Inflation vs. Deflation by Anonymous
Recently there's been much talk about whether we are headed into a period of inflation or deflation. It really is hard to figure since there has never been a time when all countries of the world were off a gold standard. Even when England closed the gold window in 1914, the US, France and other gold-bloc countries still exchanged their respective currencies for gold. And then in 1933 when Roosevelt signed the Thomas Amendment which abandoned the gold standard the US had followed since 1879, most of the gold-bloc countries of Europe stayed with gold.
The opinions of the experts seem to differ on many points to the inflation-deflation argument. And then there are the different interpretation as to what these terms mean. Everyone knows the technical meaning of inflation is an increase in the money supply. Deflation is a decrease in the money supply. Many people talk of rising prices as inflation and falling prices as deflation. Nobody talks about hyper-inflation; although the estimated world debt of 400 trillion dollars is a rather large number. Maybe it doesn't really matter since it's just a bunch of figures (credits and debts) stored on thousands of hard drives on thousands of computers scattered all over the world.
But actually, to the average, everyday, working-class man on the street, the meaning of these words hit home when they are defined as follows:
Inflation - Decrease in purchasing power (money earned buys less)
Deflation - Increase in purchasing power (money earned buys more)
Hyper-inflation - Working for nothing (money earned buys nothing)
The crux of the argument of a future inflation vs deflation really comes down to whether we will be able to purchase more with our money or less. And then again what is present-day money. We can't compare our money today with the money of 1914 or 1933. Gold, and paper representing gold, were used in the US from 1879 to 1933 as money. Today's money is not money at all. It is not gold and it isn't even fiat paper currency (as of July 31, 2000 there was only $539,890,223,079 of paper and coin currency in circulation---this used to be the capitalization of a couple of dot.coms). All we have now is credit. And there is practically no savings. Today, credit is money. And when credit becomes money, the money is actually never earned. And when credit is withdrawn, there is complete decrease in purchasing power which is defined as inflation.
What will happen when we can no longer borrow (receive our money)? It doesn't matter where prices of goods and services go. Our purchasing power will vanish. No country with large external debts have ever experienced deflation when the credit dried up. They have all met with inflation, big time.
Argentina is a case in point. In Argentina credit came to a halt and left the whole system in limbo. The debt-credit system locked up. The result has been that tenants can't pay rent, so landlords don't pay mortgages, so banks don't make new loans. Now, everything has been turned into a cash transaction, but no one has any cash. If you don't have cash, you can't buy anything. All contracts have become null and void since there is no credit.
The 72% decline in the peso has caused the price of imports to soar and is set to result in an 80% inflation rate. Consumption is falling at a rate of 24% per year and the economy looks to shrink 18%. Rising prices and falling consumption? An unusual mix but the beginning of hyper-inflation never makes any sense. This is inflation or the destruction of purchasing power. The result of a pure credit based money system after the plug is pulled.
Unlike Argentina, Japan has not experienced inflation. Why has Japan experienced deflation instead of inflation? There are a number of reasons, and these will not apply to the US when it experiences something similar to Brazil or Argentina in the future. First, the yen has remained relatively strong against the dollar. One US dollar to 124 yen is not a weak yen historically. Secondly, Japan has been and still is primarily a cash-based society. Credit still has not caught on to the degree it has in other western countries. You can still withdraw about 1,000,000 yen (US$8,000) in one hit from any ATM machine at your local bank branch. Just spread your money around to several banks and it is easy to pull the US$ equivalent of 40 or 50 grand out of the machines. And many Japanese still have twice or three times this amount in savings. Thirdly, Japan is still making money with about a US$50 billion annual trade surplus. Fourthly, most government debt (credit) is owed to the Japanese people themselves. Japan has very little external debt.
Deflation in Japan has come primarily in the form of asset deflation which has only in the past four or five years begun to directly affect the price of goods and services and increased unemployment. It is now causing the lowering of salaries for Japanese workers, in some ways catching up with the decrease in prices and increase in their purchasing power (deflation).
So what lies ahead for the US; inflation or deflation? Asset deflation is a given. It is happening everywhere in the world. It is happening everyday and has been going on for the last three years on Wall Street. Real estate is next. This is where Japan and the US do share common ground. But as for the everyday man on the street who is worried about his/her purchasing power.....
If you believe that the rest of the world will lend the U.S. (work for the U.S. for free) $1,500,000,000 dollars a day (and rising) forever, choose deflation.
If you believe the yen is bound for 150 or 160 to the dollar, the euro is headed back to 85 euros to the dollar, and gold is about to tank to US$250 an ounce, choose deflation.
If you believe the FED can increase the money supply to infinity and the digits created on all those computer hard drives will never ultimately affect the purchasing power of Joe six-pack on the street, choose deflation.
If you believe the US Government can continue to run deficits in the hundreds of billions of dollars year in and year out and fight a world wide war on terror in every country in which terror exists and then also increase the purchasing power of the average John Doe, choose deflation.
If you don't believe in the above, and believe that the party is over, and there really is never a free lunch, and that our foreign creditors really don't like us all that much anymore, and that the War on Terror will last more than two years, and ............your purchasing power for goods and services will continue to decrease as it has since your grand-daddy was born, choose inflation.
And, for those hard-core lifer-type gold bugs, if you believe that the US Dollar will lose its status as the world's reserve currency just as the sterling pound did at Bretton Woods in 1944 exactly 30 years after they abandoned the gold standard in 1914, and since it is now 31 years since Nixon closed the gold window on the dollar...choose hyper-inflation.....and go on buying your gold.
30 October 2002
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