US Hyperinflation Is A Myth
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Viscount St Albans,
It is a tug of war of two forces. Attempts to re-inflate the money supply are fighting a headwind in terms of the fall in the value of credit instruments and the disappearance of virtual value from the bubble years. Deflation is winning (ie the net effect is deflationary), but the extent to which it is winning varies. During the last three years there have been herculean efforts to keep the credit ponzi expanding, and it has made a difference, albeit at great cost. What little has been achieved has been a pyrrhic victory, as it has set us up for a greater fall in the coming years. The reflationary ammunition has been used up, and the headwind is about to get much stronger, so the net deflation is going to get much faster and more powerful.
Yes, reflation is inflation by another name. It is not, however, hyperinflation.
On another note, there is a remote possibility for some form of debt forgiveness. If that were to happen on a large enough scale then consumer balance sheets could be repaired enough to rejigger an inflationary bias going forward. I like Michael Hudson’s prescriptive ideas to get us back on a health track by taxing land rents. I know it’s a long shot but were it to happen then I believe this deflationary event could be stopped in its tracks for good. Might be a long shot, but it does allow for another outcome out there that isn’t Apocalyptic.
@JZ (and Stoneleigh, should you care to comment),
Is “debt forgiveness” (i.e. debt jubilee) really a solution?
I know Steve Keen has proposed it, and I figure he knows his stuff pretty well. But I guess I still fail to understand what the difference between “debt forgiveness” and debt destruction thorough default is.
Debts are assets to creditors. If you, the debtor, owe me $100,000 and I, the creditor, “forgive” that amount… isn’t the effect still deflationary? $100,000 of wealth would have just evaporated out of the economy…
@ JZ
Mortgage Debt forgiveness is very much on track…..
Ireland just proposed easing of bankruptcy laws and forcing banks to lower mortgage principal on overburdened households…..
I expect mortgage principal forgiveness is in the cards in the US as wellOf course, it’s all a bit circular, because your debts are my assets, so the Irish State Bad Bank will absorb the losses on Irish Mortgage reductions (just as FHA will absorb the losses in the US). So Irish folks will have lower mortgage principal payments but lose pensions etc. as the Irish Bad Bank sinks deeper into the peat bog. Same in US.
Variable81,
Exactly. Either way the effective money supply will shrink, meaning either way is deflationary.
Steve Keen does not use the same definition of deflation that we do, which leads to confusion periodically. He uses the price definition.
Many in the MMT crowd do not see an insurmountable problem here. At the very least they do not see the government debt overload as anything resembling household balance sheet dilemmas. You could have targeted debt forgiveness along with aggressive and consumer targeted stimulus filling in where consumers can’t, and thus a slow reflation that repair aggregate consumer balance sheets could conceivably stop the deflationary forces in their tracks, while still leaving stock markets buoyed. Bad banks could be wound down, replaced for a time by government charted banks that have the public good at heart. Doesn’t mean it will happen this way but it COULD play out like this, and if it did, while not being a perfect panacea, it could buy us a considerable amount of time.
@JZ,
Forgive me if I misunderstand, but what you’re proposing still sounds like deflation, albeit “strategically” and over a longer period of time.
From what I’ve seen/read, most bubbles pop and crash down (though in a “lightening bolt” fashion as Stoneleigh pointed out) faster than the time it took for them to build up. If you could somehow drag deflation out to be the inverse of the inflationary growth we’ve seen to the system since the early 1980’s then perhaps it wouldn’t be so painful – but the net effect would still be deflationary.
In other words, we really can’t do much more inflating until we do a whole lot of deflating…
Variable81,, debt destruction and debt forgiveness are very different. Forgiveness repairs the balance sheets of consumers and would act as a driver for demand going forward. Debt destruction is the other side of the coin and affects creditors not debtors. That part of the equation, as Michael Hudson and MMT’ers point out, is a palliative that can work, albeit imperfectly. Still, it’s preferable to allowing creditors cart blanch over debtors.
Debt destruction has to happen one way or the other. It can happen where debtors are freed from their obligations or it can happen that wreckless creditors take losses from lack of due diligence and the government steps in to stop the bleeding. That can much more easily happen in the USA than in Europe monetary union.
I meant that another way outside of debtors getting a clean bill of health would be what’s been happening since 2007, where creditors have been bailed out and debtors remain on the hook. That way is sure to fail us all. The former will, however, put us on the road to some form of recovery. I’m not sure if a middle ground approach will work, however. It will buy us time though.
@JZ,
So “debt destruction” is when I default and do not pay back my loans, but “debt forgiveness” or jubilee would be as Keen proposed – QE for the masses – whereby the Central Banks would print money and give it to me to pay off my debts, thus repairing my balance sheet?
The only problem I see with that is that it is a form of stealth default. If the Central Bank increases the effective money supply simply so we can pay off our debts, it would result in price inflation as more dollars (instead of electronic credit) would then be chasing the same amount of “stuff”.
