick hasn't. Here's what Rick had to say:
    What is both unfamiliar and frightening about the inflation “story” is that it is unrelieved by even the dimmest prospect of higher wages. This is where the stagflationists' forecast of persistent but nonetheless tolerable sluggishness in the economy fails, since merely annoying, 1970s-style stagflation would be preferable to the deflationary noose that has been asphyxiating the economy. Indeed, while prices for nearly everything are continuing to rise, and quite steeply, incomes remain hopelessly stagnant. Were this to continue, do you think the endgame will be inflationary, or deflationary? If you have any doubts, here's a story from the Chicago Tribune that is likely to dispel them:
    In weak economy, forgoing $4 lattes for home brews
    June 19, 2008 (Chicago Tribune)

    The "latte effect" of the go-go years had consumers spending $4 a day on coffee. Now the downturn is forcing them to rethink the wisdom of such habits.

    As inflation squeezes budgets, middle-class Americans are taking fresh stock of their spending in search of ways to save a nickel or a dime. The result: People are giving up a variety of small financial vices.

    For Michelle Hovis, that means refilling her husband's used soda container from a 2-liter bottle she buys on sale for 98 cents. She tweaked his daily habit of buying a 20-ounce bottle when the price crept up to $1.39.

    "The price of gas, milk, eggs -- everything you can't control -- is going up. So you need to watch the things you can control," said Hovis, a 31-year-old stay-at-home mom from Iron Station, N.C.

    Note that the article that is offered as evidence of impending deflation refers repeatedly to the inflation that we are not supposed to be having in the first place. Here is my reply.
    Oh, geez. We’re not still beating this dead horse, are we? Where is it written that you cannot have an inflation spiral without wage inflation? Here’s the process as explained by a couple of bright guys over at the IMF writing about India's experience, depicted with this simple diagram. The inflation is launched by a disturbance in the exchange rate value of the currency. The depreciating currency then feeds into a self reinforcing process of money supply growth, inflation, price increases, and further pressure on the exchange rate value of the currency.



    There were two exchange rate “Disturbances” in our case: the collapsing housing bubble and energy price shock. Both are ongoing.

    We have experienced for years on end commodity price inflation driven by energy imports that exert out-sized influence on prices of everything that has energy as in input cost – that is to say, just about everything. Meanwhile, real wages have declined. If you don’t believe me, eat or drive or go to Paris for a weekend.

    At the same time, we have experienced asset price deflation, especially in RRE and soon in CRE. Many banks are technically insolvent, although they don't know it yet, soon to be zombies ala Japan 1995 supported by government but without explicit nationalization.

    Both inflationary and deflationary forces are always at work in any economy. Clearly, they are netting out to inflation today. Yet by the standard deflationista's theory, the commodity price inflation will reverse with falling demand and without wage inflation commodity price deflation will commence, any day now. I have never been able to see the logic of this argument. The US has experienced inflation for years without wage inflation. Why will wage inflation be a prerequisite for future inflation if it has not been for years on end in the past?

    Tell it to the Argentines

    The primary source of our inflation for the past few years, dollar depreciation, doesn’t go away just because demand is falling and GDP is negative as the economy shrinks and folks shift from lattes to home brewed coffee. Usually it does, but not this time.




    Data point: when average duration of unemployment reaches a post recession peak of 40 weeks,
    typical since 1960 (now it’s zero), inflation peaks about six months previously. By this measure we have a long way to go. The Fed could raise interest rates and throw the US into a deep recession, but it's not clear that such a move will not simply cause the dollar to fall even more, as exchange rates are now as much determined by relative economic performance among nations as by relative interest rates and inflation. One way or another, average duration of unemployment will eventually rise to 40 weeks.

    What's "different this time" for the USA is the same old, same old for all indebted nations with huge external liabilities throughout history. Take Argentina 1988 to 1991, for example.

