Inflation vs. Deflation vs. Stagnation---Which is Worse for the US?

reply to post by RetinoidReceptor


No, not at all ..

The reason the price of oil exploded was not because of "economic expansion", I mean hell man the price of oil exploded during an official Recession .. what economic expansion??

China?

China's growth was huge, percentage wise, volume wise, not so much.

The reason oil exploded was due to mortgages leveraging oil to turn red into black on their balance sheets as the housing disaster first began taking hold..

We went from a market of actuality and rationality to a market of bold speculation and leveraging and completely unregulated fluctuations..

IMO we will not see oil that high for a very long time.. unless it is artificially held up .. something I don't see the world standing for. Banks made the price rise, but OPEC declaring a set price?

Forget about it.

As others have said, hyperinflation is the worst.

Inflation is normal and expected, as long as it's measured, controlled inflation. It's what keeps an economy growing.

Deflation is bad. It can be real bad. An economy can, however, recover from deflation, even from a deflationary spiral.

Hyperinflation is the end of the currency, the end of the government. An entire reset is the only way to correct true hyperinflation - that means new currency, new governing body, the works. You can't throw anything at hyperinflation. See: Weimar Republic.

Originally posted by RetinoidReceptor
Saudi Arabia's break even price is 49$ and Kuwait's is 33$)

RetinoidReceptor

business24-7.ae...

For their economies, it's actually a lot higher than that, because they need to balance their current account and fiscal spending.

Think more in the $70 range.

Put another way, their spending it out of control.

JK

[edit on 20-11-2008 by leo123]

Originally posted by Rockpuck
Banks made the price rise, but OPEC declaring a set price?

Forget about it.

That may be true that the price of oil was at around 150/barrel because of hedge funds and speculators, but I don't think 40 dollars/barrel is the price of oil for a growing global economy. I think it is higher. Not near 150/barrel though.

Originally posted by anachryon
Hyperinflation is the end of the currency, the end of the government. An entire reset is the only way to correct true hyperinflation - that means new currency, new governing body, the works. You can't throw anything at hyperinflation. See: Weimar Republic.

anachryon:

Technically I agree with everything you say, but the main reason I feel deflation is a far bigger threat is because the Fed will largely lose control of monetary policy, whereas they have many tools and modern knowledge to ward off hyper-inflation from happening in the first place.

Just my 2 bits.

JK.

reply to post by leo123


I also thought hyperinflation could only occur when the government was the chief and primary banker, creditor, and employer of the people?

Originally posted by leo123

Think more in the $70 range.

Put another way, their spending it out of control.

Very interesting. I mean, everyone knew the oil states had out of control spending on lavish things with the oil kids getting new cars and ships all the time. But that is pretty high. I want to know what this oil price drop is doing to Russia. I know Putin just promised that he wouldn't let Russia fall into a crisis which is pretty serious if he has to guarantee this.

Originally posted by RetinoidReceptor
I want to know what this oil price drop is doing to Russia. I know Putin just promised that he wouldn't let Russia fall into a crisis which is pretty serious if he has to guarantee this.

RetinoidReceptor

I doubt there is little he can do, other than the historical remidies of generating a national crises such as a major war.

And frankly that's what bothers me most about ALL countries right now, not just Russian.

JK

Originally posted by jefwane
I must not have made myself clear. I think hyper-inflation is worse than deflation. With deflation, cash and savings are KING. In a hyper inflationary situation ala wiemar Germany and 80's argentina, what is to stop someone from leveraging up and repaying with devalued dollars? Being in debt in an inflationary environment allows you to repay that debt with devalued dollars. Being in debt in a deflationary environment is basically suicide since you have to repay debt in strenghtened currency.

yup, you are exactly right, my friend. and that's why currencies and economies have cyclical changes, a never-ending search for balance. of course, with the worlds wealthy, providing the selfish "prod" each way to enhance their coffers, while trying to keep a sustainable population of somewhat fearful, but silent workers.

