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

First off, I am definitely not an economist. I am a pretty book-smart guy...but definitely no economist.

The word deflation is heard regularly now to describe America's current status. The cost for goods has dropped to the levels of the 1940s, gas is affordable, and buyers can find 25%-50% sales in most retail stores across the country. While it all seems great for buyers, this all leads to lower revenue for stores. From there, comes the domino effect.

Retail earnings go down, resulting in decisions that impact employees and/or closing of the business. Manufactures are less needed. Producers are eliminated. This equates to more jobs lost and less money to be earned and then spent.

So...what is actually for the United States? Deflation? Inflation? or Stagnation?

Somebody, please help...

I'm still in the deflation camp personally, but some policy decisions could rapidly thow me into the hyper-inflationary camp. What would those policy decisions be?

1) "Printing" beyond an amount that makes up for the elimination of easy credit.

2) The US issuing non-dollar denominated debt.

3) A continuation of the BS bailouts.

A deflationary Depression is survivable, I challenge anyone to tell me a government that survived a hyper-inflationary event.

reply to post by jefwane


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.

reply to post by MOFreemason


Nothing is worse then Hyper-Inflation .. this is by far the worse possible thing that can happen to a currency. It's essentially oddly worried, because an inflated dollar has deflated demand. This was the problem with the Dollar all through the Bush administration up until September actually.. The Dollar inflated so much that it's purchasing power decreased, boosting corporations, but causing a credit lapse due to a stretched budget....

HOWEVER

Why the US did not see hyper inflation quite simply is because there was such a void of debt, that every dollar created seemed to be sucked up by this void.. corporations where throwing billions at each other, buy personal wages did not increase.

If the money supply of the people vanishes, stagnates, you see deflation.

There are two types of deflation.

One is personal income deflation .. where your dollar is worth less because of increased money supply, but you don't recieve an increase in said money supply, leading to cut backs on budgets, which in turn leads to

Consumer deflation

Which is the drop in consumer prices.

Inflation of monetary funds for individuals is a sign of a healthy economy so long as it is not excessive.. the more money we bring home the more we buy the better off our GDP the stronger our dollar.

Inflation of Corporate funds means decreased value of our dollar, and less purchasing power.

CREDIT:

The extension of credit can help make up for a lack of proper monetary inflation.. however if wages deflate (2000-2008 average household income has dropped, per inflation, been dropping since the 1980's) and credit is used as a sole means of monetary expansion, seeing as consumerism is such a massive part of our GDP, it will create a credit over extension.

The credit overextension is one of the major causes of the great depression, once credit contracts, and deflation sets in because buying power plummets leading to supply and demand causing prices to bottom out, it will lead to a Depression.

We have seen only two contractions of credit on a massive, global scale. 1929 and 2008.

The reason for bailouts, tax breaks, simulus plans etc, is the governments method of saying hey, if credit disappears by god we are in a depression .. so lets make up the credit void with new cash, sacrificing the currency for the economy through inflation, however, banks consumed the cash, credit contracted, crashed world wide economies, tanked every major currency, and we ended up with the largest credit contraction in our history.

S&P closed at 1997 levels today.

The damage done is phenomenal, honestly, we have been in a recession for 14months now, and we will not see economic growth for some time.. 2010 at the earliest.

So to answer your question .. inflation can lead to stagnation which can lead to further inflation which can cause a contraction to create consumer deflation that can f** your economy up real good.

We'll probably head for a period of deflation for a year or so, then China and India will pick up along with oil, and inflation will go up. Sales will go down, and we're looking at a 1.5 to 2 year downturn in the West. Stagnation is not an option because our treaties are set up against it, we will lose money to the up and coming countries hand over fist.
Moral: Don't give your industry to your servant. He will take control.

Originally posted by jefwane
I'm still in the deflation camp personally, but some policy decisions could rapidly thow me into the hyper-inflationary camp. What would those policy decisions be?

1) "Printing" beyond an amount that makes up for the elimination of easy credit.

2) The US issuing non-dollar denominated debt.

3) A continuation of the BS bailouts.

A deflationary Depression is survivable, I challenge anyone to tell me a government that survived a hyper-inflationary event.

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.

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.

Which is exactly what the Gov TRIED to do, imo .. was inflate the currency to pay down bad debts with a devalued dollar (since debts don't adjust for inflation).

It's ironic then that such a flood of dollars into the market caused deflation and credit contraction as a side effect, which will in the long run I believe, lead to hyper inflation (like why big unit is saying).

Eventually.. all the money flooded into the Banking Sector will have to come out to the public..

Then again, the destruction of wealth through the market collapse (and it did collapse) may have been severe enough to void the new dollars.

I think I am starting to see the big picture as to what the Fed boys where trying to do...

I still doubt it worked though.

I have appreciated these insights already, particularly because I can understand your posts.