    As we explained to our readers last year, we are on a version of the curve shown in the graphs below that show the Argentine inflation and recession of the late 1980s. Not as extreme because we don’t have the levels of short term debt that the Argentines had and, of course, the dollar is a reserve currency unlike their peso. Our peso is better than their peso, but it’s still a peso – here at iTulip we call it the bonar. Still, we are on a similar curve. This is what happens when you are in debt and your government chooses to externalize its problems via currency depreciation.



    Note that the first rise in inflation in 1985 settles back down again before the moon shot in 1989. We are not talking about a predictable, linear process here. In fact that inflation was an higher amplitude version of the 1976 inflation.

    Let’s zero in on the main event, from 1988 to 1991. Note that GDP in dollars declined 35% during the period in 1989 when inflation exploded to over 3000%. Yet GDP in pesos remained relatively flat. Sound familiar? Here in the US by a measure of GDP in dollars we’re still not in a “recession.” US GDP as measured in euros or gold, we’ve been in recession since Q4 2007, as we forecast at the end of 2006.

    Back to Argentina. What were wages doing in pesos during the period? Can't have an inflation spiral without wage inflation, right? Wages were falling in dollars, of course, much as US wages have been falling in gold, silver, oil, and euros here for the past few years; that’s our currency standard today compared to an Argentine peso holder’s US dollar in 1989.



    The Argentine inflation didn’t end until the peso was tied to the US dollar in 1991. The bonar inflation will end when the bonar is tied to a new currency, now in the early stages of negotiation with the Chinese et al, according to our sources. Looks like the IMF may have a new role after all.

    The US version may go something like this. From our 2005 hypothesis of a 100% US inflation over six years
    Inflation is Dead! Long Live Inflation!


    Our 2005 analysis says home prices likely do not rise as shown,
    as asset price deflation follows asset price inflation.

    So not 3000% inflation as in Argentina but a more modest 30% or so peak year. Sound far fetched? It sure did in 2005. Question is, is the theory sounding more or less reasonable as the years go by, or should we three years later still be holding our breath waiting for the commodity price deflation to arrive?


    See also:
    Inflation unlikely to ease, economists say
    Indians fear repeat of 1990s as inflation soars
    What's so wrong with big wage rises anyhow?
    Gold may rise to $5,000 on inflation, Schroder says
    The debate continued the next day:

    Rick and EJ continue the discussion, below.

    Rick: Better you should ask how the yen performed relative to all other classes of yen assets. Answer: Just fine. Gold in fact has always done relatively well as an investable (sic) during deflationary times. Still, as a hard-core deflationist, I have my doubts that the POG will get to Sinclair’s promised land above $5000 oz.
    The yen performed well because the yen is not a reserve currency, the Japanese experienced a hyperinflation after the war, and so protecting the yen was more important than preventing deflation. In contrast, the Fed is throwing the dollar under the bus to prevent deflation. It works – too well.

    Please take another look at the Argentina example. The relationship between the dollar and gold now for the US is similar to the relationship between the peso and the dollar for Argentina in the late 1980s. Deflation in domestic peso terms, yes, inflation in dollar terms, yes also. Asset prices are falling in dollar terms but crashing in euro terms.



    Not only US stocks but US real estate is cheap if you are a European.

    Wage rates increased in Argentina during their 1988 - 1991 inflation but an American company could buy labor in Argentina for pennies on the dollar. Today US wage rates are 50% lower in euro terms than a few years ago -- great if you are a European company paying employees in the US. US wages are deflating against commodities priced in dollars, and domestic commodity prices, to the extent that these are determined by imports, are continuing to inflate.

    Oil not gold is the ultimate money as it is the critical input to everything else. As Peak Cheap Oil arrives, everything is deflating against oil, which we experience as commodity price inflation. This event is widely misunderstood as a demand shock. Oil demand in OECD nations has declined to 2% annual growth rates since 2004 as oil prices doubled then doubled again. As China and oil producers are starting to reduce subsidies, demand may fall some more, but we'll see how long the oil kelptocracies and Chinese state continues with that program -- government give-aways are all they have to maintain political legitimacy. Meanwhile, oil producers have demonstrated that they intend to keep more of the oil they have left in the ground, so in spite of politically motivated assertions to the contrary they are not increasing supply but cutting it faster than demand is falling.

