Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Is it Deflation yet, or is Hyperinflation on the way?

Economics / Inflation Jan 20, 2009 - 02:04 PM GMT

By: Joseph_Toronto

Economics Best Financial Markets Analysis ArticleLet's take a short detour to make sure we understand what inflation and deflation are. Milton Friedman, the father of the monetarist school of economics said that inflation is always and everywhere a monetary phenomenon. This is usually explained to the layman as “too much money chasing too few goods.”


Inflation is generally regarded as a rise in the price level of goods and services in the economy. The term also refers to increases in the money supply. Inflation can also be described as a decline in the real value of money—a loss of purchasing power in money. In these circumstances, consumers have an aversion to holding cash without earning interest equal to or greater than the loss of purchasing power. Hyper-inflation is the result of a total loss of confidence in the money in circulation and no one will hold the currency for any length of time for any reason. The velocity factor of money explodes the money in circulation and prices skyrocket.

Deflation on the other hand is a condition correlated to a shrinking money supply which if it persists induces consumers to hoard cash and cease expenditures altogether because they have a sure expectation that prices will soon be lower. When one hoards cash, whether in a mattress or in a bank account, the money in circulation collapses, prices fall, and people hoard more cash as it's scarcity value continues to increase it's purchasing power.

You should be able to see that inflation and deflation are not necessarily monetary phenomena only, but can be caused and exacerbated by human expectations. Milton Friedman's statement is relevant only when employing economists favorite escape clause, “all other things being equal” including the assumption of static human expectations.

Economist Gerard Jackson explains deflation this way: http://www.brookesnews.com/091901obamarecession.html

“Deflation occurs where the absolute quantity of money shrinks. This invariably happened when there was a run on the banks. When depositors withdrew their money a reverse multiplier set in and a rapid monetary contraction occurred bringing a recession in tow. The result was that prices had to fall if the number of transactions was not to fall. Of course, true deflations are always accompanied by depressions because what is contracting is not notes or coins, i.e., cash, but fictitious bank deposits, the product of credit expansion produced by a fractional reserve banking system. This is where we get our reverse multiplier.

There is no doubt that the money supply is collapsing ( http://joesinvestoblog.com/?p=292) as money evaporates with each and every defaulting mortgage, bad loan and bank loss. The rapidity and ferocity of the collapse together with the futility of the Fed's massive new lending programs, lends one to believe that we are facing a liquidity trap tantamount to the Fed's “pushing on a string”. A liquidity trap occurs when even though interest rates have fallen to zero, economic uncertainty and fear of default is so high among lenders and borrowers, that no one can be induced to lend or borrow in order to reflate the money supply. This is evident in the Fed's expansion of the monetary base by nearly a TRILLION dollars which did little more than expand bank reserves by an equal amount. It tells us that none of the Fed's new money is being lent out. It's sitting in bank's reserve accounts.

So where are we now?

Are we to experience Depression era deflation for the first time in a century or will the soon to be enacted governmental fiscal stimulus together with the central banks attempts to massively reflate the money supply result in hyper-inflation?

It appears that in this circumstance where even though commodity prices are rapidly falling and consumer prices are dipping not quite so dramatically, that deflation is a risk. We have no way of knowing whether this is becoming entrenched in expectations which have previously been drenched in decades of inflation. What we do know is that the Fed will do everything in its power to avert deflation. Why? Because the proverbial liquidity trap renders the Fed's powerful monetary policy levers utterly ineffective and obsolete, just as in the Great Depression whereby economic growth declined or stagnated for over a decade despite the best efforts of the Fed. Deflation reduces the all powerful central bank to a mere bystander in an economic catastrophe.

If the lending and borrowing tide ever turns, and it will, the Fed will be faced with the unenviable task of mopping up all of that excess cash before hyperinflation sets in. They will be forced to sell all of those assets and bonds they have been massively buying forcing interest rates substantially higher thereby running the risk of truncating an incipient economic recovery. It's quite a tightrope they will have to walk if successful in averting deflation. Recent and ancient history of central banking effectiveness in managing the money supply under sometimes erratic human behavior and expectations indicates that although the Fed may eventually be successful, or not, it will be very very messy getting there

Very Best Regards,

Joseph Toronto

http://joesinvestoblog.com

Joseph Toronto, has managed stock and bond portfolios for 26 years for some of the largest institutions in the west. He began in 1982 as a portfolio manager and analyst for the LDS Church Investment Trusts. In moving to the Trust Division of West One Bank he became senior investment officer and managed assets in excess of $100 million. Later, as the senior portfolio manager of Pacific American Investors, Inc. he managed stock and bond portfolios for high net-worth individuals nationwide. In 1993, Mr. Toronto founded Affiliated Investment Advisors, Inc., as a registered investment advisor for serious investors seeking professional management for superior safety and returns. Mr. Toronto is a Chartered Financial Analyst and is a member of the Salt Lake City Chapter of the Financial Analysts Society and the Association for Investment Management and Research. He has a Master's degree in investment securities and a B.A. degree with a dual major in finance and management.

Currently, Affiliated Investment Advisors, Inc. manages investment portfolios for retirement plans, profit sharing plans, individuals, IRA's and other trusts.  We believe Affiliated offers professional portfolio management with superior investment returns while steadfastly safeguarding and protecting your capital. As a registered Investment Advisor, Affiliated's portfolio management services are “fee only” and takes no commissions or performance incentive.  It is not a stock broker or financial planner and does not sell any investment or insurance fund or product. joe@aiadvisors.com

© 2009 Copyright Joseph Toronto - 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 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules