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

To: mishedlo who wrote (70149)	9/25/2006 8:55:07 PM
From: YanivBA	Respond to of 110194

Deflation is not the opposite of inflation, answering Mish. Your definition is illogical It is my understanding that definitions are not a matter of logic. Definitions are meant to advocate fruitful discussion. They do so by laying down what one means when he says some word or uses some concept. Quoting wikipedia: A definition delimits or describes the meaning of a concept or term by stating the essential properties of the entities or objects denoted by that concept or term. My intent is to change the definition of deflation so that it would be based on an essential property rather than on inessential properties. I do this because I view existing definitions to be less useful than the one I have in mind. My definition is more useful because it ties the effect, the decline in goods prices to what I believe is the cause. It is like arguing that up is not the opposite of down. I really don't think the comparison is fair Mish. Clearly inflation has several definitions running around. Everybody on earth pretty much agree that down is the way to the center. Of course one can define words to mean whatever one wants and that in fact is what people accuse me of when in fact I use a widely held definition (although not the most widely held definition). I also advocate the monetary definition of inflation. It has very nice properties that the CPI definition lacks. For example any movement of the aggregate supply is excluded from being relevant. Also any change in time preference is also excluded. And so on … By focusing on the root cause of the prevailing inflation that has plagued fiat currencies we get to set aside the numerous things that might effect the aggregate price level. At any rate without acceptance of what practical use is there just to make stuff up? More to the point what use is there to have a term like that with no opposite but no opposite? What are you going to do, coin two new words that are the opposite of inflation and deflation? Please dont! No new idea has any acceptance when first presented. I don’t see that stopping you from trying to think thing through. Sure having a small widely recognized vocabulary helps promote smooth online discussion but this discussion has been stuck for so long now. Something is wrong here. I think I found what is wrong and I am trying to suggest how we can fix it. If inflation is related to money supply it is not only pointless but silly to suggest deflation is not related to money supply but rather business risk. Now OK if you do not accept that inflation is a monetary thing then it is acceptable to suggest that deflation is not either, but to seriously propose that inflation and deflation are not opposites goes well beyond silliness to complete absurdity. I do accept that inflation is a monetary thing. I never said that money supply has nothing to do with inflation. My view is this: Money and credit are not the same. Money is acceptable in all transactions and never needs to be returned. Credit is acceptable in only some transactions and leaves a two sided paper trace that demands a future transfer of money to close the deal. When we talk about inflation the distinction is not important but when is comes to deflations in fiat currency regime it becomes all important. The problem is that the monetary authority has full control on the supply of money. As Dr. Bernanke pointed out the US government has the power to increase the supply of money to what ever it heart desires. The transmission of money into the economy is also not that important IMO. If banks are not willing to lend the money to facilitate a monetary expansion a fiscal expansion can always do the job This is what they tried in Japan. But it didn't work. Turns out that just increasing the money supply is not enough to cure deflation. In a fiat currency deflation you can blow out the money supply but still get no growth. So that to me signals that money supply, while it may have a lot to do with how deflations start, is not core to the phenomena. Now if you talk about "money and credit" and are willing to get rid of the first part "money" then we have a lot of common ground. Credit is primarily in the hands of savers and banks. Both are endogenous to the economy. The central bank can increase the money supply but if neither banks nor savers are willing to lend to businesses then the deflation will continue. But unlike money supply credit supply is endogenous and we can ask farther why banks and savers are not willing to lend to business? The answer must be stated in term of the perceived risk/reward ratio of doing business and the alternative risk/reward of a safe heaven investment. Now if you what to call deflation a contraction of credit that is almost fine with me. Whet happens if the government decides it can lend straight to businesses by itself? Doesn't that increase the supply of credit? It does. Now everything hinges on whether such a measure would work. I think it won't work. At the very least you wouldn't be able to go back to a market economy without risking deflation again. So that leaves the risk assessment of lenders as the main cause for now. I think this is a good place to stop. Risk assessment is an expectation and expectations are tricky. It is also is quite easily measured as the spread between government bonds and business loans. But only to get a glimpse of where this expectation is coming from we can argue that the economy only provides some potential for profits and the amount of potential profit versus the amount of outstanding debt is critical for establishing the risk/reward of any diversified loan portfolio. Some people have proposed there is deflation is some things and inflation in others, and that is possible if one does not accept that inflation and deflation are monetary phenomena but related to prices of goods and services. But for any particular good or service it is impossible to have both inflation and deflation at the same time. For inflation let's stick with the monetary definition. Under the monetary definition there is no such thing as deflation in some things and inflation in others. There is only what happens to the money supply. Every good in the market has a price of its own which moves because of the particular supply and demand for that good. Same applies to my definition of deflation. There is only one measure of deflation: implied business risk. Goods still have their prices. Perhaps you are attempting to clear up the inflation/deflation debate but all you have done is sling more mud in the air. The idea that inflation equates to the CPI but deflation equates to business risk is therefore complete total nonsense. I never meant to argue that inflation equates to the CPI. Quite on the contrary I am basing myself on the clarity of thought that one gets when one uses the monetary definition of inflation. Unfortunately one can not get the same clarity of thought by using the monetary definition of deflation. This is what I try to correct. Regards, YanivBA.