    Rick: But I have no qualms about assuring my subscribers that gold is all but certain to hold its purchasing power – not only relative to all other classes of assets, but relative to anything that you would care to call money.
    Gold is an international currency. As governments print to reflate economies, the value of national currencies deflate against gold.

    My theory since 2001 is that this process will eventually take gold to $2500. Needless to say, that was contrarian back when gold was trading at $270. At $900 we have new entrants with very deep pockets to take us to the next stage of the market:
    "Gold prices may rise to $5,000 an ounce as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally."
    If funds keep throwing billions at the gold market, and CBs become net buyers as Schroder expects, who knows – maybe we'll get to $5000. The paradox is that the guys who created this mess are the same guys who are now struggling to maintain the purchasing power of all the money they made on it. The rest of us are collateral damage.

    Rick: Even more certain is that, on a day in the not-too-distant future, Americans will realize that the hundred dollar bills they carry in their wallets are fundamentally and intrinsically worth no more or less than the $1 bills. I can’t tell from your writing whether you understand this, but if you do, it should disabuse you of the notion that the economy is somehow going to continue to muddle along. Muddling is one thing we deflationists all strongly agree cannot continue for much longer.
    I have no allusions that the US economy can muddle along. For a quick summary of my positions, I recommend:
    Rick: Concerning deflation and its symptoms, there is little I would care to add to the story I linked from the Chicago Tribune (which you have yet to acknowledge and presumably did not bother to read). When middle-class America cuts out lattes and starts refilling soda-pop containers, that is not inflation, or stagflation, or hyperinflation; it is a small step toward Depression, when almost nothing pleasurable, or that we currently take for granted, will be affordable.
    I did read it. Substitution always occurs during inflations. See:This will go on and on for years and years as living standards decline. Inflation is easier for people to adjust to than you'd think, certainly easier than 25% unemployment and no money around to buy anything, as was the policy choice in the 1930s as wealth holders pressured the State to stick to the gold standard which tied the Fed's hands to create inflation. As soon as the US went off the gold standard in 1933 and gold was re-priced, an instantaneous spike in inflation from -10% (deflation) to +15% (inflation) resulted.



    This inflation occurred after thousands of banks failed and the banking system had basically cratered. Those who hold fast to the theory that we are going to see commodity and wage price deflation as an outcome of this credit bubble don't seem to understand this part of the history of the last US credit bubble.

    By the way, the gasoline sign using to illustrate the Five Signs of Inflation piece was created using a web tool atom.smasher.org. Actual gas prices at the time in April were around $3.50 for regular and few believed that regular gas was going to rise of over $4. Now the sign looks like what you see everywhere. Soon those prices will look quaint.

    Rick: Like Mish, I’m not looking for an argument -- I simply don’t have the time.
    If I'd been forecasting deflation for years on end and a google news search produced 136 times as many results for a search on "inflation" versus "deflation" (142,539 search results vs 1,043 search results), I'd be looking to make some adjustments in my model.

    The only major adjustment that I've had to make is my forecast is on long term interest rates. I expected they'd have turned up by now, given the high levels of inflation. A friend who is a hedge fund manager running $1B told me in March he was finally taking huge short positions in long treasuries. He moved into the 10 yr at 3.34% and now it's at 4:16%. Good move. Will yields continue up and prices down?

    Here's a surprising voice added to the inflation chorus:
    When asked about the potential for stagflation, a combination of weak growth and high inflation, Greenspan said, "Oh certainly."

    Greenspan also said, contrary to the opinion of many, that there isn't a commodities bubble building. "Once you get inflation pressure starting to emerge, you don't get bubbles." he said. (Forbes, May 2008)
    I'm sure Bernanke wasn't too happy about that pronouncement.

