So I've been really trying to wrap my head around the whole inflation/deflation debate. The prevailing wisdom is that we're in a period of deflation now, but look out, inflation's going to come and come hard. However, thinking back over the past couple years, it's played out something like this:
Early 2007 - Inflation is here, but it is contained.
Late 2007 - We must cut the interest rates to contain this recession, but there is the threat of inflation in the near future.
Early 2008 - The threat of inflation is contained, and we must cut the interest rate to alleviate the recession.
Late 2008 - Deflation *might* be here, but we must be on guard for inflation.
Early 2009 - We'll finally agree that we're in a very, very short period of deflation, but inflation is going to happen with a vengeance very, very soon.
One of the financial sites that I read most often has been predicting deflation for at least the past year, but it really only has been recently that the major "economists" or mainstream media will have even admitted that we are in a process of deflation (maybe early Fall?). Now, although it's relatively certain that we're experiencing deflation, there is the constant drumbeat that inflation will occur, and occur sooner rather than later. The WSJ article in today's paper hammers this point (denoting the risks to corporate bonds), but you'll see it again, and again and again that:
"While we may be suffering from a very brief period of deflation, it's a foregone conclusion that we'll be suffering from either really, really, really high inflation at best, or Zimbabwain style hyper-inflation at worst."
The markets don't point to this, however. Inflation-protected TIPS are only predicting 1.5% inflation / year over the next 10 years. Gold / silver / commodities have fallen (way) off of their highs. Gold is down 15% to $850. All of the things that should be going through the roof if inflation were imminent, aren't. I'll be the first to admit that the market is smarter than I am, and if the talking heads are pointing to inflation, but the market isn't, what am I missing?
Could it be that the mere threat of inflation is what the pundits are hoping for? People don't up their spending during inflationary periods, unless something is rising in value faster than inflation (like housing prices). If inflation was 5% per year for the past 5 years, and projected to be that way for the next 5 years, there's no incentive to buy anything now... It's more expensive than it was last year, and is less expensive than it will be next year. As long as that 5% is steady, spending will be steady.
However, if there was no price increase for this year (or a decrease, woohoo!), and prices are forecast to jump by 5% next year, well you'd better go out and buy it now. You'd be positively stupid to wait until next year when prices are higher...
And that is why I'm suddenly very, very leery of these pundits and talking heads going on about how sudden and drastic inflation is right around the corner. It seems like the inflation pundits are pushing an agenda, and basically insulting anyone who disagrees . Don't put your money in bonds, because inflation will wipe you out. Buy stocks and gold, buy stocks and gold, buy stocks and gold...
Japan's exchange rate in 1990 (the beginning of their "lost decade") was 130 yen to the dollar. The exchange rate in 2002 was... 130 yen to the dollar. They printed money, bailed out banks, and ran up a huge deficit and their exchange rate actually improved in the 1990s (to ~83y to the $ in 1995).
Now we're not Japan, but I just can't help feeling that inflation isn't guaranteed. I'm almost thinking that we might be in for deflation now, deflation tomorrow, and a slow bottoming process before we slowly start to inflate again. Obviously this would drive the pundits nuts, but they're also the ones who were predicting a contained sub-prime crisis, housing and stock prices to keep rising for the next decade, $200/barrel oil, etc.
Thoughts?
Early 2007 - Inflation is here, but it is contained.
Late 2007 - We must cut the interest rates to contain this recession, but there is the threat of inflation in the near future.
Early 2008 - The threat of inflation is contained, and we must cut the interest rate to alleviate the recession.
Late 2008 - Deflation *might* be here, but we must be on guard for inflation.
Early 2009 - We'll finally agree that we're in a very, very short period of deflation, but inflation is going to happen with a vengeance very, very soon.
One of the financial sites that I read most often has been predicting deflation for at least the past year, but it really only has been recently that the major "economists" or mainstream media will have even admitted that we are in a process of deflation (maybe early Fall?). Now, although it's relatively certain that we're experiencing deflation, there is the constant drumbeat that inflation will occur, and occur sooner rather than later. The WSJ article in today's paper hammers this point (denoting the risks to corporate bonds), but you'll see it again, and again and again that:
"While we may be suffering from a very brief period of deflation, it's a foregone conclusion that we'll be suffering from either really, really, really high inflation at best, or Zimbabwain style hyper-inflation at worst."
The markets don't point to this, however. Inflation-protected TIPS are only predicting 1.5% inflation / year over the next 10 years. Gold / silver / commodities have fallen (way) off of their highs. Gold is down 15% to $850. All of the things that should be going through the roof if inflation were imminent, aren't. I'll be the first to admit that the market is smarter than I am, and if the talking heads are pointing to inflation, but the market isn't, what am I missing?
Could it be that the mere threat of inflation is what the pundits are hoping for? People don't up their spending during inflationary periods, unless something is rising in value faster than inflation (like housing prices). If inflation was 5% per year for the past 5 years, and projected to be that way for the next 5 years, there's no incentive to buy anything now... It's more expensive than it was last year, and is less expensive than it will be next year. As long as that 5% is steady, spending will be steady.
However, if there was no price increase for this year (or a decrease, woohoo!), and prices are forecast to jump by 5% next year, well you'd better go out and buy it now. You'd be positively stupid to wait until next year when prices are higher...
And that is why I'm suddenly very, very leery of these pundits and talking heads going on about how sudden and drastic inflation is right around the corner. It seems like the inflation pundits are pushing an agenda, and basically insulting anyone who disagrees . Don't put your money in bonds, because inflation will wipe you out. Buy stocks and gold, buy stocks and gold, buy stocks and gold...
Japan's exchange rate in 1990 (the beginning of their "lost decade") was 130 yen to the dollar. The exchange rate in 2002 was... 130 yen to the dollar. They printed money, bailed out banks, and ran up a huge deficit and their exchange rate actually improved in the 1990s (to ~83y to the $ in 1995).
Now we're not Japan, but I just can't help feeling that inflation isn't guaranteed. I'm almost thinking that we might be in for deflation now, deflation tomorrow, and a slow bottoming process before we slowly start to inflate again. Obviously this would drive the pundits nuts, but they're also the ones who were predicting a contained sub-prime crisis, housing and stock prices to keep rising for the next decade, $200/barrel oil, etc.
Thoughts?