For your consideration I found a 2011 NY Times article by Martin Hutchinson and Robert Cyran that speaks to the numerous issues that a debt jubilee could raise:
The Downside to a Debt Jubilee
Good ends do not justify bad means. That philosophical observation applies to proposals for a big American debt jubilee that are now doing the rounds. The basic idea is to slash consumer debt, which is an admirable aim for an overleveraged nation. Household debt is still 90 percent of gross domestic product, down only modestly from the 2008 peak of 100 percent. But even bank-haters should recognize that this cure might be worse than the disease.
To start, writing off debts would not necessarily increase economic growth. Every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank’s capital or of an investor’s net worth — subtracting from resources and confidence.
And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.
The issue of moral hazard also cannot be ignored. Much of the excess debt was incurred through irresponsible mortgage refinancing, which peaked in 2006 at $322 billion, representing 2.4 percent of G.D.P. The reckless use of houses as A.T.M.’s was a major factor in decapitalizing and destabilizing the American economy. Forgiving such debts will teach the wrong lesson: borrow in haste, repent never.
Finally, investors would rightly see a jubilee as an attack on property rights. That runs the risk of throwing markets into disarray and discouraging foreign investors from buying assets in the United States. Risk premiums on both debt and equity capital would increase.
There are better ways to deleverage. Higher inflation does the job more naturally, without invidious choices about whose debt got reduced. But inflation also discourages savers, weakening capital formation. The best way to get debts under control is the hard slog of paying some back and writing the rest off.
Sound money, including interest rates above inflation, would help by preserving existing capital and promoting savings. After all, capital creation, not its destruction through debt forgiveness, is what makes capitalism work.I think the Times article grossly understates the problems facing the consumer going forward in this deflationary spiral. This paragraph of theirs is plain wrong:
“And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.
That’s neoliberal nonsense. Destabilizing banks would not be the end of the world as Hudson and others have pointed out. Uncontrolled inflation is the least of our problems too. And uncontrolled inflation is not a necessary result of debt forgiveness. “Usually inefficient” is no argument when being faced with the biggest debt deflation in our time.
Also the moral hazard argument can be handled with strict regulation going forward. So, yes, we’d get slower growth under this umbrella, but we’d also move forward instead of backwards which is preferable to what lay ahead if we do nothing. Furthermore, do these authors feel the same way about the moral hazard attending bank bailouts?
Variable81,
There is already target debt forgiveness. Increasing the depth and breadth of the forgiveness to help more debtors is a good and just move. Repairing mortgage debt alone would go a long way to getting consumers back on their feet. The losers would be the big money banks along with taxpayers vis a vis Freddie and Fannie. The banks can go in receivership. No biggie. The government can write off the its loss with the stroke on a keyboard. The healing can begin.
pipefit –
You’ve made a number of interesting points, but one I’d like to take issue with is your reference to a rising GAAP annual deficit.
Unlike a cash deficit, a GAAP deficit requires no bond auction to cover, and the government pays no interest rates on said deficit. Additionally, the GAAP deficit adds zero dollars to the economy of the moment, also unlike the cash deficit.
It reminds me of the Social Security Trust Fund. There’s no “there” there. Its completely notional. It represents a sum total of a future problem (or in the case of the Trust Fund, the sum total of future required additional borrowing by the Treasury from the very real bond market).
As such, if it doesn’t represent real dollars spent into the economy today, how can it possibly be inflationary, much less hyper-inflationary? Unlike deficit-spent dollars which definitely CAN be price-inflationary, especially in favorite sectors such as defense, education, and healthcare.
Sorry, but I’m still not seeing the difference beween ‘debt destruction’ (default) and ‘debt forgiveness’ (QE for the masses) save for one would be inherently deflationary while the other would be inherently inflationary.
Perhaps you can explain what you mean by “uncontrolled inflation is not necessarily a result of debt forgiveness”? The way I see it if a Central Bank prints large sums of money to “forgive” debt of we the little people and prop up asset prices (our houses), they’ve just inflated the amount of money in circulation by handing it over to the creditors who would then use it buy other goods and drive up those asset/good prices (result still equals price inflation).
As far as moral hazard re: bank bailouts, I can’t say I agree with bailing out banks – but I think it is a bit hypocritcal to criticize bank bailouts only to turn around and suggest a bailout for the masses who borrowed more than they could afford, driving up asset prices and creating debt bubbles.*
I recognize some (most?) may disagree and point to the human suffering that could be alleviated by granting bailouts to the people, but to me that reeks of a sort of tyranny of the majority who made unwise financial decisions punishing those of us in the minority who did not (I have no debt, but had to work hard and sacrifice much to get to that level of financial security).
To give a personal example, I have many friends who have started their families and purchased homes, some even going as far as purchasing rental properties in addition to their primary residences as they view themselves to be saavy investors. Most of these friends are highly leveraged and will be wiped out should anything even remotely resembling a 2007/2008 scenario come along again.
These are friends I care about very much and have known for most of my life. But do I believe they should have some sort of debt forgiveness to save them from financial calamity? No. Do I believe they should be financially wiped out? Absolutely.**
This speaks to the concept of the moral hazard of any sort of bailout – if you provide it, you only encourage people to continue to go further into debt by making them believe society will protect them should they fall on hard times.
I’ve played the Cassandra and tried to warn them a million times of the dangers of leverage, cheap credit and asset bubbles but it simply does not seem to stick for most of them… and I have no right, let alone the power, to force them to act in a different manner.