    But I would be grateful if you would provide me with a bullet-point synopsis of the major economic events that you expect to occur over the next 7-10 years. That will be the easiest way for me to determine whether I may have misunderestood you. Do we perhaps envision the same endgame -- an economy in smouldering ruins, credit markets wrecked for at least a generation, widespread poverty and unemployment to match or exceed the Great Depression, and the U.S. having to rebuild its manufacturing capacity almost from scratch in order to make an honest living in the global marketplace? If that’s “stagflation,” or hyperinflation, then you needn’t bother to respond. I'm writing a book for Penguin that explains a tough transition period. We took a wrong turn in the 1970s. Now we have to go back and fix it.

    The thesis of the book may help you understand where I'm coming from:

    Working title: The New New Deal, Re-industrialization of Post Depression America

    The recession that the US is entering in the early part of 2008 is not a typical business cycle recession or even a post bubble recession as occurred in 2001. The collapse of the housing bubble and the energy price shock are the triggers that started a process of major structural change in the US and World economy. When the transition is over in a decade, the US economy will hardly resemble its current form:
    • Dependence on foreign borrowing to finance consumption and operate the government will end and reverse
    • Dominance of the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth will give way to new productive industries in transportation, energy, and communications
    • Trade deficits that started in the early 1980s will reverse and the US will begin to run a trade surplus
    • Burden of economic rent extraction in the form of interest on public and Private sector debt will be lifted via a combination of inflation, restructuring, and debt cancellation
    • Low national and household savings rates will rise to 1960s levels
    • Consumption will decline by half, from 70% of GDP today to 50% of GDP
    • Energy intensity, the amount of energy needed to produce a dollar of GDP growth will decline by half, led by conservation initiatives

    The US will experience the transition as a series of recessions which,
    cumulatively, may be as severe as in The Great Depression, but inflationary versus deflationary. We are seeing the first of these now.

    The New New Deal asks and answers:

    How did we get into this mess?
    • Why have US financial markets been in turmoil for over a year?
    • Why has the dollar weakened over 40% since 2002?
    • Why is inflation rising?
    • Why is unemployment rising?
    • Why are asset prices falling?

    How are we going to get resolve our crises?

    My publisher doesn't want me sharing the solutions part of the book, but basically the idea is that unlike the old New Deal, this time we unleash markets on the problem, with equity versus debt based financing.

    iTulip Select: The Investment Thesis for the Next Cycle™
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    Last edited by FRED; 07-03-08, 11:02 AM.

  • #2
    Re: You're not going to believe this: Inflation/deflation debate still alive?

    Tying the bonar with the Yuan... wouldn't that annihilate China's exports? I don't see how a new currency would change anything: there can be only one winner in this game, and China, with the trade surplus, has time on her hands. China is the world's largest gold exporter, and so perhaps China can attack the gold market to push money back into USD.

    As for wage-push inflation impact, I don't see how inflation can get much worse if wages do NOT increase AND there's a sustained decrease in aggregate demand UNLESS we maintain massive deficits AND/OR lose seignorage. Iraq plays into this as a potential weakness in our USD oil currency, which is the crux of our purchasing power. More analysis on the vulnerability of the USD as the currency for oil is needed.

    If the US gov reduces its deficit and manages to maintain seignorage, then speculative and compulsory demand for USD will maintain or increase. The question is: will the US gov manage to reduce the deficit and NPV of liabilities(Obama has a decent tax plan for that, to his credit) without creating putrcry for deficit spending to jumpstart the economy?

    Also, can we maintain the imperial circle? Say we do have deficit spending: does it matter? Having traveled a bit, I can say with confidence that most countries are far worse places to invest than the US: economics being a confidence game, will the new hot money flowing into New Deal 2.0 manage to also persuade speculators to hold treasuries?

    Comment


    • #3
      Re: You're not going to believe this: Inflation/deflation debate still alive?

      wages ARE going up. just not here. [isn't it time for global analyses?]

      Comment


      • #4
        Re: You're not going to believe this: Inflation/deflation debate still alive?

        Originally posted by jk View Post
        wages ARE going up. just not here. [isn't it time for global analyses?]
        but are those wage increases increasingly financed from ever decreasing trade surpluses as subsidy-driven industries grind to a halt?

