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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Raining on the Inflation Parade

Economics / Deflation Sep 24, 2010 - 12:07 PM GMT

By: Seth_Barani


The major components of the dollar index are Euro, Yen and Pound. If Euro and Pound are expected to struggle from sovereign debt crises and Yen to be kept weak by BOJ intervention, why will dollar index fall? Predictions of a weak $DXY (under 70) seem to be built on shaky grounds. The present formula to calculate the dollar index is a very poor representation of dollar's purchasing power, since it does not take into account prices of asset-vehicles beyond a few forex currencies some of which are also manipulated by central banks. It is our belief that dollar index does not show the true nature of inflation/deflation.

Answering a single question would enlighten us about inflation/deflation.

Prices of which items are increasing/decreasing on an annual basis for the past few years?


---Gold and fellow metals... prices are going up.
---Everything else....prices are coming down to earth (see references).

If you accept an explanation that gold prices are speculatively driven, then the economy is in a deflationary path. Oil prices fell nearly 50% in five years from its peak. Natural gas prices fell from $12 to $4. Housing indicator is in a free fall after a brief interruption from stimulus.

Even the manufacturing activity in China, the major supplier of retail goods in US, is undergoing a slow down. Goldman Sachs, BNP Paribas and others have cut growth forecasts for China by more than 1% which further points to reduced consumption of fuel and raw materials. Some improved manufacturing was reported at Germany but it remains to be seen whether it is real on an annualized basis.

If ever a tiny indicator of inflation was found, Helicopter Ben wouldn't be talking about QE2 and "unusually uncertain" economic times. Instead, he will be blowing a trumpet of success before Congress. A few months of M2 (money supply) expansion claim by the Federal Reserve might be a red herring. It could include refinancing of mortgage obligations. In fact, Freddie Mac data from the office of Chief Economist (see reference) show that while only 49% of 30 year fixed rate mortgages were refinanced in 2002, nearly 83% of 30 year fixed rate mortgages refinanced in year 2009. Therefore, much of the recent M2 expansion ($400 billion, see reference) comes from a short circuit between the banks and the mortgage borrowers but no money has gone into economic activity.

Therefore, based on the above factors, we argue that deflation is the better descriptor of the present state of US economy. And it won't be long before the speculators took profit in gold (presently at $1298) and silver (at $21.40) sending them crashing to ground. The question unanswered so far is, what would one do, holding on to the greenbacks after selling gold/silver? Where is the next bubble? Certainly won't be Treasury bills. There is little difference between Treasury bills and dollar bills except for liquidity purposes. Both are IOUs. Both fetch similar interests (esp if you plug in the dollars in FDIC insured deposits). We believe the money might move into emerging markets and developing countries. India may be a large beneficiary of capital inflows. USDINR (presently at 46.10) might be a good short now as rupee could strengthen.


Food Prices -

Housing Prices -

Oil Prices -

Coal and Natural gas Prices -

Wheat Prices -

Federal Reserve data on M2:

Freddie Mac data on annualized refinance data:

    Author Seth Barani is a PhD in physics and is a freelance capital market researcher and trader. He can be reached at

    © 2010 Copyright Seth Barani - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


24 Sep 10, 15:32

First you need to understand what inflation is as clearly you don't!

25 Sep 10, 03:16
funny guesstimations

Is there any sober person who really believes deflation in a fiat money environment? In the years between 1930-1933 US was in a gold standard. There was no FDIC and banks were quite unregulated in the preceding 1920s. So it was very natural for money supply to contract. Today we have FDIC, no metal standard and an overly irresponsible banking system which makes deflation impossible. I think the only chance for US to get out of the crisis without abandoning existing monetary system is TOTAL CONTROL and EXPLOITATION of world oil reserves (passivizing Saudi Arabia, Iran, Mexico, UAE etc.), meaning WAR ECONOMY. If we look at the inflation adjusted DOW index between 1929-1939 and 2000-2010, they look very very similar. What comes after 1939?

Seth Barani
25 Sep 10, 04:20
inflation/ thank you!

Criticism of my reports is always welcome with a big smile :-) Thank you. From my understand inflation is gauged by increasing prices (aka reduced purchasing power of dollar). I do not use the faked CPI and other surveyed and doctored data put up by the government, especially when they are close to Zero.

Is there another definition of inflation that you would like to use?

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