Inflation or Deflation -- Which is it?

Discussion in 'Stock Market' started by Tech_Esq, May 6, 2009.

  1. Tech_Esq
    Offline

    Tech_Esq Sic Semper Tyrannis!

    Joined:
    Jul 10, 2008
    Messages:
    4,408
    Thanks Received:
    558
    Trophy Points:
    48
    Location:
    Northern Virginia
    Ratings:
    +558
    Ok, I understand the argument for inflation

    as explained in the above from Marketwatch.

    But what is the argument that we are headed into a period of deflation? It seems counter intuitive to me.
     
  2. Iriemon
    Offline

    Iriemon Senior Member

    Joined:
    Apr 2, 2009
    Messages:
    2,745
    Thanks Received:
    99
    Trophy Points:
    48
    Location:
    Miami
    Ratings:
    +99
    The concern for inflation is real, and the Fed has flooded the money supply, but whether it materializes into real inflation depends upon whether the Fed constricts the supply once money starts moving thru the economy again. The fact that the money supply has expanded does not make inflation a foregone concluson if it is temporary.

    The period of deflation is caused by falling price, a function of investors pulling money out of investments (in this case real estate) and into cash or savings that are not being lent out; and be a recession where there is falling demand for products and services.

    The "multiplier effect" expands the money supply by multiples of the original supply if banks lend their money out. If on the other hand they sit on it and loans are repaid without loaning new money, the supply contracts, and again by multiples.
     
    • Thank You! Thank You! x 1
  3. Paulie
    Offline

    Paulie Gold Member

    Joined:
    May 19, 2007
    Messages:
    22,377
    Thanks Received:
    3,172
    Trophy Points:
    183
    Ratings:
    +3,173
    The actual money supply itself has not yet been significantly increased, only the monetary base, which is at an unprecedented level. The point at which banks start lending and investing those reserves is the point when the money supply will start to siginificantly increase. This is something I see a lot of people get confused about, and I was one of those people not very long ago.

    The threat of inflation is certainly on the horizon, and I'm not quite sure how the Fed can really do anything to stop it at this point. They loaded up the banks for a REASON, and that was to recapitalize them and strengthen their balance sheets so they could lend again. Either they never lend it and the economy never really recovers, or they lend it and we see inflation like most of us have probably never experienced.

    If the Fed were to eventually extinguish some of that money, we'd most likely enter into a period of stagflation, because if they took it ALL away, we'd simply be back where we started, and the price increases certainly wouldn't subside for quite some time. Once the market has gotten to a point of bearing a price, it tends to stay that way for a while.

    The Fed is a dangerous entity, and anyone who thinks they do ANYTHING for the benefit of the common folk is an idiot.
     
    • Thank You! Thank You! x 2
  4. Iriemon
    Offline

    Iriemon Senior Member

    Joined:
    Apr 2, 2009
    Messages:
    2,745
    Thanks Received:
    99
    Trophy Points:
    48
    Location:
    Miami
    Ratings:
    +99
    The Fed can contract the money base.

    That is the balancing act, sure.

    Who should do it instead of the Fed? Instead of the Fed doing this tough job of balancing the money supply or base the yahoos in Congress should? Or just don't do it at all and let the supply be dictated by the amount of some metal we dig up?

    Sure its a dangerous job and a tough one. That is exactly why Congress shouldn't do it and why we shouldn't base supply upon some metal.

    If there is a better way than the Fed to control the money supply, I haven't heard it yet.
     
  5. Paulie
    Offline

    Paulie Gold Member

    Joined:
    May 19, 2007
    Messages:
    22,377
    Thanks Received:
    3,172
    Trophy Points:
    183
    Ratings:
    +3,173
    Iriemon, before even considering the Fed for the task, one must cite the authority in the constitution for its mere existance in the first place.

    And no, I would never consider handing the task over to Congress. I'd much rather the people exclusively decide interest rates via supply and demand of money, and replace the Fed with nothing. Gold discoveries typically grow the supply at a rate of around ~2% per year. That's plenty of inflation, or growth if you will, to sustain a prosperous working economy. Milton Friedman suggested increasing the money supply at a steady 2% per year for adequate growth. I'm at a loss for understanding why, with this basic example, a gold standard would be so horrible.
     
  6. Iriemon
    Offline

    Iriemon Senior Member

    Joined:
    Apr 2, 2009
    Messages:
    2,745
    Thanks Received:
    99
    Trophy Points:
    48
    Location:
    Miami
    Ratings:
    +99
    I'm fine with the constitutionality. IMO the constitution give Congress the right to create the Fed. I'm not really interested in debating the subject, which is essentially moot at this point.

    My position on why I think going back to the gold standard would be a big mistake as been set forth a number of times. If you or someone else wants to see it again I'll re post.
     
  7. wimpy77
    Offline

    wimpy77 Member

    Joined:
    Jan 21, 2009
    Messages:
    591
    Thanks Received:
    10
    Trophy Points:
    16
    Ratings:
    +10
    paulie is a staunch supporter of ron paul who wants to ban the fed. i have come to agree with ron paul on some things but this is not one of them. i can respect paulie's position though.
     
  8. Paulie
    Offline

    Paulie Gold Member

    Joined:
    May 19, 2007
    Messages:
    22,377
    Thanks Received:
    3,172
    Trophy Points:
    183
    Ratings:
    +3,173
    I'm not really sure how the point of constitutionality of the Fed is moot. Whether something is constitutional or not is pretty much the most politically important thing in this country.

    And wimpy, I think you accept the Fed because you're just so used to it that you can't imagine such a drastic change that would take place if it were to be abolished. I'm not always that open to big changes myself in many ways, but this is one where I'm all for it. Elite big wigs decide our monetary policy, and thereby our personal financial lives. We as the people have ZERO say in the matter, and that is simply NOT what this country was founded upon.
     

Share This Page