Inflating a Deflating Bubble

by: Myron Shlapak

As I read the many articles regarding the economy that are available on the web, I find that this picture is not so simple after all.

In the stock market annals, one of the most famous sayings is "buy low and sell high." Has anyone ever really thought about what this means and how it affects the the seller and future buyer?

Next let us look at inflation. There are so many different types of inflation that perhaps we should list some of them.

1. There is monetary inflation, where there is more paper money than people need so they buy more then they truly want just because everyone else is.

2. There is commodity inflation, where there is less of an item that people need so the scarcity demands a higher price per unit.

3. There is speculative inflation where people buy with the belief that prices of a desirable item will be rising.

4. There is political inflation, where the government that stands behind the paper money is collapsing and people require more of the paper to justify the risk of accepting it.

5. There is credit inflation, where money is created out of thin air through derivatives or promissory notes.

6. There is transportation inflation, where items are moved from source to consumer at an ever-increasing cost.

7. There is income inflation, where people demand more income to maintain their lifestyles rather than reduce their spending.

8. There is compensation inflation, where people demand more return for less input.

I am sure there are even more inflationary causes than those listed above, but now let us now look at deflation.

1. There is monetary deflation, where the paper money in circulation is worth more than before and requires less to buy what we truly need.

2. There is commodity deflation, where there is more of an item that people or industry needs and it sits at the source or in storage.

3. There are deflationary expectations, where people refrain from buying expecting that prices will decline.

4. There is political deflation, where government explicitly forces the reduction of prices through political actions.

5. There is credit deflation where only the highest credits are awarded the cash at ever-lower rates.

6. There is transportation deflation, where delivery costs are dropping due to extreme competition for limited demand.

7. There is income deflation, where people are willing to work for less to maintain their employment.

8. There is compensation deflation, where people are forced to input more for less return.

There is always a ying for every yang, A plus for every minus. What the central bankers know or see we can only speculate on - or is it that they too are only speculating?

From my perspective, we are on the cusp of a very serious future. The excesses of the past few decades need to be expunged from the psyche of America. The only path for this exorcism, I fear, is through a severe recession/depression. The ultimate results may even prove detrimental to our democracy and lead to the further weakening of the republic.

The Federal Reserve is very concerned about deflation and their plan is to combat it at all costs. Japan is still, after all these years, working its way through their own deflationary cycle with no clear cut solution or end in sight. Past Fed studies of Japan’s deflationary situation posed the theory that had their central bank cut rates more rapidly, or inflated the money supply more vigorously, they might have resolved the situation sooner. In other words, throw lots of money at it. This may work for the U.S, but history tells us that these actions may have unexpected results.

I fear those results.