Originally posted by MOFreemason
reply to post by leo123

 

I also thought hyperinflation could only occur when the government was the chief and primary banker, creditor, and employer of the people?

Works for me!

reply to post by RetinoidReceptor


In his speech to the nation a few weeks ago, which last nearly 2 hours, he also guaranteed that reliance on the dollar as the accepted global trading currency will not continue past the end of this year.

Not sure how/what he'll do to single-handedly abolish the dollar though.

Originally posted by leo123
anachryon:

Technically I agree with everything you say, but the main reason I feel deflation is a far bigger threat is because the Fed will largely lose control of monetary policy, whereas they have many tools and modern knowledge to ward off hyper-inflation from happening in the first place.

We've already lost control of monetary policy. The entirety of Ben's studies, everything he's done his working life, his entire thesis....is wrong.
Treasury & bond markets are telling the story now. Protracted deflation is priced in for five years.

We'll come out of it, though. Deflations reinflate.

My concern is, as Rockpuck mentioned earlier, that as we come out of the deflationary period, all that money that's been pumped into the banks (which they're stockpiling) will enter the daily economy.

Think of it like a balloon. If a balloon runs out of air (deflation), you can blow it back up again. You might have to patch a leak or two, but it can be reinflated (measured inflation). If you blow up the balloon with an air compressor, though, the balloon will explode into a million pieces. Nothing you do can make that balloon able to hold air again. You need a new balloon (hyperinflation).

Originally posted by anachryon

Originally posted by leo123
anachryon:

Technically I agree with everything you say, but the main reason I feel deflation is a far bigger threat is because the Fed will largely lose control of monetary policy, whereas they have many tools and modern knowledge to ward off hyper-inflation from happening in the first place.

We've already lost control of monetary policy. The entirety of Ben's studies, everything he's done his working life, his entire thesis....is wrong.
Treasury & bond markets are telling the story now. Protracted deflation is priced in for five years.

We'll come out of it, though. Deflations reinflate.

My concern is, as Rockpuck mentioned earlier, that as we come out of the deflationary period, all that money that's been pumped into the banks (which they're stockpiling) will enter the daily economy.

Think of it like a balloon. If a balloon runs out of air (deflation), you can blow it back up again. You might have to patch a leak or two, but it can be reinflated (measured inflation). If you blow up the balloon with an air compressor, though, the balloon will explode into a million pieces. Nothing you do can make that balloon able to hold air again. You need a new balloon (hyperinflation).

anachryon:

I certainly agree with you about the message being delivered by the bond market.

As with the other, I guess we'll just have to take it day be day because in many ways I think we are in a bit of a no man's land here.

I also agree with you that the delationary scenario for the next few years is already hard cast. And remember, I have only been wrong once before in my life, and that was in 1964 - but even then there was some doubt.

JK

reply to post by anachryon


You are forgetting that debt destruction is destroying "money" faster than it is being created, thus, no massive stockpiling of money that you are suggesting. The unwinding of leveraged positions and CDS obligations are literally a black hole as far as money is concerned. Even with the $350 billion allocated so far, hyper-inflation is wayyyyyy out there, they can not print fast enough. Deflation is here and much, much more dangerous than hyper-inflation.

reply to post by RetinoidReceptor


Oil demand, if it matched inflation of global economies, would be around 2% a year.

Oil today would be roughly around 30-35 dollars a barrel.

anachryon

I think we all agree on exactly what you say. Deflation, like inflation, is natural in a business cycle, hyper anything is horrible, but hyperinflation you cannot recover from.

leo123

The FEd already lost control, we are seeing huge swings in prices of everything from grains to oil to the shelves at retail stores..

In the end the FED cannot control how we spend, what we spend it on.

They gave $600 to anyone who would take it.. that month we saw the largest savings spike in history. Oh. That was America deciding NOT to spend free money!

The end of an era.

The Gov can reduce or increase the money supply. They can set interest rates for bank-to-bank loans.

That's it.

