Monday, May 16, 2011

We are all deflationists now

There is a big inflation vs deflation debate.  But really both sides believe in deflation.   Deflationists believe in deflation when measuring prices in  paper money.  The inflationists believe in deflation when measuring prices in terms of gold coins.

The meaning of the historical record is not obvious.  In the early 1930s the US was sort of on paper money and sort of 40%  gold backed.  So do you count the deflation in this time as deflation in terms of gold or deflation in terms of fiat money?   I think there is a big clue.  The way they ended deflation was by getting off the gold standard and making it illegal for people to own gold. 

If you look at house prices measured in ounces of gold they are down by about a factor of 4.  That is some deflation.

7 comments:

  1. Vince, what is your view on the impact of the Fed not starting QE3 right away? In my mind, the Fed will eventually do a QE3. However, in between the end of QE2 and the start of QE3, what do you think could happen to interest rates, and to asset prices?

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  2. I think short term events are less predictable than the ultimate outcome of too much money creation. If people really believe there is no more QE then maybe stocks and other prices would go down. However, if prices are going down there would be another QE (Bernanke wants stock prices up). So I am not sure enough of any short term to make any bets on anything.

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  3. I can't wrap my mind around gov deficit in the $1.5 trillion at the time that Fed said they would not proceed with QE3. Either gov spending will suck up huge amount of capital from the economy, or the Fed lied. At the moment, I am thinking that the Fed lied. It will keep purchasing treasuries but more covertly. Perhaps BOE, BOJ, or some other parties will do what the Fed asks them to do to step in and buy treasuries to keep funding gov spending. QE3 in disguise.

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  4. This blog is excellent but I miss having updates. Hope there is nothing wrong?

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  5. I don't see how the US Federal government could continue to operate if the Fed really stopped buying government bonds. Who else is going to buy that $100 billion per month at this point? They will not balance the budget. As soon as the debt ceiling is raised they need the Fed to keep buying.

    Just busy and not sure what else needs to be said. You read my 38 year cycle page?

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Looking for polite debate on ideas. Never attack a person. Be nice.