Deflation vs. Inflation

Inflation is the rise in price of goods.
Deflation is the implosion of the value of a currency.

Just like neoliberals want free trade scams in the countries neocons invade. The neoleft are capito-commies and the neoright are communo-cappies.

There is no difference.

Someone asks. I believe the answer is NO. Except God, of course, and He's not telling.("The glory of God is to conceal a matter, but the glory of kings is to search out a matter"). This argument about deflation and inflation has been going on for decades amongst experts. As in so many discussion of this type, it is first of all paramount to have definitions. The definition of inflation/deflation varies amongst different schools of economics. And one must also be very clear that no one knows the future. At this point in time, we have inflation, by the Austrian definition, because the Federal Reserve is increasing the money supply and thereby debasing the currency. We see both rising prices and falling prices currently, rising in commodities like wheat, aluminum, copper, gold, soybeans, oil, etc. and falling in housing, computer technology, etc. Ask yourself why about these things and figure out the answer.

What will happen? The answer to that question is "no one really knows." Try to get educated from both sides of this issue, and based on your learning, decide who is making the best predictions, understanding that those predictions may be wrong.

Doc

The United States has been inflating for a long time. It is not exactly correct to say that the country is "heading" towards inflation. But the real inflation has been to a large extent hidden from the people.

This is because the US enjoyed world currency reserve status. Partly this is due to the fact that if you want to buy oil on the world market - you need to exchange whatever currency your country uses for US dollars.

At the same time, many industry and manufacturing jobs that were once exclusive to the US have gone global. Americans lose their own jobs of their own (originally) industries abroad.

So then, if the US loses it's reserve currency status because it can no longer control oil, then the inflation of decades that has been shipped across the world, held by central banks and other large institutions and companies - will come flooding back. That is where the real inflation will start.

The sad thing about all of this is that it was totally unneccessary. America could have kept it's soveriegnty, it's industry, it's jobs. But it chose to give the printing power to the Fed and local bankers, and to borrow heavily money printed out of thin air to execute a "world police" mentality. The congress is also to blame, with the exception of people like Ron Paul - for taking the easy path to credit creation instead of the harder path of relying on increased taxes for their projects.

1) Increased taxes cause revolt because they are obvious
2)Increasing the money supply (through the banking mechanism)does the same thing but since most people don't understand it - they accept it.
3)Having a reserve currency status compounds #2 because the inflation is further hidden as it is "exported" around the world because
4)At some point that reserve status will end, as it always does with all fiat currencies that are backed by nothing but power. In this case, the power over oil. Even this power will not stop the free market from dumping dollars as they are devalued because congress and the banks keep printing more and more of them into existance.

The one option the US has under the *current* system is to raise interest rates - and to raise them to very high levels. But this is only a temp fix as well. The entire system of fiat currency needs to be scrapped - and congress and other elected officials cannot rely on printing money to fund their goals - neither banks who are imprudent (lending more money than they have in deposits) be allowed to be bailed out by the US public.

Whether you deflate or inflate, one common occurrence in both situations is a drop in wages. Inflation steals your wages by devaluing the money you earn with rising prices. This gives the "appearance" that commodity based assets are rising in value. In fact, it is the dollar dropping in value. While deflation occurs when the money supply is constricted. Deflation does not mean depression. It does mean that with less money available ( credit), that assets will most likely start dropping in price, along with wages because of higher unemployment . The stock market, real estate, and most likely oil and gold as well will go down in price if the deflationary trend continues long term. While paper assets will most likely drop first ( look at the bond market), be prepared to see hard assets drop in value as well. Agricultural will be last on that list, after all we all need to eat and now the government is subsidizing corn farmers to take food out of the food supply and make energy with it. A really stupid move. However this policy bodes well for agriculture.

Most likely the FED's most recent deflation is meant to prop up the dollar vs. cause a depression. Remember, as the FED cuts rates, it makes US Treasuries less appealing to investors, especially when the competing currencies offer much higher rates of returns on more stable currencies.Trillions of dollars are held in reserve by foreign central banks all over the world. This was not the case during the great depression. And since the dollar is not backed by gold, what can those banks demand in return for those dollars? Answer: nothing! What will happen is the dollars will come back into the US in the form of asset purchases. The FED's most recent constriction in the money supply is most likely anticipating a flood of dollars back into the US money supply in the form of foreign investment.

I don't think this analysis makes sense.

The only way we could have deflation is if the government allows massive bank failures and defaults on its own debt and programmatic obligations. I don't see that happening. The Fed will continue to pour money into the market through credit and then, when that fails, as it already appears to be doing, it will print money and pour that into the market. The government will rescue the banks and borrowers by throwing money at them - money that can only come from printing because the federal line of credit is drying up. The government will also experience declining revenues as the economy grinds down. To meet its obligations, it will print money. It will have no choice. The resulting inflation will drive investors out of the dollar and the plummeting demand coupled with the massive printing will lead to hyper-inflation. The only alternative is massive default and I don't see that happening. Inflation is too easy.

Besides, if you bet on deflation and stay in dollars and you are wrong, you lose everything. If you bet on inflation and flee into hard assets and we have deflation, you still have the hard assets, although the exchange value in dollars may go down as the dollar gains strength.

We as a nation are awash in debt, and GWB's newest budget proposal has the largest deficit in history. How is that deflationary? Also, it is my understanding that the government stopped publishing the M1, M2 and M3 numbers in 2005. What have I missed?