I watch Bloomberg and CNBC daily, but sometimes have trouble sorting through the rhetoric and mass-information.

IMO deflation is the far greater threat of the three.

1) Governments lose their control to stimulate the economy. Once interest rates go to zero, they haven't got any arrows left. It is far easier for a Fed to control inflation and ward off hyper-inflation through monetary policy than it is to defeat deflation - just ask Japan.

2) The net cost of borrowing money increases.

3) It is a self-feeding mechanism that can change consumer behaviour to the further detriment of the economy. Namely, why would I buy today when it will likely be cheaper tomorrow?

Deflationary recessions and/or depressions are long and painful because the Fed has so little control. It took Japan 10 years to climb out of theirs, whereas inflationaru recessions tend to be short and sweet because the Fed has so much more control over the economy via monetary policy. Inflation rears it's head, ratchet up interest rates to a minimum of 4 percentage points above the inflation rate and that bad boy is shut down in short order.

JK's 2 bits

What will probably happen is that we will enter a deflationary period for a few months (which we have been on the outskirts for a while) and then the dollar will start weakening, especially since T-Bills interest rates are going so low (they are below 1% meaning the Treasury is basically being given money for free in short term bills).

Then we will enter the inflationary period to get us out of deflation and money that is being added to unfreeze credit markets will bit us. The dollar will then start its slide once again along with some other currencies (like the pound, euro, etc.) in relation to asian currencies (except the yen).

I am personally waiting to buy up natural gas and oil. I think they have some more to fall. But when oil hits around 40 dollars a barrel, I think the buying opportunity is great.

I don't believe there will be hyperinflation or anything like that though unless something catastrophic happens. But you could definitely see the inflation rate in the 15%.

[edit on 20-11-2008 by RetinoidReceptor]

reply to post by leo123


Your comment about "why buy today, when I can buy cheaper tomorrow" is probably what is going to destroy the smaller US retail chains after this horrific Christmas shopping season.

reply to post by RetinoidReceptor


Don't mean to get off topic in my own thread, but do you foresee oil dropping even below $40?

Originally posted by MOFreemason
Don't mean to get off topic in my own thread, but do you foresee oil dropping even below $40?

Well I am not really sure as oil that cheap is REALLY cheap. Meaning I don't even know if the people in the business of getting oil will even do it because their costs may be more. It also depends on how much the dollar strengthens and for how long. It may very well dip down that low but it wouldn't stay there for that long. I think 40 dollars is probably the lowest where suppliers will not start shutting down. I think that it is a good buying opportunity if you look at it in relation to pricing with the dollar (because the dollar will start to slide in a few months-1 year). Demand side...depends how deep the global recession is.

[edit on 20-11-2008 by RetinoidReceptor]

[edit on 20-11-2008 by RetinoidReceptor]

Oil in 2001 traded at around $20 a barrel .. Oil's "actual" reasonable price is around $35-40 a barrel.

I would be highly surprised to see it drop below the 35-40 range.

Oddly enough, back in june, I predicted $40 oil before the end of the year.

Oil as of right now:

Oil 48.95 -0.47 -0.95

Originally posted by Rockpuck
Oddly enough, back in june, I predicted $40 oil before the end of the year.

I had a feeling you were a smart guy!

Originally posted by MOFreemason

Originally posted by Rockpuck
Oddly enough, back in june, I predicted $40 oil before the end of the year.

I had a feeling you were a smart guy!

The hero's always come out after the fact.

Originally posted by Rockpuck
Oil in 2001 traded at around $20 a barrel .. Oil's "actual" reasonable price is around $35-40 a barrel.

I would be highly surprised to see it drop below the 35-40 range.

Oddly enough, back in june, I predicted $40 oil before the end of the year.

Well things are different now. Most countries, for example, will be in severe deficit if oil went back down to 20 dollar per barrel (Saudi Arabia's break even price is 49$ and Kuwait's is 33$). I am also talking about investing in oil at these low prices for the long term. Oil, after there is some growth again, will increase dramatically. Before there is growth, nobody can really tell especially with the dollar swings.

reply to post by MOFreemason


Problem is, with oil falling so fast, it has plunged the entire Middle East into a recession, and if the price is prolonged at this lower level, the ME will see a catastrophic depression.

Bad for the whole world.

Especially since it was the ME princes and kings, tyrants and "holy men" who propped up the Western economy (like Citibank) with that oil money.

Cities that once seemed to explode over night have ground to a complete halt.. there will be no Dubai Land. May Disney World rejoice!

When oil falls, cost of shipping falls, price of goods fall, revenue falls, companies lay people off.



Not to mention these price fluctuations have the American people worn out, a trend to be "Thrifty" is taking hold, which won't bode well for the economy either..

Take the economy off Credit card shopping spree, and like the crack whore this economy is, we will see a violent economic withdraw.