        Comment


        • #5
          Re: You're not going to believe this: Inflation/deflation debate still alive?

          Originally posted by jk View Post
          wages ARE going up. just not here. [isn't it time for global analyses?]
          wages going up in china means rising prices of china imports in the usa.

          Comment


          • #6
            Re: You're not going to believe this: Inflation/deflation debate still alive?

            I posted a comment by some executive at Nippon steel mentioning how he could no longer pass on the costs to his customers of the price-hikes from his suppliers... I think it's a good indicator that we're hitting a production wall.

            Comment


            • #7
              Re: You're not going to believe this: Inflation/deflation debate still alive?

              How droll that some are still chanting deflation... although hourly average wages certainly have been deflating.
              In one of those sad surprises to most, they actually peaked in early 1973 whether using CPI or the more real shadowstats data.




              Per Fortune magazine in 1999, the average annual individual salary in the US went from $32,522 in 1970 to $35,864 in 1999. Both numbers are expressed in 1998 dollars (in other words, corrected for CPI measured inflation as of 1998). I don't know their data source but suspect it could be yearly IRS data - anybody know?
              http://www.NowAndTheFuture.com

              Comment


              • #8
                Re: You're not going to believe this: Inflation/deflation debate still alive?

                Originally posted by bart View Post
                How droll that some are still chanting deflation... although hourly average wages certainly have been deflating.
                In one of those sad surprises to most, they actually peaked in early 1973 whether using CPI or the more real shadowstats data.




                Per Fortune magazine in 1999, the average annual individual salary in the US went from $32,522 in 1970 to $35,864 in 1999. Both numbers are expressed in 1998 dollars (in other words, corrected for CPI measured inflation as of 1998). I don't know their data source but suspect it could be yearly IRS data - anybody know?

                I find it quite informative the graph that you post above, Bart. It reminded me to a table of data referring to the evolution of the minimum wage here in Mexico. As measured per Mexican CPI data, in real terms it was at the highest level in 1976, after a decree on the final period year by Luis Echeverría. We see that the bulk of the afterwards deterioration was during the rampant inflation period, namely between 1976 and 1988, and that later governments until 2000 maintained a loss in Minimum wage deterioration, being, numerically and in real terms, the Vicente Fox period the first one that ended with a minimal loss of minimum wage in real terms.

                Table can be found, with related explanation in spanish from Manuel Aguirre Botello, the author of it, HERE

                Why is the minimum wage so important in Mexican Economy?

                Before the rampant inflation period, tariffs and fines were set on a base level, and corrected (if applicable) every now and then according to decrees. At the early 80's since it got too difficult to be legislating constantly the new tariffs, which were eaten alive by inflation before being implemented, the idea was to link them to a base price that anyway had to be modified as pertaining by mexican legislators. The most widespreadly used price tag that has always been subject to decreed increases is the daily minimum wage.

                Other issue is that there are three numbers nationwide for the Minimum Wage in Mexico.

                Souces: Wikipedia and Mexican SAT Minumum Wage page

                Daily minimum wages set anually by law and determined by zone; 52.59 Mexican pesos in Zona A (Baja California, Federal District, State of Mexico, and large cities), 50.56 pesos in Zone B (Sonora, Nuevo León, Tamaulipas, Veracruz, and Jalisco), and 49.50 pesos in Zone C (all other states)
                Just to set another example where inflation turned rampant with an inflation in wages that kept losing in real terms and has not "catched" price inflation until both were leveled to a single digit.
                sigpic
                Attention: Electronics Engineer Learning Economics.

                Comment


                • #9
                  Re: You're not going to believe this: Inflation/deflation debate still alive?

                  So the US has been experiencing wage deflation for many, many years (with debt substituting for income). Yet one is lead to believe that price inflation (at least as far as some goods/services are concerned) will continue to rise even though deflation of wages remains. As for global wage deflation (commonly called cheap labor), rising wages are expected (assuming that job growth continues rather than reverses: rising unemployment due to global economic recession - or at least a significant slowdown), resulting in exporting inflation. In any case, wage increases in so-called emerging markets would have to be rather significant to overcome and exceed the current and still deflated wages in places like India, China, Vietnam, etc., to the point where one can say that wages in said countries have rise to such an extent that those wages can no longer be considered cheap.

