what are indicators of deflation before it hits?

That isn't correct. Price increases are NOT inflation. Price decreases are NOT deflation. What you are describing are normal free market forces at work. Inflation is an increase in the supply of money that exceeds the change in demand for money, resulting in a general increase in overall price levels in the economy [not just the price of a particular product]. Deflation is a decrease in the supply of money that exceeds the change in the demand for money, resulting in a general decrease in overall price levels in the economy. Both inflation and deflation are monetary effects and NOT just price changes.

 

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Both can be caused by monetary effects, but the effect is the same. Suppose there was a major war in the middle east. Monetary policy has not changed, but gas is now $8 a gallon. Does the increase gas prices affect inflation? YES. Inflation/deflation is a measure of a set basket of goods versus a previous period, that is all. Causes can be argued forever, but the fact that the basket changed price, either up or down, is a hard fact. Yes, if gas went up to $8, but many other things in that basket went down, the basket could still be cheaper and you have deflation even though gas is triple what it was. This is the reason they strip food and energy out of inflation readings frequently, since they are more volatile. Yes, price increases and decreases ARE normal markets at work, but their net effect, due to shortages, demand changes, monetary policy, government borrowings, future expectations, currency revaluation, etc. IS inflation/deflation.

The real danger is that you have an organization, the US government, that compiles this "basket" and makes "adjustments". The danger is that they have a vested interest in reporting low inflation numbers. This is a major conflict, and I have seen their adjustments and disagree with them. I think inflation is systematically underreported in this country.

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time."
http://en.wikipedia.org/wiki/Inflation#cite_note-0

 

In your example, the increase in gas prices is NOT inflationary. The effect is NOT the same. There are always price increases and decreases in a free market as supply and demand adjust. If there is a disruption in the supply of something, the price rises. If demand for beanie babies goes through the roof, the price rises. This has nothing to do with inflation and deflation. In the 1970s, the Arabs embargoed shipments of oil to the US and the price rose. This, by itself, is not inflationary. It depends completely on the monetary policy decision regarding how to react to it. In the 1970s, the government decided to monetize the price increase and the inflation rate went up. If they decided not to monetize it, the price of other goods and services would have to fall. But overall prices would have remained the same.

Understanding inflation isn't simple because Americans typically are not precise in the use of language, and as Keynes pointed out, "not one man in a million will figure it out." [slightly paraphrased] But it is important to understand that changes in prices do not represent inflation or deflation.

Anyway, that's all I'll have to say about this because it can become repetitious, and you can have the last word. Some people will get it, some won't. I just wanted to put the correct answer out there in the hope of helping some people understand it.

 

Every time I read a post by Cloud, I get smarter.
Every time I read a post by medorman, I get confused.

Supply and demand has nothing to do with inflation/deflation. I can see how you can mis-understand the terms if you base ideas off your gut and Wikipedia.

Someone might need to take a quick economics class, you can find them online even.

(not meant to be mean, just encouraging education)

 

Sorry that I am not clear, or that you believe I need to take an economics class. Its kind of sad since I used to teach macro and international econ at the graduate level. I won't argue. I understand Clouds point of monetization of the inflationary pressures, but simply point out to the incredible monetization measures done in Japan in the 1990's and the fact deflation was still persistent. In his argument the monetization would have instantly created inflation, but it didn't. The monetization of a central bank is not the only monetization in effect, the more important monetization is consumers willingness to spend, and their view of the economy.

I really didn't mean to have the last word Cloud, you can say what you wish. I just wanted to apologize if I have been unclear, or if you believe I am just wrong.

P.S. Xtronic, look up CPI and see how it is calculated. This is the official measure of consumer inflation in this country. This is how everything you buy, all supply/demand curves combine to be an inflation reporting measure. Like I said, I believe its underreported, but it is still the basic measure of consumer inflation.

 

No problem and no need to apologize. I just don't want the thread to start running in circles through repetition, which I've been known to do. And I'm not trying to stop others from joining the discussion.

 

I am waiting for hyper-inflation.
I haven't seen anything greatly devalued. Prices only seem to skyrocket.
Even the real estate market, which should be correcting in a big way, is not.
Everyone is sitting tight so as not to lose their shorts.

 

Me too.

 

really wouldn't worry about deflation. There are way too many dollars being printed and electronic assets being pushed into the economy. Twice as many dollars without a corresponding increase in production of goods and services will lead to INFLATION. Right now, a miserable economy is keeping inflation in check, but it i ONLY a temporary phenomena..