The current phase of American business is quite simply.. we are not American. We are globally placed and devoid of nationality. American companies, so long as they are based here, can export all their jobs over seas, so long as McDonalds and BK hire the excess citizenry.

anachryon

Isn't it hilarious that Benny studied the Great Depression his whole life, and he gets his dream job to see it happen again? His core thesis is correct, and that is the cause of the great depression was the contraction of credit.

Ironic he did everything to avoid a contraction of credit, just to have it happen anyways.

In the end, he's still a politician.

--------------------
the politicians we can't trust. promises broken, the false words that they spoken, they don't give a sh* about us. From the crowd of it all to our own county hall they are giving our country away, it's progress they say, and this is the new way, and they say you'll just have to trust us. - Johnny Cash.

Originally posted by aava
You are forgetting that debt destruction is destroying "money" faster than it is being created, thus, no massive stockpiling of money that you are suggesting. The unwinding of leveraged positions and CDS obligations are literally a black hole as far as money is concerned. Even with the $350 billion allocated so far, hyper-inflation is wayyyyyy out there, they can not print fast enough. Deflation is here and much, much more dangerous than hyper-inflation.

There's no massive stockpiling???


And that's only through Oct 1! Current numbers as of 11/19 show just excess reserves at $652.858B. The above chart shows $179.935B.

That's an additional $472.923 BILLION in excess bank reserves stored with the Federal Reserve. That most certainly LOOKS like massive stockpiling to me.

Originally posted by Rockpuck
Isn't it hilarious that Benny studied the Great Depression his whole life, and he gets his dream job to see it happen again? His core thesis is correct, and that is the cause of the great depression was the contraction of credit.

I almost feel bad for the guy. He's spent his entire adult life studying GD1 and formulating means to avoid it happening again. Remember what he told Friedman & Schwartz? "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Ben's thesis of inflating our way out of a potential deflationary depression has come to practice. He's got his chance to put his theories to work, and he's done so in spades - over $4T now spent to try and prop everything up, I believe? Yet the bottom continues to fall out, and it gets worse every day.

The face of economics will change after this. Ben was certain he had it right, but it really doesn't appear that he does. Spending our way out isn't working. Dropping money from helicopters isn't working. They're gonna try ZIRP next; Japan's already showed us that won't work.

I wonder what new economic school will be born of this.

What scares me is that I see us getting hit with the absolute double whammy. To directly answer one of the OP's questions, I feel that stagflation is, by itself, the worst of the three. You have raising prices, but stagnant production, which is very stressfull on the consumer. However, I think we're headed towards something that is far worse than stagflation. I see deflation immediately followed by hyper-inflation caused by the ridiculous amount of currency the fed has handed over to the financial sector. Currently the banks are sitting on their little gifts while the rest of the sectors deflate. Watch how catastrophic it becomes for the consumer next summer when they just start to balance their (likely) reduced income with the lower prices and tighter credit and suddenly the banks release all of this cash flow into the system. It takes the consumer longer to see their personal income recieve any sort of inflationary adjustment than it takes for corporations to adjust their prices upward to reflect inflation. Think it sucks now when people recieving government unemployment and low income assistance are struggling to make ends meet, try doing it when you're getting the same stipend and suddenly everything is twice as expensive.

As it stands right now, I do not believe I am in a sector of the economy that is going to suffer much from deflation. The projects I work on are pretty much recession proof, if there is such a thing, and are already funded by and large. So realistically speaking (and I'm not trying to rub anybody's face in this at all, just being honest) I would benefit from short term deflation. Our expenses at home would be reduced and it would finally be possible for me to purchase a house & some land instead of renting a townhouse. However, if hyper-inflation hits, I'll definitely feel the sting from that on everything from my weekly grocery bill to my gasoline to buying the kids new clothes.

Basically what I'm saying is that I still don't really see any light at the end of the tunnel here.

Originally posted by MOFreemason
I thought we were headed the route of hyper-inflation and start to worry big time about a month ago.

Now it appears we are more deflation.

I'm curious to know which is worse, although, sounds like hyper-inflation would be the true collapse of us.

Last year, real inflation in USA was some 16-20%.

