what are indicators of deflation before it hits?

what are indicators of deflation before it hits? and is there usually any kind of lag time in between said steps to deflation? hoping this question is a learning experience for me and others here that know little about how it happens

Alex

 

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Before it hits? I'm not sure. I guess it would be characterized by a general shortage of money in the economy that would lead to a significant rise in defaults on debt and, subsequently, crashing markets.

My expectation is that the road ahead will be somewhat different than the traditional inflation or deflation scenario. We may see the price of necessities rise [inflation] at the same time the prices of luxuries fall [deflation]. A lot of bonds will default [deflation] while the dollar falls [inflation]. Real estate may continue to fall [deflation] while PMs rise [inflation]. Low interest rates may continue longer than most people expect, but will have the effect of destroying capital formation rather than helping it. These are strange times, and the old rules may not be sufficient to enable most people to navigate through them. It's going to take new thinking, new strategies, and a creative understanding of an economic landscape that no living person has ever experienced in order to prosper. I have no confidence that I can do this, but I'm trying. Good luck to all of us.

 

Nobody has their entire savings in FRNs cash. So, most of the money spoken of is really just an electronic number on some computer some where. You pay a bill using a check, no FRNs are used. Instead the number written on the check is instantly subtracted from a computer somewhere. So lack of available money is really just a tightening of the free flowing of this electronic money supply. This can happen in the form of unemployment, where people aren't making money and adding to their bank accounts. It can also happen is banks stop lending money as freely in the form of credit.

Hey, isn't that happening right now!!!!

 

Another way of thinking about what Cloud is describing, (correct me if I am wrong Cloud), is that anything desired by the rest of the world going up in our view since our dollar is falling and they are prospering, while any US specific assets are declining, and our richer citizens feeling it as well.

I can buy that, though I think US assets, since we still are the largest economy in the world by far, can only far so far before they become a bargain for overseas investors. I agree a person is safer in assets not denominated by dollars right now, but that is accomplished many ways, by owning farmland, by owning stocks with large exposures to China or countries doing well, any commodities, (PM being easiest to own), etc.

Sorry if I mischaracterized your point Cloud.

 

There are a lot of ways to tell. The way I prefer is to use my magic 8-ball. Many others use phsycics.

 

?You constipated?

 

huh?

 

I wasn't really thinking about the rest of the world, although that becomes a factor too. It just isn't easy to predict inflation or deflation at this point because the situation hasn't happened before and there are no reliable guidelines that I can discover.

 

1998 Asian crisis comes to mind. The countries overspent, had massive defaults, currency devalued significantly, and were only "rescued" by Western financiers buying everything up for pennies on the dollar when they got too cheap. To the people in those countries, their own products deflated, but anything that could be sold overseas inflated greatly. Warren Buffett made tens of billions I heard, and many banks made more. I wonder who would make trillions on us? The Chinese?

That is one scenario.

 

I'm looking at it simply like this if deflation is happening I want to sell my pm's and get cash and once deflation is turning around and starting toward inflation buy up a ton more pm's cause they are cheaper before hyper inflation hits cause the government is going to go over board on bailouts and flood the economy with money from said bailouts...

least it kinda makes sense... or does that not sound plausible?


Alex

 

Deflation, unless it is worldwide, would hit US specific items. This means land, rent, food, entertainment, etc. If deflation is not worldwide, then items like PMs would not be affected, since there would still be strong demand internationally.

I would keep your PM as a hedge, and as part of a balance portfolio of assets just in case whatever scenario comes up. Most likely its inflation, but even in deflation you should be fine unless its worldwide.

 

I'm still not a believer in deflation. Even if the economy was dieing for deflation because nobody had any money and goods abound aplenty, I've never known any business of lowering their prices. Usually, they will offer deals to get people to buy, like buy one, second one is free. Or they might move more items with a sale like, "pay what you did in 1970, sale." But, this won't last.

