De Graaf

Gold, Silver and Deflation

Their are some very interesting comments from you all. I want to add to understanding of deflation, as this is not always understood completely.

Some of you talk as if deflation is happening. My question to you would be...what deflation are you talking about.
Their are two major forms of deflation.
1. Monetary deflation
2. Asset deflation.

What we see in today's markets is asset deflation initially caused by the massive deleveraging effect instigated by the low interest loans and mortgages that fueled consumer spending and the inflation of housing prices. More on that in a second.

That said, we have a liquidity problem, a credit crisis. Banks have dealt with bad securities and derivatives based on inflated subprime mortgages bundled together in tranches. Banks don't trust eachother anymore, thereby stopping the interbanking supply of money. This slows the consumer and corporation spending overtime.

Now, the point is, that this is deflationary. But not monetary deflationary. Because for having monetary deflation, you have to see price levels decline. Actual products become cheaper. People postponing expenditures of consumergoods. That was not the case until (probably) now. There are signs of product pricings going down slowly. Inventories stockpiling, creating major discounts in shops. If this continuous, we will see producers try to compete eachother on the marketplace, fighting for customers, thereby lowering their prices, until a level where pricelevels meet costlevels. That is the ultimate situation of deflation. Spiralling down of an economy. Again, not widely happening yet.

To continue with asset deflation; which is happening widespread accross our markets. This phenomenom is caused by deleveraging as I said earlier. This results mainly from banks and hedgefunds, not being able to hold on to their customers, or reaching their given trailing-stops and investment criterias, thereby selling their stocks and investments. This affects all stocks and sectors momentarily, due to the grim outlook of the market sectors. All are based on the problems in the motor of our economies, that is the financial (banking) sector.

The FED is trying to spur this 'motor' with fiat dollar currency. Inflating its way out of an recession and possibly a depression, regardless of the cost of inflationary practices. Eventually debasing the dollars face value.

If the dollar remains the reserve currency of the world (questionable) countries like China and Japan will remain invested into Treasury bonds. Holding the dollar up eventually.
On the other side, if problems in their (China) own country become greater, there may even be a decoupling phenomenom happening soon, first shown into export decoupling and continued by a dollar decoupling, as they experience that their domestic growth will not flourish anymore by a constant decline in American consumer spending towards manufacturing sectors in (mainly) China.

To Finalize;

If monetary deflation shows not to be an issue in the future, inflation will rule the markets when it hits the ground in the real economy (banks will have to start lending out again first) then we will see inflation sky-rocket.
If that happens, the comment from (mrees999) is very appropriate;

[quote]
"We have a Tsunami of inflation building. Before a Tsunami hits, it's common for the tide to rush out to sea. This deflationary act - just adds fuel to the wave of inflation building to come wash over us. Our surfboard in this mess will be gold and silver. Rushes down in price now - stays on top of the wave bearing down on us." [end-quote]

Very nice analogy.