Inflation was created because prices of oil, raw materials and food went rampant. It was done for purpose.

Oil hit almost $150 because the rich one (I won't mention them, we know who are they ) lost a lot of money in mortgages so they needed high oil/food/raw material prices to gave back lost money. That's because bobble was created .

After inflation comes deflation.

USA is already in deflation followed by Japan and UK, soon EU...

[edit on 21-11-2008 by Vojvoda]

Originally posted by mybigunit
The problem is with deflation we will have a stronger dollar. With a $60 trillion dollar debt we really cant afford a strong dollar. With inflation crap will go up and this at a time when no one has jobs. Im in the corner with Rock Puck saying that Hyper Inflation is the worse case but that wont happen yet. I like Peter Schiff feels we will have some deleveraging then you will see some major inflation if not hyper inflation. I really dont see a win situation in all this with all the debt we have. If we didnt have all this debt there would be several roads to take.

Deleveraging is cause why $ became stronger and stronger even US economy is crap. Several good texts about it (found in some Serbian forum ):

The de-leveraging process has left the central bankers empty handed, exposed as having empty financial cupboards. Thus the need for massive central bank swaps from the US Fed, which has perversely farmed out its function to foreigners. In fact, the foreign central banks might be in possession of more US$ inventory items than the US Fed. So the US central bank has asked foreign central banks to do its job, and to manage the world reserve currency? This amidst a US$ rally!?!

When the market mavens talk about the de-leverage process, they refer to speculative investments being liquidated. Oftentimes, they do not include in the story how Wall Street firms, desperate to stave off bankruptcy, are targeting viciously their own clients. The big accounts lie in hedge funds, where the private wealthy are being decimated. Credit is being pulled. Margin calls are being delivered. Margin ratios are being raised. Those funds whose positions are aligned with the predators on Wall Street continue in their investment portfolios. Those funds in opposition are attacked with artillery, carpet bombs, and early morning raids. The US Dollar is rallying amidst this type of sinister liquidation. The result has been numerous spread trades anchored by the US Treasury Bond are forced into sale. That means a US T-Bond buyback occurs from the short cover on the trade. Whether a spread on mortgage bonds, corporate bonds, emerging market bonds, or crude oil, or gold, the trade is liquidated, and a US T-Bond is bought back. NO TANGIBLE END DEMAND, ONLY US TREASURY BOND SHORT COVERS. This is the basis for a US$ rally!

The recent surge, which has pushed the dollar up more than 30% against some currencies in recent months, is purely a short-term technical phenomenon. The move is caused by global investment deleveraging, in which major financial players are reversing (unwinding) risky trades and piling into what is erroneously perceived as the safest haven they can find. Increasingly, foreign assets, many of which had appreciated more than American assets, have been sold, and the proceeds stashed into U.S. Treasury bonds, which these investors believe to be the Fort Knox of finance. The cascade has caused momentum trades, margin calls, redemptions, and other factors having nothing to do with the underlying fundamentals of the dollar or the U.S. economy. In fact, all that has happened to the U.S. economy, and all that the government has done, and is likely to do, in their misguided attempts to contain the damage, is extremely bearish for the U.S. dollar.

The worst case scenario would be hyper stagflation.
en.wikipedia.org...

This would be a situation where there is significant stagnation in industrial output, while there is hyperinflation as the government prints excess money (bailouts, stimuli etc).

Look at Zimbabwe. There is stagnation because nobody can do business with the local currency. Businesses are actually forced by Mugabe's regime to produce items for a lower cost than the raw materials. Since raw materials are bought in US dollars and the final product sold in the zim dollars, the manufacturers make huge losses. To compound this problem, Mugabe simply prints more money; lops off zeros from notes when things get too big and simply repeats the cycle over and over again.

The current highest denomination of note would be 1 quadrillion zim dollars if Mugabe hadn't revalued the currency twice.

As most people who have studied history know, hyperinflation is the worst threat. I think it would be more accurate to describe it as hyperstagflation though.

[edit on 21-11-2008 by 44soulslayer]