I suppose it comes down to that you can warn a person not to touch something that is hot, but the only way for them to learn is to let them burn themselves. Unfortunately in this case, “burning themselves” may amount to collapsing our financial system and perhaps parts of society along with it…
* This actually makes me think I should take a look back at ancient debt jubilees and see who was actually getting bailed out back then – was it just personal debt jubilees, or were organizations/enterprises of the ancient world forgiven as well? A further thought – ancient Rome tried debt jubilees and still saw debt destruction & collapse in the end; if we’ve already done jubilee through bank bailouts, bankruptcy laws, etc. then perhaps debt destruction & collapse is inevitable?
** I would draw the line at the concept of “debtor’s prison” or those in debt being rolled into military service, whether friend or foe… Stoneleigh often speaks of it and the concept of it frightens me deeply.
Variable81,
I’m not dogmatic regarding possible solutions. I pretty much agree with what’s been laid out by stoneleigh and Ilargi. There has been no hyperinflation, and I see no mechanism whereby we’ll see anything resembling it in the future.I don’t, however, shy away from exploring any action which could mitigate the pain for the masses going forward. As such I don’t much care about the highly questionable moral arguments lobbed about in respect to debt forgiveness of some kind, especially when said debt was encouraged by the very government supposedly charged to look out for our best interests. The fraudulent lack of oversight by regulators alone, which allowed said bubble to grow kind of eliminates any moral component regarding consumer debt accumulation, especially in housing. Bill Black calls what happened a criminogenic lack of oversight at the highest levels of government. He understands that mortgage forgiveness would benefit many unscrupulous speculators, but that would pale in comparison to the many folks who have been collaterally damaged through little fault of their own. This form of jubilee would be only one part in a larger conversation on our living arrangement going forward. I believe structural changes are a must going forward too. I like Michael Hudson’s ideas here, which essentially emasculates the extractive forces behind the FIRE economy. At any rate, the problem facing us is clear as day. For me, at least, it’s time to move on to practical and realistic solutions to the mess we find ourselves in. Punishing the victim isn’t one of them.
First of all, if this post is crap, just delete it, I don’t know everything, heck most times I figure I don’t know anything anymore, I just tell it like I see it.
Forget debt forgiveness, they’ll just pile it right back on, haha, likely at lower rates. I’d rather see government buy the homes since they already are anyways, and provide to the low income which we have plenty of. Fire the CCC back up to maintain all this government housing instead of contracting everything out at low bid which turns out to be junk. Create a health care system run by the government to compete with the private, are you poor?, then you get the government version.
Many things are causing the problems we have. Take feminism, although a beautiful thing, can we afford to give the power of independence to 50% of the worlds population, then let government pay for her food/housing/children when she only wants to screw bad boys who run off and never wanted to support a family in the first place – guess so. And, at that, he can’t get a decent middle class job anyways, it went to a cheap labor country. Lol, makes my life easier, since I now need a girl the same as a fish needs a bicycle too!, and lol2, on even NPR they discuss domestic violence, mostly the guys fault, lol3, no, this is how she likes it, and she can dish it out just as bad, sorry feminist societies won’t admit this, until she finally breaks you. Any intimacy or love left? pffffhhh!, I finally gave up and joined the “me” society myself. I guess ,lol4, many girls I know have practically multiple sexual partners at any time, whereas I’m like what the heck is sex?, I forgot! Certainly these creatures need some free health care, especially reproductive, and now, they got it.
Mild inflation combined with collusion and monopolistic tendencies.
I’m in IT, I make about 50k/year, my friend started in nursing about the same time I started in IT, I now make about 60k/year, she makes 100k/year plus doing the same work / same time period of employment.
Taxes for sure!::
Rent for one is only a few thousand more than the property taxes alone on a house, I can’t afford wife/kids but my government can, I also can’t afford the housing to house them, and the food to feed them, I guess I could work until I was dead, and get a million dollar life insurance policy for them, but why worry about that, that’s what she wants, I’m not worried about my gene pool going extinct anytime soon, but she is, and that’s alright with me.Piles of money = money base. You can pile money up, the more of it you got sitting in piles, the less velocity and taxes it can conjure up, I understand corporate’s are piling cash as well.
The rumors are true – Real Estate = banking cartel = interest payments = property taxes = maintenance = two income trap = money for nothing for the money pile growers. I had some RE, now that I got rid of it, I have this pile of money growing larger by the day, to be honest, I don’t see it as having much value at all, I can buy all this materialistic crap, but it only pleases me temporarily.
The question regarding why is QE not reviving growth?, well the government is giving money to the banks, and they hook up the investors who buy homes and wrap these up into some kind of differentiated investment portfolio, juicing the RE market.
Interest rates!, they have been going down for 30 years, they won’t shoot up unless inflation shoots up, that will be dependent on energy which we depend more on for food than ever before in history. This is the part of the equation that is the most important. The only places I see people actually working for a living is where inflation is rampant, and the energy comes from a workers back.
Variable81,
I agree totally with your post!
