The issue that is set to move to center stage, sometime in the next 9 months, has less to do with theoretical inflation, or theoretical deflation, but rather--the exploding supply of US Treasuries. Sure, banking systems worldwide are being recapitalized, as governments attempt to replace part of the destroyed debt. And sure, some of that capital or even alot of that capital is not getting into the system, and is being hoarded. And yes, there is deflationary pressure at the margin right now, as at least on a directional basis, prices of most assets are downward.
However, here in the US, two dangerous trends are now underway. 1. The poison of the financial companies has been brought onto the government's balance sheet, both via the FED and Treasury. 2. The FEDs balance sheet has exploded higher and the supply of treasuries has done the same.
There is only one barrier between us now and severe inflation, and that is the rising nominal level of the USD. However, once it becomes understood that future rollovers of government debt could start to be a problem, then a new cascade effect could set in--this time on government debt.
The private sector of the US is emitting some deflationary pressure. As I have written elsewhere, the choice is between whether an economy will experience an overall paradigm of inflation or deflation. Inflationary or deflationary pressure is subordinate to the overall paradigm. My view is that since the Great Depression, the paradigm has been inflation. But, we have deflationary flare-ups/pressures along the way. We're getting one of those now.
But while the private sector deflates, the public sector is inflating. We will likely not experience this new inflation until 1. The money gets into the system and starts multiplying. 2. Buyers of US treasuries begin to balk, and the global observation of the balk sends the USD back down again.
Bottom line: it's not possible for the USD to strengthen past the moment that auctions of US treasuries start to go badly, as buyers either refuse to buy or demand much higher rates (lower prices) for those bonds. When that point is hit (or anticipated) the USD will be unable to strengthen and the full effects of the current reflationary efforts will rush to center stage, as our purchasing power heads downward again. So in a way, the inflation-deflation debate here in the US imo now moves directly to the fate of the US treasury bond market.
On the matter of anticipation: investors in the US Treasury bond market can roughly be divided into two groups: the first are price insensitive buyers like foreign governments and large pension funds who buy no matter what. The second are discretionary buyers, like mutual funds, hedge funds, individuals, and large investment pools, etc.
The second group will very likely have started exiting the US treasury bond market before there are actual problems with rolling over the maturing debt. This could begin at any time. It may have even already started.
To wrap up: the US is currently experiencing deflationary pressures within an overall paradigm of inflation, as we are no where near yet to altering the paradigm to deflation. The deflationary pressures are in the private sector--but not in the government sector. And accordingly the primary lever by which inflation or deflation is arbitrated, the USDollar, is at serious risk and is imo fated to succumb to the historic issuance of new debt and the expansion of the FED balance sheet, and the decision of our govt to take the poisonous debt up into the federal balance sheet(s).
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