Monday, October 20, 2014

Inflation vs. Deflation

Lately we have been watching to see if signs of deflation were taking hold despite efforts by the Fed and other Central Banks to ward it off. In the interest of being fair and balanced we will present two views of inflation and deflation in this post.


Peter Schiff of EuroPacific Capital - Governments Need Inflation, Economies Don't

"In an article in the UK's Telegraph on October 10, veteran economic correspondent Ambrose Evans-Pritchard laid bare the essential truth of the nearly universal current embrace of inflation as an economic panacea. While politicians, CEOs and economists talk about demand stimulus and the avoidance of a deflationary trap, Evans-Pritchard reminds us that inflation is all, and always, about debt management.

Every year the levels of government debt as a percentage of GDP, for both emerging market and developed economies, continue to go higher and higher. As the ratios push out into uncharted territories, particularly in Europe's southern tier, the ability to "inflate away" debt through monetization remains the only means available to postpone default. Evans-Pritchard quotes a Bank of America analyst as saying that even "low inflation" (not to mention actual deflation) is the "biggest threat to the dynamics of public debt." IMF Managing Director Christine Lagarde ramped up the rhetoric further when she recently told the Washington Press Club that "deflation is the ogre that must be fought decisively." In other words, governments need inflation to remain viable. It's the drug they just can't do without.

But as this simple truth is just too embarrassing to admit, politicians and central bankers (and their academic, journalistic, and financial apologists) have concocted a variety of tortured theories as to why inflation is not just good for overly indebted governments, but an essential economic good for all. In a propaganda victory that even Goebbels would envy, it is now widely accepted that purchasing power must decrease for an economy to grow."
Click link above to read the full article.

Rick Newman - Yahoo Finance - Why Deflation is so scary

"If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average.
Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold.

The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s.

When all prices fall, consumers have a strong incentive to put off purchases -- after all, everything will probably be cheaper tomorrow. Some purchases are hard to delay—food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough."

Click link above to read the full article.
My added comment:

Both articles cover many of the same points, but the authors obviously draw different conclusions. One thing they both agree on is that governments and Central Banks will fight deflation to the death because only inflation allows them to continue to run an ever increasing debt based monetary system. This is why most everyone thinks that the final end game to the current monetary system will involve a major inflation event. It's because if deflation does take hold (as it may be now) it is assumed the Central Banks will react with even more massive stimulus.

Of course the Central Banks assume they will not lose control of the situation (either in a depression style deflationary implosion or in runaway inflation at some point). Their crticis assume they will lose control at some point which will end the present monetary system. The critics argue over whether this will be a planned or unplanned event. Time will tell us who gets it right.

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