                  As for energy, there too we are seeing rising costs, costs which still have a distance to go to account for 'true' costs: externalities, especially the looting of nature. This is especially obvious in the US where gas is cheap, but elsewhere too where the environmental costs have been displaced from the US to other countries (i.e. think air pollution in China, which of course makes it's way to California). So . . . the cost of energy is still got a ways to go to move from what one would think of as deflated to inflated, though the trend is moving in that direction (for which we can be grateful for).

                  Costs for woman's clothing, SUVs and trucks, houses, toys, electronics, etc., are still in the state of deflated prices, either reflecting overproduction (glut) or cheap labor. Of course rising costs has taken hold for food and energy, which is no less a a global matter, just as deflation imported to the US from China (still happening, even if prices are going up - again, closing that gap between deflated and inflated still has a ways to go, and a significant one at that). So, one would expect that price increases in some sectors will continue for the foreseeable future (whatever the hell that means). Likewise, deflated wage costs in areas mentioned above can be expected to continue . . . for the foreseeable future.

                  As for Argentina . . . bad, bad example. As expected, the confusion here lies in turning cause and effect upside down. Many factors were at play in Argentina, which reflect a complexity that attributing inflation to currency-centric depreciation fails to take into account. The world is not so simple. The failure of the Argentina economy can be attributed to many factors, but that regarding currency is symptomatic. The same can be said about inflation in Argentina. Social, domestic/political, geo-political/global and other factors were entangled in Argentina, the result of which lead to inflation and a currency crash, not the other way around.

                  http://www.newleftreview.org/?view=2410

                  Comment


                  • #10
                    Re: You're not going to believe this: Inflation/deflation debate still alive?

                    Originally posted by phirang View Post
                    but are those wage increases increasingly financed from ever decreasing trade surpluses as subsidy-driven industries grind to a halt?
                    i think you raise the key question: whither chinese incomes? or, perhaps, wither chinese incomes? this in turn leads to: what will china do as the u.s. consumer economy goes into reverse? i would imagine that unemployment and food availability/affordability are the highest concerns of the chinese leadership. as exports to the oecd slow, how will the chinese react? they just bumped up the domestic oil/energy price, reducing subsidies, and presumably ratcheting down demand, while attacking domestic inflation. the schiff scenario is that they allow their currency to appreciate, so that the cost of globally traded goods like food and fuel is reduced, thus solving their inflation problem. this only works, however, if they can shift their economy toward domestic consumption. it is hard to see how they could quickly make such an adjustment, but the alternative is mass unemployment and social instability.

                    Comment


                    • #11
                      Re: You're not going to believe this: Inflation/deflation debate still alive?

                      I felt from the beginning that playing the military adventure card was to prop up the bonar, not seize the oil wells per se. The super-sized bases in-country, the deep water berthing and airbases in the Gulf, are all about just that. Playing the khaki card against Iran will be bonar decision-driven as well. The question is, does it still work and what are the fiscal implications in doing so. A major component in the inflation question, and one that separates the big boys from the Argentinians.

                      Comment


                      • #12
                        Re: You're not going to believe this: Inflation/deflation debate still alive?

                        Originally posted by donalds View Post
                        As for Argentina . . . bad, bad example. As expected, the confusion here lies in turning cause and effect upside down. Many factors were at play in Argentina, which reflect a complexity that attributing inflation to currency-centric depreciation fails to take into account. The world is not so simple. The failure of the Argentina economy can be attributed to many factors, but that regarding currency is symptomatic. The same can be said about inflation in Argentina. Social, domestic/political, geo-political/global and other factors were entangled in Argentina, the result of which lead to inflation and a currency crash, not the other way around.

                        http://www.newleftreview.org/?view=2410
                        This is why Argentina is a good example. Read the article again. We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them. The inflation is related to depreciation in the US in a similar, albeit, different way than it was in Argentina.