I am convinced that while allowing TBTF Banks to fail would have been destructive to the world, that is the ONLY WAY to save Capitalism and also get a recovery. I am of the opinion that Capitalism need failures and swift dispensation of justice (e.g. to people like Corzine). That is the way one ensures that resources are deployed correctly. For example, if lending to housing to anyone who breathes is going to bring the house down and you are sure of not being bailed out and that whoever is responsible for the same will be sent to prison, then it is highly likely that such institution will be careful about lending. “As you sow so you reap” seems NOT TO APPLY NOW. It is more like “As banksters sow, Tax-payers reap if banskters lose, banksters reap if banksters win”.Instead intervention, malfeasance, gaming the system, spreading moral hazard in the system, propaganda, not prosecuting criminals, falsifying reports is being practiced. Can anyone in the right senses believe that this will end well?
Hi Folks,
Of course history never repeats but rhymes. Past ‘hyperinflationary’ events have been due to local currencies being isolated and inflating locally due primarily to loss of relative value. What we have today is a global economy where the dollar is the defacto reserve currency. There is no other relative global currency to lose value to (as far as I am aware the galactic credit/bars of gold pressed latinum are not available in this quadrant of the galaxy) as the euro has lost this status if it ever truly had it. Remember the dollar is the only global currency used freely in many countries around the globe, legally or otherwise as recognised ‘tender’.
What is likely to happen instead is the steady depreciation and devaluation of the currency as happened to the Roman currency which was successively devalued over centuries.
The current crisis will probably see this happen over decades. Also the inflation (re; price increase not money volume – see below for definition) is likely to be in commodities, while assets crash through the floor. The scenario of houses being cheaper than a loaf of bread is not impossible. The fact that in the UK relative house prices have already crashed 60% due to a stealth devaluation of sterling, leading to foreign investment keeping local prices high .
Which suits the banks fine as it keeps their loses looking good, but keeps indigenous inhabitants priced out of the market and unable to get credit. It must also worry the banks creditors, which in the EU looks like a game of tag. The UK bank debt dwarfs Greece, owing most to Germany and Spain. If the government presses ahead with a national house building plan things could get interesting.
A better way of stimulating housebuilding, Fathom said, would be to force prices to fall back to their equilibrium level by forcing banks to repossess struggling borrowers and disclose their hidden bad debts. Bank of England money printing could “be used to recapitalise the banks”. That would leave them “free to lend” and make houses more affordable again.
Yeah right… Loaf of bread or a house?
L,
Sid.The richest among us have exactly the same amount of ‘money’ in their bank accounts as the poorest among us have in theirs, zero. How does zero hyperinflate?
2008, over $40TT of the global ‘money’ supply vanished without a trace. Think about that.
Carl post=5869 wrote:
(Since) 2008, over $40TT of the global ‘money’ supply vanished without a trace. Think about that.And yet, amazingly, prices for everything that people actually need and buy continue to increase, and gold and silver have doubled. Who woulda thunk?
alan2102 post=5989 wrote: [quote=Carl post=5869]
(Since) 2008, over $40TT of the global ‘money’ supply vanished without a trace. Think about that.And yet, amazingly, prices for everything that people actually need and buy continue to increase, and gold and silver have doubled. Who woulda thunk?
Gold and silver only have the value that they’re sold or traded for. Doubling is irrelevant if the owner holds it all the way back down to–and perhaps past–its purchase price.The best use of gold is in the form of a ring. Get a spouse, a true partner. Then the rest won’t matter so much (as if it really did in the first place).
SteveB post=5992 wrote:
Gold and silver only have the value that they’re sold or traded for.That would be true of any investment, I believe.
Doubling is irrelevant if the owner holds it all the way back down to–and perhaps past–its purchase price.
Indeed. Which is why it is not a good idea to buy at the parabolic tail end of a bull market. In gold and silver, we’re years away from that point.
The best use of gold is in the form of a ring. Get a spouse, a true partner. Then the rest won’t matter so much (as if it really did in the first place).
Apples and oranges — both very good to eat.
Gold won’t buy happiness, but happiness won’t pay the bills.
gurusid post=5849 wrote: Hi Folks,
the inflation is likely to be in commodities, while assets crash through the floor. The scenario of houses being cheaper than a loaf of bread is not impossible.Yes. It is called “biflation” — a useful concept. Prices of food, fuel and most consumables goes up, while financial “assets”, real estate, luxury goods, etc., go down. I’ve put together a few notes about it, here:
Inflation? Deflation? or Biflation?
Inflation? Deflation? or Biflation?alan2102 wrote: ” It is called “biflation” — a useful concept. Prices of food, fuel and most consumables goes up, while financial “assets”, real estate, luxury goods, etc., go down. I’ve put together a few notes about it, here: Inflation? Deflation? or Biflation?”
In my opinion, biflation is not at all a useful concept. It just muddies the waters. The dynamic you are pointing to is essentially what we have been predicting at TAE all along, but you are couching it in needlessly confusing terminology. To review our position, inflation and deflation are monetary phenomena. The money supply is either expanding or contracting. Price changes are lagging indicators of monetary expansion or contraction, but are also impacted by many other factors such as local scarcity or glut, international arbitrage, input availaiblity, transport potential etc. For these reasons, looking at prices alone is not very useful. It is more important to understand causes than to look at effects, particularly when those effects are subject to confounding factors. It is also more important to understand affordability (ie prices in real terms) than to look only at movements in nominal prices.
