Rob Viglione

Why I See Long-Term Deflation

@Scott, best point made. Asset prices are undeniably falling, but at some point the crash will temper and we'll have to face incredible increases in money supply and unmanageable piles of debt. This will likely be the dominant factor in the long-term inflation-deflation battle.

Best case in point is to learn from Zimbabwe/Rhodesia.


On Dec 23 07:24 AM Scott1 wrote:

> in real terms, true, demand is falling, so prices should fall under
> a system of fixed money supply. But if the money supply increases
> dramatically (acknowledging velocity of money issues, of course)
> , prices can nonetheless rise. The authorities are intent on increasing
> the money supply and thus creating inflation in order to bailout
> the banks and the homeowners (this will make the banks profitable
> allowing them to play the yield curve and lower the real debt load
> on homeowners, because their salaries and eventually their house
> values will rise relative to their debts, which are mainly fixed).
>
>
> Most developing countries have probably spent half or more of the
> last fifty years in inflationary periods, even when in real terms
> their economies were often shrinking. Zimbabwe, anyone? If Zimbabwe
> and many other developing economy know how to create perpetual inflation,
> despite often shrinking economies, why should the US have a problem
> doing so?
>
> There is no trick to creating inflation, the myth that it is difficult
> seems to be perpetuating through the memosphere because people don't
> understand basic economics. There is no limit to the money supply
> under a fiat monetary systems, if the authorities increase the money
> supply by sending out checks or buying up assets (which amounts to
> the same thing) using monetization (ie issuing new money out of thin
> air) prices would eventually rise, and the changeover can happen
> quite suddenly.
>
> There really is no trick to this, yes demand is falling relative
> to supply, so prices must fall in real terms, but if we double the
> amount of money outstanding or triple it or more, then prices will
> rise again, same laws of economics apply. If there are more units
> of currency outstanding, then each good and service in the economy
> is worth that much less in terms of currency outstanding.
>
> The government can create an infinite supply of money, there is no
> technical limit, if the government only has the will they can always
> create inflation by sending out checks or buying up assets. See
> Bernanke "Deflation, making sure it doesn't happen here"