                        Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term. In our case:
                        • Dependence on foreign borrowing to finance consumption and operate the government
                        • Dominance on the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth
                        • Burden of economic rent extraction in the form of public and private sector debt
                        • Low national and household savings rates
                        • Dependence on domestic consumption for 70% of GDP
                        • Persistent trade deficits
                        • High energy intensity, the amount of energy needed to produce a dollar of GDP growth
                        • Dependence on energy imports

                        These inevitably express themselves as currency weakness and inflation. There are many differences in the US vs Argentina cases, of course. If Argentina ran its economy as the US has since 2001 the peso would again be in crisis. The US has a privileged position, but is losing it.
                        Ed.

                        Comment


                        • #13
                          Re: You're not going to believe this: Inflation/deflation debate still alive?

                          Fred, you say:

                          "We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them."

                          You also write:
                          "Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term."

                          E.J. says above:
                          "The inflation is launched by a disturbance in the exchange rate value of the currency."

                          So . . . taken together, inflation results from currency "disturbance" which itself is the result of (using Argentina as an example applicable to the US) "economic problems."

                          So, we are in agreement: inflation and currency "disturbances" are the result of social, political and macro economic developments. In addition, it should be understood (and I think it is) that inflation/currency movements and their consequences are the result of global developments, that is, should be understood in a global context.

                          My point is this: taking all of the above into consideration, would it not be analytically more accurate to argue one's case relying on an analysis of social, political and macro economic factors? Granted, such an analysis is often touched upon in iTulip. But does not too much attention to inflation/currency (recognized as symptom not cause) serve to conceal the more significant factors at play? Recognizing that currency movements and rising or declining prices is simply the outcome of larger developments, why not focus on these developments, and then relating them back to price/currency movements . . . rather than the reverse?

                          Understanding price/currency movements - admittedly crucial to one's understanding - should serve to flesh out these larger developments. My point is that too much focus - getting caught up in these movements - can result in failure to flesh out more important and substantial developments, with the misfortune of leaving the subject matter unduly concealed in what can amount to a fetish, where movements of prices/currency exchange can seem to take on a life of its own, and thus by weight of argument be confused as the casual agent rather than the consequence. Doing so results in the failure to accurately address the inflation/deflation debate.

                          Aside: I am part owner of a farm in far southeast S. Dakota and in contact with residents in Iowa. The consequences for food prices due to the recent flooding in the midwest and especially in Iowa is loaded with uncertainties. But I think it safe to say that those consequences will be much more significant in the relative near future than they may now appear.

                          Comment


                          • #14
                            Re: You're not going to believe this: Inflation/deflation debate still alive?

                            a chat I had with an econ friend of mine who's at MIT:


                            " inflationary spiral .. that's the key thing to control here ... i mean all you need is sufficient consumption curtailings to induce that to not happen -- could include maintaining low wages among other things ... the oil shocks i think as they run their course will induce this anyway .. im not concerned about an inflationary spiral. .. this is cuz the oil shocks .. ppl tend to misread it as an increase in the price of a huge component of our consumption bundle. the better way to understand it is like an adverse productivity shock -- it makes us less cost effective in production in all industries because its like increasing the marginal cost everywhere. "

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                            • #15
                              Re: You're not going to believe this: Inflation/deflation debate still alive?

                              I think the two big mistakes that people make is to judge inflation by wage prices, and to fail to understand the debt default is not deflationary.

                              First, Rick and Mish do not understand that inflation is created by borrowing money. That is how money is created. Through borrowing. Inflation happens when people borrow at a rate that exceeds the rate of economic growth.

                              Second, folks like Rick and Mish believe deflation happens through defaulted loans. Their argument is that widespread defaults lead to deflation.

                              But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.

                              Only paying back loans results in deflation, because only paying a loan back removes that money from the economy. Paying back loans is flipside of inflation. Defaults are not the flipside of inflation. You can have widespread defaults and still have high inflation, but you cannot have people paying back their loans without a falling money supply and deflation.

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