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Old 09-10-2009, 01:38 PM
 
Location: San Diego California
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"Debt, Inflation, & Deflation" by Steve Puetz, FSU Editorial 09/09/2009

This article makes a convincing argument for further economic deflation despite government intervention. It does so by explaining the difference between monetary, and credit inflation, and the premise that there is a limit to intervention. Can anyone provide a convincing argument to the contrary?
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Old 09-10-2009, 02:07 PM
 
Location: Portland, Oregon
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A minor deflation is good, it tends to happen with major recessions after a big run up in prices...but sustained deflation is bad.

A) If a unit of money is worth more next year then this year, people will delay purchases as long as possible, and the economy then contracts as there is less demand for goods. Since companies then don't need to produce as much, they lay off workers..leading to fewer people able to spend anything. It's the deflationary spiral theory.

B) Lending and investing markets shut down as customers hoard currency, there is no incentive to put it in a bank because you earn 0 risk interest because of deflation. If you lend it out you would be very risk adverse, even worth the same proportionally you would have gained by just sitting on it (say you lend out $100, and 10% deflation in 1 year, you would get $90 back as equal proportionally. If you sat on it or received $100 back you would have the same amount of money, but if you sat on it you would not have the risk of it not being paid back).

C) As population increases deflation rates would increase, more people not just chasing the same amount of money...but fewer units of money.

There are more in http://en.wikipedia.org/wiki/Deflation, but they do a better job of explaining it more concisely then I do.
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Old 09-10-2009, 02:58 PM
 
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i think it is very hard to say what will happen with any certainly, especially since we are not yet sure how the global situation is shaking out. i read a very good read today that analyzes the subject:
Inflation or Deflation? How to Tell -- Seeking Alpha
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Old 09-10-2009, 05:34 PM
 
Location: Heartland Florida
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Deflation is impossible with a fiat currency. Inflation has been the norm since 1913. There is no way that deflation can happen, period. However, the severely overinflated assets like real estate may fall in value because they cost money to hold and lose money when not occupied.
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Old 09-10-2009, 06:35 PM
 
975 posts, read 1,546,508 times
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Quote:
Originally Posted by tallrick View Post
Deflation is impossible with a fiat currency. Inflation has been the norm since 1913. There is no way that deflation can happen, period. However, the severely overinflated assets like real estate may fall in value because they cost money to hold and lose money when not occupied.
So the depression never happened in your mind, huh? Egads!
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Old 09-10-2009, 10:37 PM
 
17,752 posts, read 15,090,112 times
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Quote:
Originally Posted by tallrick View Post
Deflation is impossible with a fiat currency. Inflation has been the norm since 1913. There is no way that deflation can happen, period. However, the severely overinflated assets like real estate may fall in value because they cost money to hold and lose money when not occupied.
Hi Tallrick,

There was sustained deflation during the Great Depression and Japan was a recent memory. The reason why certain assets are falling in value is because they are not equity owned but through debt. Housing buyers buy with debt and since banks are not loaning at the same rate, there are fewer dollars to chase housing. These dollars are also not circulating in the rest of the economy but shrinking supply and demand has prevented some goods from falling in price.
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Old 09-10-2009, 11:30 PM
 
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Quote:
Originally Posted by Traderx View Post
So the depression never happened in your mind, huh? Egads!
Our money was still on the gold standard during that time period until the Government made it illegal to even own gold in 1933. Instantly deflation turned into inflation. The "great depression" deflation was due in part to the money being still backed by gold and silver.



http://www.gold-eagle.com/editorials...man021209.html

There is a difference between "deflation" and "correction". I'm not sure where you shop but my prices on bread, milk, eggs, etc. have been going up still. The Government has thrown and is throwing boatloads of money into the system. Deflation IMO is the last of our worries.
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Old 09-11-2009, 05:50 AM
 
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roubini had suggested that we might conceivably see "stag-deflation" (or stagflation depending on policy response):

there are risks associated with exit strategies from the massive monetary and fiscal easing," Roubini wrote. "Policy makers are damned if they do and damned if they don't."
Government and central bank officials may undermine the recovery and tip their economies back into "stagdeflation" if they raise taxes, cut spending and mop up excess liquidity in their systems to reduce fiscal deficits, Roubini says. He defines "stagdeflation" as recession and deflation.

Those who maintain large budget deficits will be punished by bond market vigilantes, as inflationary expectations and yields on long-term government bonds rise and borrowing costs climb sharply, he wrote. That will in turn lead to stagflation, Roubini said."
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Old 09-11-2009, 11:55 PM
 
Location: North Carolina
795 posts, read 1,205,166 times
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Quote:
Originally Posted by wheelsup View Post
There is a difference between "deflation" and "correction". I'm not sure where you shop but my prices on bread, milk, eggs, etc. have been going up still. The Government has thrown and is throwing boatloads of money into the system. Deflation IMO is the last of our worries.

We would probably suffer from sticker shock if we knew the real cost of every item.
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Old 09-12-2009, 04:49 AM
 
Location: Conejo Valley, CA
12,476 posts, read 17,016,116 times
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Quote:
Originally Posted by subsound View Post
A minor deflation is good, it tends to happen with major recessions after a big run up in prices...but sustained deflation is bad.
Not when the primarily reason you're in a recession is because people went hog wild on debt. Deflation essentially transfers wealth from people with debt and gives it to people with cash. Inflation does the opposite.
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