 

This story is repeated so often that people believe it without checking the statistics. The truth is that deflation is more than a distant threat.

http://www.shadowstats.com/charts/monetary-base-money-supply

 

Good point, for inflation to actually be going on, many many people have to be trading their dollars for goods.

Just a question, for medoraman, how do you think the global economy changes the traditional views of inflation/deflation?

 

Well I would say simply that traditionally economies were more closed, providing all basic materials internally. Therefor it was easy for Country A to have inflation, and Country B to have hyperinflation and Country C to have deflation simultaneously. There was trade but it was at the margins and didn't affect most transactions. With more Internationalization the Central Bank in any country has less power to control its internal economy since the international pressures are too great. Look at Japan in the 1990's. Without International trade their deflation would have much more severe. However, since it was moderated by international inflation buying their goods, their deflation was much more prolonged than it should have been.

Before such a rise in Internationalization, I would agree somewhat with Keynesians. Keynes wrote that the Central bank of a country could control the economy through monetary policy, demand side economics as it were. With massively more trade, that simply is just not possible anymore, since there are way too many pressures that the Central bank cannot control. They still have power, but not absolute power. International financial markets can actually completely override all but a few countries Central bank decisions. The 1990's devaluation of the British Pound is a glaring example, but there are many more. I would say only the US, German, Japanese, and Chinese Central banks are large enough to not be ruled by the International financial markets, and maybe not the Japanese and German banks. The Chinese can since the yuan is not really convertible freely. I would say in ten years the US could not survive a no confidence vote in the dollar from the financial markets.

I am trying to make it brief.

 

"Core US inflation is the lowest since the mid-1960s. US business inflation (pricing power) is at zero. Bank lending is flat and securitised consumer credit has collapsed from $900bn to $240bn in the last year."

http://www.telegraph.co.uk/finance/...spike-queers-the-pitch-for-Bernankes-QE2.html

Well, $660 billion in credit gone in one year. Yeah, I can see how that'd be deflationary. But, this is consumer credit. Bank money on hand after the bailouts and record profits along with all the QE'ing that's been going on is inflationary. Just wait till the banks start lending again, and all that QEing starts to move to the velocity side of the Quantitative Theory of Money equation, and see what happens.

I've said this before, I'll say it again. Price volatility due to monetary policy seems to lag 4 to 6 years. So, all the bailouts and QEing will be felt in 2012-2014. Do recall that in July and August of 2008, the Fed was worried about Inflation.....not a housing bubble burst.

 

Good points. As a contrarian I would point out all of the new financial regulation will increase costs and decrease profits on the banks, as well as remove a lot of extended credit to consumers. Also, it does not matter how much money the Fed pushes into the system. The Japanese Central Bank pushed even more into their system, and it just sat there. Consumer appetite for debt is the other half of the equation. If consumers of capital do not have confidence in the economy, they will not borrow regardless of all the QE you can throw at them. If consumers have confidence, then QE will increase inflation.

I am not saying which way it will go, and agree that it would most likely lead to inflation, just pointing out the other half needed for QE to induce inflation.

 

I think you are correct that the case for inflation is not certain. The QE programs give money to major financial institutions. If they hold it, the velocity of [that] money is zero. Institutional balance sheets are improved, and public balance sheets, in the form of increasing Treasury debt, are destroyed. The outcome could easily be deflation. The Fed isn't pumping money into the general economy. M3 is falling. This could change if public policy changes, but that's something nobody can predict.

 

Also - need to factor in whether foriegn govts are increasing or decreasing their reserve holdings of US dollars.

 

One of the signs of deflation is a thumping noise. I heard it the other day in my right front tire and sure enough ...it was deflated.

 

Post of the week!

 

The head of the Fed doesn't agree with you.

"
The Doctrine refers to measures that the Federal Reserve can use in conducting monetary policy to combat deflation. In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation entitled "Deflation: Making Sure "It" Doesn't Happen Here."[1] In that speech, Bernanke states:

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."
​

He provides an assessment of the causes and effects of deflation in the modern economy. In order to combat deflation, Bernanke provides a prescription for the Federal Reserve to prevent it. He states that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. He provides a seven specific measures that the Fed can use to prevent deflation."

1) Increase the money supply (M1 and M2).

"The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."
​

"
5) Depreciate the U.S. dollar. Referring to U.S Monetary Policy in the 1930's under Franklin Roosevelt, he states that:

"This devaluation and the rapid increase in money supply ... ended the U.S. deflation remarkably quickly."

​

 

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