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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: bart13 who wrote (70130)	9/22/2006 6:42:12 PM
From: YanivBA	Read Replies (7) \| Respond to of 110194

Why deflation is not the opposite of inflation. Well it is all about definitions isn't it? Sure if you define inflation as a rise in the CPI and deflation as a drop in the CPI then, of course, deflation is the opposite of inflation. But then you also get all sort of aberrations like that a Katrina-like event is inflationary and a good harvest year is deflationary and that is just bull. Lets talk straight OK? Inflation is the part of growth of the money supply that exceeds what is needed to support the growth of the economy, right? In other words, inflation is excess money printing. Sure excess printing always leads to prices raising somewhere and usually leads to a raising CPI but to equate the two would be plain wrong and make all the discussion useless. What is there to talk about inflation? Just read the CPI. The truth is that it is the CPI that is almost useless but observable while excess money printing is all important but unobservable. We use the CPI because we want to learn about excess money printing. But by the time it reaches the CPI it is all dead and done. You can't protect yourself, right? So you have to care about the source to be able to do something about it. So what about deflation? Well it turns out that if we define deflation to be the opposite of inflation it becomes a non issue. If deflation is just a lack of printing then well, just print some more, right? Wrong. Making deflation be something that is not really a problem does not solve any real world problem. Deflation is never and nowhere a monetary phenomena. Deflation is always and everywhere a business risk phenomena. (Copyright YanivBA, first used here – this applies to the entire post, please credit me for any use of this sentence or any of the rest). Precisely like inflation is really too much money meeting too little products deflation is really too much debt meeting too little profit potential. The implication is a shift in risk attitude that drives savers into perceived safe heavens. However, there is no such thing as a natural safe heaven. Gold was once the safe heaven and so a deflation was simply a rush away from business risk and into gold. Today because gold is volatile relative to planed consumption it is no longer the safe heaven it once were. Today the safe heaven of choice by most people is fiat currency and government bonds. This is the world we live in whether we like it or not. The significance is that if you want to look at a deflation at work you need to look at measures of business risk. Get me a chart of Japanese business spreads. Then we could talk. As a second best we could look at government bonds yield which should show (to my understanding) a bull market that has not yet broken. I want also to note that if you accept my definition of deflation and that deflation is not the opposite of inflation it is theoretically possible to have both a deflation and an inflation at the same time. The safe heaven that springs to mind is gold, of course, or possibly oil. However, things would have to get pretty volatile for those to be generally considered safe again. YanivBA.