What we have said at TAE is that the money supply will contract substantially on the collapse of credit. Prices will follow to the downside, but as purchasing power will fall faster than price for most people, everything will become less affordable (ie prices will rise in real terms even as they fall in nominal terms). As a much larger percentage of a much smaller money supply starts chasing the essentials, they will receive relative price support and will therefore be much less affordable than everything else.
Of course the value of financial assets will fall further than essential real goods. These are the very credit instruments whose collapse in value is at the heart of deflation. Their value is virtual (ie excess claims to underlying real wealth), while goods hold real value. That doesn’t mean the price of real goods can’t fall in nominal terms though, at least for a while. Deflation is such a powerful force that it would be expected to cause all nominal prices to drop initially, albeit not all to the same extent.
Prices have risen during the rally as a lagging indicator of ‘heroic’ attempts at reflation. As such, prices tell you what has been happening, not what will happen. Focusing on the money supply, particularly on the perceived value of credit instruments, is the way to see trend changes as they occur. The consquences of the trend change will play out in the real economy later.
I fully expect the nominal price of essentials to bottom early in the coming depression. This has been part of TAE’s view for several years (see the 2010 version of A Century of Challenges). At first all prices fall, but over time, as essentials become scarcer and competition for them becomes fiercer, I would expect nominal prices to rise even in the face of continued deflationary depression. That would mean real prices going through the roof.
Keeping terminology clear is important to presenting a consistent argument that all discussion participants can understand. Otherwise we end up talking past each other and appearing to disagree while we are actually describing the same dynamic. Discussions here are based on monetary definitions of inflation and deflation. Biflation does not exist. Bifurcation of price movements does and is already part of our worldview.
“In my opinion, biflation is not at all a useful concept. It just muddies the waters.”
My thoughts exactly, Nicole.
Biflation is nothing but another way for people who don’t understand what inflation/deflation is, to make sense of what they see but can’t explain. It doesn’t help them, they need to go back to the real definitions. Moreover, terms such as these, simply because they are so wrong, make interpreting events harder, not easier. If you don’t get that the largest credit bubble in history cannot be followed by anything but the largest debt deflation in that same history, it’s back to zero, and again, until you do. Inflation and deflation cannot exist simultaneously. Deflation, put simply, is the contraction of the money supply and velocity of money (which has plunged not unlike that Baumgartner guy) already.
I would add to what you write that prices of a substantial group of goods is high(er) today because a lot of zombie money (money that is not real, but “exists” by the grace of Soprano accounting standards that temporarily hold deflation at bay) has moved into them away from very poorly performing bond and stock markets (the latter still trade on very low volume).
And interestingly, that is in perfect line with what we always say, namely that down the line real goods have real value (not reflected in a particular price level, but in affordability). That’s why many investors move into food, energy etc., and that – obviously – raises prices. And that is not inflation or biflation or anything like that, it’s deflation that makes people move their “money” from one “asset class” (the one deflation hits first, i.e. Treasuries) to another (oil, corn). I would add gold to that, in the sense that it is simply another way that far too many people at the same time think they have at their disposal to protect their money.
ilargi post=6035 wrote: “In my opinion, biflation is not at all a useful concept. It just muddies the waters.”
My thoughts exactly, Nicole.
Biflation is nothing but another way for people who don’t understand what inflation/deflation is, to make sense of what they see but can’t explain. It doesn’t help them, they need to go back to the real definitions.
What you mean by “real definitions” is YOUR definitions. And that’s fine. Define words as you please, for your purposes; just make certain that the definitions are clear up front, every time the words are used, when your definitions do not comport with conventional and broadly-accepted ones.
In the case of “inflation” and “deflation”, the definitions found in all dictionaries and reference works, apparently without exception, are inconsistent with your definitions. I accept that you want to use your own definitions, and as I say that’s fine. Just don’t pretend that yours are any more “real” than others’. If anything, the situation is the opposite of that.
Inflation and deflation cannot exist simultaneously.
As conventionally defined, they can, and do; it is happening right now. Yes, I understand that by your definitions, the situation is otherwise.
Please note that I’m not saying your definitions are wrong. Maybe they’re right, and far superior to others. Maybe they represent unique and brilliant insight on your part. I don’t know. But I do know that they are idiosyncratic and inconsistent with reference works and general (“man on the street”) understanding.
Please note also that I did not write the dictionaries, and I am not responsible for what hundreds of millions of people believe to be the definition of “inflation” and “deflation” (higher and lower prices, respectively). Your beef is not really with me, it is with them — the dictionaries, other reference works, and common understanding.
From my post:
https://alan2102.wordpress.com/2012/11/05/inflation-deflation-or-biflation/
Note:
I recognize that others may have their own (atypical) definitions of “inflation” and “deflation”, but in this post I am using “inflation” to mean what dictionaries and other common reference works say it means, and what almost everyone understands it to mean: higher prices. (While its mirror-opposite, “deflation”, means lower prices.)
Vis:
http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.
en.wikipedia.org/wiki/Inflation — In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
http://www.investorwords.com/2452/?inflation.html — Definition of inflation: The overall general upward price movement of goods and services in an economy.
stoneleigh post=6032 wrote:
The dynamic you are pointing to is essentially what we have been predicting at TAE all alongTAE has predicted increased prices of food, fuel, most consumables, medical services, education, most commodities, precious metals, and generally most things that people actually buy and use?
It is…more important to understand affordability (ie prices in real terms) than to look only at movements in nominal prices.
I don’t know about “more” important, but it is true that the prices don’t give the full picture. Continual price increases of almost everything that people actually buy and use, in daily life, does not fully reflect affordability when incomes are dropping — as they are, modestly. The price increases are, in real (affordability) terms, even worse than they appear. But the price increases are still the main thing, by far. That could change, of course, but that is the way it is for now.
What we have said at TAE is that the money supply will contract substantially on the collapse of credit. Prices will follow to the downside
I’m having trouble correlating that with the first pull-quote, above.
but as purchasing power will fall faster than price for most people, everything will become less affordable (ie prices will rise in real terms even as they fall in nominal terms).
Well, deflationists have told me for 15 years that prices of the things mentioned will fall in nominal terms, but so far it has not happened. Maybe that will change. Maybe they will be vindicated, yet.
In any case, I’m having trouble with your statement that “The dynamic you [alan] are pointing to is essentially what we have been predicting at TAE all along”. That does not seem to be the case, at all. The dynamic I am pointing to is increases in nominal [yes, nominal] prices of most common consumer goods and services, aka “inflation” as commonly defined (see reply to Ilargi, above). That’s what I have expected for 15 years, that is what has happened during that time, and that is what I expect to continue for some time to come.
Prices have risen during the rally as a lagging indicator of ‘heroic’ attempts at reflation. As such, prices tell you what has been happening, not what will happen.
Just to be clear: I’ve never taken price changes to be predictive, with confidence, of further price changes. No intelligent person would think that. On the other hand, it is true that trends, once in motion, tend to continue, often for a lot longer than anyone expects. And it is evident that heroic attempts at reflation will continue indefinitely, probably with increasing intensity.
Keeping terminology clear is important to presenting a consistent argument that all discussion participants can understand.
I certainly agree with that. And as such, if you wish to use idiosyncratic definitions (e.g. of “inflation”), you must be especially careful to present your definition anew, in almost every document or discussion, in order to ensure understanding. That’s a lot of work. It might make more sense just to use the conventional definitions, and make your point (regarding precursor monetary phenomena, etc.) in a different way.
Biflation does not exist.
It exists, and is happening right now, given near-universally-accepted definitions of “inflation” and “deflation” (which I understand that you reject).
alan2102,
You are perpetuating, and indeed amplifying, confusion unnecessarily. Our definition of inflation and deflation is not nearly as odd as you make it sound. It is in fact the traditional definition, and is quoted by one of your sources (although the source also hedges its bets in a confusing way):
http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.
This source points out that changes in the money supply are the cause, and price changes are the effect. We do point out our definition regularly, and our readers understand that that definition underpins discussion here. We have also explained regularly why we use this definition.
The apparent paradox of deflation is that even as prices fall, things become less affordable for most (with the exception of those who have preserved capital as liquidity). We have been pointing out that things that people use would be getting less affordable. You seem to be suggesting that this will happen at higher nominal prices, while we are saying it will happen at lower nominal prices. The important point is the affordability.
You say that prices have risen for many years. Of course they have, as we have been in an inflationary credit hyper-expansion for 30 years, and prices generally follow changes in the money supply. Prices have, however, fallen where international wage arbitrage has been a major factor, such as for electronics, which illustrates other price drivers at work. (And where nominal prices fall despite inflation, real prices are going through the floor.) These confounding factors are one reason we use our clear and precise definition of inflation. To do otherwise takes all the explanatory and predictive value out of the concept, which suits the powers that be perfectly well by the way. They don’t really want people to understand the system.
As the deflationary dynamic picks up momentum, we will see nominal prices fall. We anticipate trend changes here, rather than just describing existing trends. Watch and see over the next few years.
stoneleigh post=6044 wrote: alan2102,
You are perpetuating, and indeed amplifying, confusion unnecessarily.You will, I trust, forgive me if I disagree. I think “biflation” is a useful clarification, cutting through a great deal of unnecessary confusion created by this endless “inflation vs. deflation” debate. It expresses, in a single logical word, the phenomenon we now see, and the one most likely to intensify greatly in the coming years.
Our definition of inflation and deflation is not nearly as odd as you make it sound.
Consult ANY dictionary or reference work, or ask pretty much anyone anywhere, and you’ll see what I mean.
It is in fact the traditional definition, and is quoted by one of your sources (although the source also hedges its bets in a confusing way):
http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money [i.e. higher prices]. Synonyms: price rises, increase, price increases, rise.
There is no “hedging of bets” there. There is a clear focus and sine qua non: HIGHER PRICES. Increase in currency supply is mentioned, but only secondary to the key characteristic, the defining phenomenon: HIGHER PRICES.
