Sunday, April 19, 2009

The deflationary bust

Looking around "Financial Sense"...

Professor Antal E. Fekete revisits his deflationary theory: we have passed a crucial point in debt accumulation. From now (actually, from 2006, he says) onward, the more politicians attempt to stimulate it with debt, the faster the economy will shrink. Gold, the machine's "governor" that set limits to debt, was decoupled from the system a century ago - it got in the way of war financing.

Stephen Tetreault says if there's a rise in stocks, sell: "I do not see a positive bullish catalyst in the making as we head into the earnings sector other than a potential short squeeze, relief rally that should which should be sold into." He notes that deflation means those that can, are paying down debt, but also lenders are widening the margins between the interest they pay and the interest they charge, which gives further impetus to deflation.

Tony Allison says, sooner or later energy is going to cost more. He's thinking about the right point to speculate, the rest of us should consider the effect of higher energy costs on family budgets, and therefore on how reduced disposable income will be allocated.

Captain Hook foresees a time when "the public finally gives up the ghost on stocks in general, correspondingly they will fully embrace the likelihood of deflation, which will trigger a temporary collapse in commodity prices, led by their paper representations." He thinks this will be the time when physical gold will win; I wonder whether that is so, when most of us are so dependent on an electronic system. We're not farmers, selling corn and cattle to each other; the machine cannot be allowed to stop. That's why I think there will be, for a time, a switch to currency inflation; then perhaps a rerun of the early Eighties, as someone public-spirited in public life takes unpopular action to prevent the dive into the abyss.

For E. M. Forster's extraordinarily accurate vision of the future, written in 1909, please click the last link above. Telephone, TV, a populace paralysed by lethargy and wealth in its bedrooms...


Mark Wadsworth said...

Do you mean 'deflation' in the sense of 'economic contraction' (which appears uncontentious) or in the sense of 'asset price bubble deflating'?

It seems to me that the fall in sterling must result in an increase in the price of imported goods ('inflation'), but that is probably more a one-off increase that will level off once people have adjusted. So for a given level of spending power, a higher amount for food, petrol etc must result in a lower amount for buying shares or houses.

Sackerson said...

I think the latter, Mark. A mishmosh of economic contraction, weakening currency, higher import prices, industry not able to take quick advantage of devaluation because of a shortage of skills and also because of higher costs of imported raw materials, less disposable income, and a government that will try to paper over the cracks by increasing the money supply.

Mark Wadsworth said...

Thanks, that's what I thought.

Lola said...

I rather support the Misian concept that inflation and deflation are monetary phenoma and price rises and falls are a result of each, not their cause.

Clearly a currency devalued by excess production of it or the traducing of its quality will buy less of something for the same quantity of it. That is money is a commodity that allows us to measure other different commodities that have differing economic value. Hence a sheep has an economic value that might be 1000 times that of a pencil. If one currency unit buys one pencil it must buy 1/1000 of one sheep. But, if the currency unit loses confidence of the user, or more units are arbitrarily made, more are required to measure the economic value of the sheep/pencil. Of course scarcity affects price, so less sheep means more pencil equivalents. And the same scarcity rule applies to the commodity of money.

Socialists, I have come to decide, really do not understand money. They despise it and see it as a tool for social engineering. hence they always mess up economically. They also crave to be rich themselves, but only by taking wealth from someone else, not by creating it themselves. The old 'profit is theft' fallacy.

This current crisis is fundamentally a crisis of money. Japan, the USA, Europe and the UK political leaderships have all made the same mistake and allowed themselves to be seduced by the idea that they control money. They don't. We do. We, the 'markets'. They have failed in one of the five or so primary duties of States with a monopoloy of fiat money. They have failed to run sound monetary policies. We have spotted this and we are now sorting it out.

So, we have had the inflation, and to cure the inflation they are adding more inflation - making more money. The cure is delfation - the destruction of money, the reduction of its quantity. Prices will fall, but so must wages. After all if you are paid in bigger pounds you can buy more things.

The solution is easy. Politicians must free up the market, or rather get right out of it and let us sort out the mess they have made.