Land has value but if you aren't buying any nor selling any, who cares what the value is? Rent, want lower rent, you have to move to a new location. No landlord lowers his rent to existing renters. Food, they'll have sales to move items temporarily, but the sales won't be permanent. Entertainment, as the number of people able to afford going to the movies decreases for lack of money, I can only see the price of a movie ticket going up to cover the lost revenue due to lack of ticket sales, much like what happened when the VCR came around.

P.S. I wonder if this talk about deflation wasn't sparked by some official like the fed in order to throw people off of their "preparing for inflation" game. What better way to get people to sell their assets like gold and silver and invest that money into something like the stock market.....Yeah, that's the ticket.

 

I think it will be incredibly difficult to get the timing right.

 

Well deflation happens in food all the time. Prices go down with large harvests. For rent, we experienced that during the housing boom when landlords could not get tenants. They started offering 2 or 3 months free rent, then started discounting rent to existing tenants around here if you threatened to move. 2 for one or any other type of sale is effectively deflation since it is lowering of the real cost of the goods. Entertainment is volume sensitive, if you started seeing 40-50% decreases of people attending movies I would bet ticket prices would lower, not increase. They would have less money to make the movies, but that is part of the deflationary spiral as well.

Deflation can happen, and parts of it happen so regularly we simply do not recognize it. System wide deflation would appear like these examples listed, but overall would be brutal. Honestly, it is very litle risk though, unless all of the governments start, (continue), to do something really stupid.

 

You may want to also check to see if the amount of liquid assets (or even liquidity indices) have started to increase rapidly for governments, top companies, or perhaps very smart people. TC

 

Normal changes in the supply and demand for food or other products has nothing to do with deflation. Deflation is a monetary phenomenon, not a change in supply or demand.

 

I think your example highlight what I was referring to. Instead of lowering the price of rents, landlords just gave a few month free in hopes of getting renters at the current price once the free months were over. Food prices do fluctuate with the harvest, but when was the last time you saw a box of cereral go down in price? How about a frozen pizza? And what about fast food, like fast food chains? I see deals like .50 burgers every now and again, but if it is a sale, and the price still says $2.50 for a burger, the promise is the price will go back to that eventually.

I'm not concerned on deflation on a 2-3 month scale, when most everything else is pointing to inflation. Here's an interesting article that claims that inflation is about 2-2.5%, but because housing is included in the inflation index, most of the deflation you see if the price of housed collapsing. But the rest of the economy is inflationary.

As usual, I'm looking for that article but can't find it. I'll keep looking, hopefully I will find it. I think it is somewhere in MSN money.

 

Monetary deflation is systemic I agree. But if the price goes down for a segment of purchases, what do you call it? If it goes up it is called inflation, so...... Deflation is simply a lowering of the price of a certain basket of goods, nothing more or less. The causes can be differentiated, but not the effect.

I was just trying to show how we experience lower prices periodically, and how deflation would not hit you over the head at first. Most people do not recognize deflation when they see it.

To Silversurfer, the free months rent was just the beginning. Landlords were also cutting rents to existing tenants, and making deals to get new ones in. A few months free rent is deflationary, since their average housing cost went down. The burger promotions are also deflationary. I don't know about you, but if I go to McD I only order the double for $.99. My cost for meals there has decreased. What I was trying to illustrate was small things we do not think of as deflation really being so. The OP asked what to look for, and those would be examples. These are simple ones not damaging the economny per se, but once consumers start to EXPECT these price lowerings, that is when it is bad. Consumer expectations of either deflation or hyperinflation is the real damage, since they will change behavior accrodingly.

 

Hmm... I would argue the opposite. A relatively short time ago a mcd double cheeseburger was $.99, now they sell the mcdouble for $.99 and it has one less slice of fake cheese. They are giving the appearance of the same item but you are actually getting less for your money.

 

But what was the price of a double cheeseburger, (now $1.19), before the promotions? Five years ago they were about $1.80, and big macs $3, so even at $1.19 over the course of five years the double cheeseburger is deflationary for me.

Btw it is good cheese on those burgers. The stuff you buy in the grocery store, "singles", is the fake stuff. Legally in the US to be called a cheeseburger it has to be made with processed american cheese, not cheese food or cheese product. Look at the label in the store and see what it is.