“Inflation”, as defined in all reference works, and as understood by practically everyone, refers primarily not to any putative causal influence, such as currency supply, but to the bottom line, the unarguable end-of-the-day empirical phenomenon: HIGHER PRICES. The higher prices might be caused by increased currency supply; indeed, that is likely true, and I don’t deny it. There is also cost-push inflation, and demand-pull inflation. But those things are a different matter: they are interpretative and speculative, not integral to the definition of the word, by the lights of almost everyone. Yes, I appreciate that you do not like this, and that you prefer a different definition, with your favored theory of cause built-in. As I said to Ilargi: your beef in this regard is not with me, but with the rest of the world.
We have been pointing out that things that people use would be getting less affordable. You seem to be suggesting that this will happen at higher nominal prices, while we are saying it will happen at lower nominal prices. The important point is the affordability.
By focusing on “affordability”, you are doing, in essence, what you accuse me of doing, i.e. of glossing-over the cause of the thing, and proceeding direct to the bottom-line empirical phenomenon. And I agree with you: affordability is the key thing. The point of disagreement is that I think that affordability will be less influenced by deflation-/deleveraging-related events (including things like higher unemployment) than you do. Those things will be part of the picture, but relentlessly-increasing — even skyrocketing — nominal prices will be the most visible and most hurtful aspect. The cause of the affordability problem will be, in my view, more a matter of increasing prices than anything else.
Prices have, however, fallen where international wage arbitrage has been a major factor, such as for electronics, which illustrates other price drivers at work.
You’re absolutely right. That IS one area where prices have gone down — way down.
These confounding factors are one reason we use our clear and precise definition of inflation. To do otherwise takes all the explanatory and predictive value out of the concept,
Well, instead of fighting the whole world with an odd new definition, why not invent a new word, and leave the old words to be what they are? Much, much easier that way. I know this from hard experience. It is practically impossible to get people to accept an atypical definition — I mean “people” outside of a very small group, to whom you are directly speaking. And it is tough to get even THAT tiny group to get it and stick with it! Such are the pressures of universal social acceptance of a standard definition. You can fight the dictionary, but it is like fighting city hall. Very tough. And the very moment you let up, everything will go back to the way it was.
Ask yourself: why is it so important to you to build a theory of cause into the definition of these words? Why are you not arguing with the word “price”, and attempting to build a theory of cause into THAT word? Why not just let these words mean what they mean, and figure some other way to make your point?
which suits the powers that be perfectly well by the way. They don’t really want people to understand the system.
You’re certainly right about that.
As the deflationary dynamic picks up momentum, we will see nominal prices fall.
In some sectors, yes, we’ll be seeing some real bargains:
https://alan2102.wordpress.com/2012/11/05/inflation-deflation-or-biflation/
[snip]
— tony urban real estate, condos, etc.; possibly ALL
real estate
— fancy cars
— fancy consumer hard goods, e.g. big-screen tvs
— stocks and bonds, mutual fund shares
— vacations, hotels, cruises
— most or all services (massage, bookkeeping, you
name it)
— medical services except for clear essentialsWatch and see over the next few years.
Indeed. My hat is in the ring, as is yours. We’ll see!
It is not TAE that has co-opted the term inflation. We are simply using the traditional definition, and the one it clearly make sense to use if one wants to actually understand what is going on. Many others use the same definition for the same reason. The alternative is confusion that leads to widespread ignorance as to the situation we are facing. It is that ignorance we are trying to combat. The definition underpinning discussions here will remain the same. This particular discussion is, however, over.
I perused the site for a “here’s how we roll”-type message that might be pointed to when someone with Alan’s perspective or a newbie visits (or is directed by one of us regulars), but found nothing suitable. (Could’ve missed it, of course.) Something on the “Front Page” might be nice. Otherwise, the site and discussions probably appear somewhat unwelcoming and difficult to join.
I realize it can be hard to find the big picture amid the huge amount of information that’s accumulated in five years. What we need to do is to sort out the primers to make them more organized and searchable. We may be able to find the time to do this over Christmas. Time is always a challenge however when there are only two people to do such things. I would very much like for the site to be more welcoming. Hopefully the new DVDs, which should be available very soon, will fill that role.
I have a great deal of patience with newbies and am happy to explain our worldview or point to specific primers (like Inflation Deflated for instance). I have less patience with people who have commented over a number of years, as alan has, and still quibble over our use of basic definitions. Essentially, there is a limit to how many times we can go through the same loop, knowing perfectly well it will achieve nothing, especially when it happens on more than one thread simultaneously.
I’d say there’s plenty material today in the Primers section (accessible from the Front Page, in the Menu bar) to explain how and why we define inflation the way we do.
I couldn’t understand how consumer prices would deflate past what they are. Consider the t shirt you can purchase the big discount stores on sale in a package for a price that works out to $1. Shipped from China. Duties paid. Store cost paid. Lets figure your cost, no matter how fast you can sew, is 1 hour of labour. How will it become lower?
The answer: We didn’t pay the cost, we made use of slaves. Using the military to invade and influence countries we force others to build products below the material cost. The fact is the $1 t shirt doesn’t pay for the cost of shipping, duty, and store costs. Our ability to act as terrorist to 3rd world countries does.
