Bruman

Evidence That Big Inflation Is Coming

I agree with the basic premise, but I do think that the collapse of asset prices has brought on short term deflation. When asset prices collapse, like housing and the stock market, you have basically eliminated a portion of the money supply, because assets that had been convertible to money are now convertible to much much less. That means that many other prices must fall in order for markets to clear (e.g. costs of iPods now have to drop before the quantity produced can be sold, because people aren't feeling as rich). The contraction of credit also means that prices need to drop to clear markets.

Eventually goods production may slow so that prices can creep up for markets to clear, but this may mean that employment is down, reducing people's income, and forcing other prices down. Thus, these are money supply issues.

There is also the question of the velocity of money. Inflation/deflation can happen if the number of transactions rises or falls rapidly. This is a part of the money equation MV = YP or (money supply)*(velocity) = (output)*(price levels). Usually money supply changes faster than velocity, but that may not be the case presently.

At the same time, I do agree that central banks are flooding the system with money, and that is likely to produce inflation down the road. But I think that deflation has happened and may persist for another 3 months or so.