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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Lucretius who started this subject8/4/2003 11:07:25 PM
From: Teri Garner   of 436258
 
The U.S. has a history of major inflation followed by massive deflation for the past 200 years. These inflationary periods were accompanied by increasing debt and rising inflation while the deflationary periods were associated with decreasing debt and interest rates. In between the inflations and deflations we experienced periods of disinflation, which just happened to coincide with all the gains in the stock market over the past 100 years. The periods of inflation and/or deflation were not what you would call beneficial to the stock market. We have been experiencing disinflation for the past couple of decades (the best environment for common stocks), but we would not bet on this environment to continue and we expect to fall into a deflationary period shortly.

Inflation is an abnormal increase in the available money and credit beyond the proportion of available goods, resulting in a sharp and continuing rise in the general price level. Deflation, on the other hand, is a reduction in available money and credit that results in a decrease in the price level. In other words, deflation is the destruction or elimination of the build up in debt associated with inflation. Because of the relatively recent events of the 1970s almost everyone is familiar with what happens during periods of inflation. What occurs during deflation is less familiar since the last time it happened was during the 1930s. Precipitating the deflation of the 1930s was the inability of the banks to lend out money supplied by the Fed. While the banks had the funds to lend, qualified borrowers didn't want the money and the others were not creditworthy. This could have taken place because of job losses, business failure, or the bank not wanting to loan the money to non-credit worthy borrowers. And if you think about it, why should they? The goods they would have purchased with the money borrowed were declining in value due to excess capacity and deflationary conditions.

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