Case in point is Guatemala where the US government as a point of national security invaded to force lower prices of bananas. The capital city was bombed because the country had free elections and had become democratic. This seems good but the people wanted wages that would allow them to come out poverty. This would mean higher food prices for Americans. American planners saw the possible domino effect of countries trying to get fair wages crippling America. The developed world depends on depressed food prices. So the army bomb, invaded and installed a ruthless dictator – and we got low low food prices. Good for everyone!! Recently with the advent of the information act the US military admitted to this.
So how can prices on basic items go lower? They can’t. We are losing our ability to invade countries to force a lower price. Historically invasions allow the pillaging and therefore instant resources are obtained but over year 2 and beyond there is a diminishing return. Many cases, in less than 5 years, the costs outweigh the benefits.
Currently there is an intent to invade and control all of the middle east – this will not succeed. When this fails many 3rd world countries will seek out independence and refuse to make lower price class goods. What would be the point you are selling the below the cost of material and labor.
BUT there is a way prices of something will deflate. Banks have figured something new out. Recall mortgage debts on mortgages more than 50% paid for. They have received more money than the initial debt but not the interest. The mortgage holder is now in bankruptcy. The bank then purchases back the property in auction for pennies on the dollar thus deflating assets in the markets.
Changing this to a economic algebra game lets see what has just happened. Suppose there are 1000 penny assets in the market and my bank owns 10 pennies and mortgages of 100 penny assets. Now lets call in the asset debts and possibly make 2 pennies. The books state we have 12 pennies in assets but the bank knows something different. They went from 10/1000 of market value to 12/902 of the market ($0.01 to $0.013). As the others do this they only increase in value.
proof this is happening this is an analyst I follow
https://www.youtube.com/watch?v=UtNlLyy8JXU&feature=g-all-u
So I will make a prediction myself. We will experience inflation/deflation a re-evaluation. Basic consumer goods will rise significantly in price while housing and luxury goods will drop. Because of governments involvement in creating money while manufacturing output dwindles we will experience classic stagflation. It is simple cause and effect and the fact we have not for years been adding value beyond our consumption.
stoneleigh post=6053 wrote: I realize it can be hard to find the big picture amid the huge amount of information that’s accumulated in five years. What we need to do is to sort out the primers to make them more organized and searchable. We may be able to find the time to do this over Christmas. Time is always a challenge however when there are only two people to do such things. I would very much like for the site to be more welcoming. Hopefully the new DVDs, which should be available very soon, will fill that role.
I have a great deal of patience with newbies and am happy to explain our worldview or point to specific primers (like Inflation Deflated for instance).
Understood and appreciated, Nicole. Is there anything in particular we could do to help?
I flipped through the Primers pages looking for “‘Inflation’ Deflated”, got to page 3 and just happened to notice it listed at the bottom under the “More Articles…” heading. A page 4 for those last three items might make them more visible.
I plan to (re?)read it.
SteveB,
What I want to do is to organize and categorize the primers, so all the finance ones (and other topics) are together and in some kind of logical progression. That way newbies have somewhere to start with where our worldview is coming from. To us and our long term regular readers it’s old hat, because we’ve been saying the same things over and over again for a long time, but to new people it can be confusing, overwhelming and impenetrable.
Also, there are some important primers that aren’t in the new primers section yet. I need to go through things to make sure everything that should be there is there.
Finally, some primers really need to be rewritten and updated. I’m hoping to get to some of this in December, as I’ll be in one place for the whole month. It’s a question of finding the right balance between doing administrative and presentational things versus creating new material to keep up with what’s going on.
Things are about to get exciting (and not in a good way) IMO, so there’s going to be a lot to write about.
stoneleigh post=6059 wrote: Things are about to get exciting (and not in a good way) IMO, so there’s going to be a lot to write about.
I agree.
I’ll be doing some writing in December as well. Slightly different topic. 😉
Thanks for your work, and please let me know if I can be of assistance.
stoneleigh post=6053 wrote:
I have a great deal of patience with newbies and am happy to explain our worldview or point to specific primers (like Inflation Deflated for instance). I have less patience with people who have commented over a number of years, as alan has, and still quibble over our use of basic definitions.I’m not quibbling. I said that your definitions might be superior to the conventional ones. I respect the passion with which you defend them. And for my own part, I find your definitions attractive. But all that is beside the point. As I said to both you and Ilargi: the issue is between you, on the one hand, and essentially ALL dictionaries and reference works (both print and online), combined with the understanding of almost everyone, everywhere (a few exceptions noted), on the other. As I said to Ilargi: I did not write the dictionaries, and I did not persuade billions of people to accept the definitions that they do now accept. This is not about me and my “quibbling”.
I made my points very clear. I would welcome your to reply to them — at your leisure. But if you choose not to, I’ll drop it.
Essentially, there is a limit to how many times we can go through the same loop, knowing perfectly well it will achieve nothing, especially when it happens on more than one thread simultaneously.
I don’t know that I’ve ever discussed the definition of “inflation” and “deflation” with you before. If I did, I forgot. I do remember getting in to this discussion on the old latoc (doomers.us), years ago, but that did not involve you.
Also, what is this about “more than one thread simultaneously”? We’re discussing this definitions issue here, and nowhere else. I posted a few things on another thread, about energy, but haven’t been back to that for a few days.
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