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To: XBrit who wrote (31410)	10/26/2000 9:13:35 AM
From: Oblomov	Read Replies (1) \| Respond to of 436258

I didn't mean for it to be cryptic. I was responding to David's comment about how the media have totally ignored the deflationary forces at work over the past year. It seem that the economy has been precariously balanced between inflation and deflation over the past three years. The trend, IMO, has been toward deflation, but due to years of loose credit policy as an attempt to fight it, we have seen inflation crop up in commodities. Only Austrian economic theory purports to explain why this has occurred: The loose credit policy has resulted in investment in lower stages of production (consumer goods), without the correct corresponding investment in higher stages of production (capital goods, such as drilling equipment, tankers, etc.). So we have inflationary and deflationary forces tugging at our economy at the same time. The problem is that these forces don't merely cancel each other out. They each do damage to our economy in its own way. Note how the dollar strengthens as the U.S. economy slows. This is evidence that the stronger force is deflation at the moment. The only missing ingredient for deflation is that the savings rate is still extremely low. I believe that this has been possible by virtue of a rising stock market. If a bearish psychology takes hold, then deflation will begin to be evident. But, there are industries already experiencing the effects of deflation. The auto industry, for example, has huge overcapacity, and is desperately trying to preserve what little pricing power still exists. On the other hand, the financial firms (who hold bonds and cash) are doing well. Also doing well are the tobacco firms and sellers of luxury goods. They have pricing power for their goods regardless of the monetary environment. Comments?