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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (3881)12/26/2003 12:24:10 AM
From: Joan Osland Graffius  Read Replies (4) of 110194
 
russ,

There has been serious discussions on SI concerning inflation, deflation and stagflation.

If one defines inflation as monetary (fiat) growth fueling misallocation of these funds into non productive assets, I believe there is a law of economics that the system must experience deflation of the money supply. During the 1990's the system experienced monetary growth with a serious portion of this capital invested in non productive assets. My thinking is the money supply that went into these non productive assets must be destroyed.

My theses is the US must experience a period of deflation. If this deflation is managed poorly, while the capital is under destruction, after the destruction of capital the system could experience massive inflation. In other words if the central banker floods the system with fiat currency a John Law type of environment could then be experienced.

What is interesting to me is Japan has not as yet experienced inflation, which tells me they have not destroyed the capital that was misallocated during their bubble. I guess we know this is true as the banks in Japan are still holding non productive loans.

The system can experience higher prices for goods and services, but this is not inflation. It is the cause of the fiat currency devaluation relative to other competing currencies. If these higher prices are associated with goods and services required for survival this will cause deflation to increase more than the misallocation of capital because less capital will be available for procurement of non essential goods and services. These higher prices will also cause people to wait to purchase essentials until required. What I am thinking is, people will wait to purchase goods until it is absolutely necessary.
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