Tuesday, 10 February 2009

Deflation



There is a lot of debate about whether we are going to have inflation or deflation. A lot of people are scared about inflation getting out of control because all the government's of the world are printing massive amounts of money to solve all our problems (i.e. issuing credit; monetizing debt). What these people don't understand is that asset deflation is happening faster than credit creation. Basically, the central banks can't create credit at the same rate credit is being destroyed. So the end result is deflation. I was listening to a Youtube interview of Mike "Mish" Shedlock, a well-known financial blogger, and he made some good points in that interview that i want to point out.

"I go back and look at the last time that money supply soared (base money supply soared) like it is now. Guess what? There are only two other occurrences. One was in World War II and the other one was in the Great Depression."

Essentially there are only two times in the last 100 years that money was being printing like it is today. He also goes on to say:

"Here are the conditions that one would expect to see in deflation: falling Treasury yields, falling home prices, rising corporate bond yields, a strengthening dollar, falling commoditiy prices, falling consumer prices, rising unemployment, a negative GDP, a falling stock market, a falling credit mark-to-market.....and a spiking base money supply as the government attempts to fight it. We would see banks hoarding cash. We would see a rising savings rate, and we would see the purchasing power of gold rise."


Source:
Stock Shotz Interview
January 4, 2009

For more details, you can check out his article about inflation/deflation on his blog:

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