Great explanation. And I almost guarantee you that most readers of this website, including me, understand your position and agree with it.

My argument is that you and a host of other individuals here, are looking at inflation and deflation from the wrong perspective. As you yourself explain, increase and decrease of money in circulation and increase and decrease of good and services causes prices (who knows which good or service) to fluctuate. I agree with you 100% on this.

In my opinion, that is why for anyone to explain inflation and deflation in terms of price increases and price decreases is almost impossible and it is incorrect.

Why? Well, take the Weiner Republic for instance. While food prices and essentials were rising, the cost to rent plummeted. So what kind of environment was that than? Was it inflationary or deflationary? I think you would agree that it was inflationary, as a huge increase of money (to pay for war) was chasing ever fewer goods. That expansion of money is inflation.

In my opinion looking at prices is incorrect because there are too many variables involves, as you mentioned, productivity, weather, social issues, etc, etc. Bad weather causing oranges to up in prices is NOT inflation.

So what is the correct way, in my view, to see inflation and deflation. I think you have to take a holistic approach and see it from the money supply+credit perspective, NOT from a price perspective. The money has expanded in the last 3 years, but that has been dwarfed by the credit collapse. So in essence, the money supply+credit has contracted. In my opinion, this view is much more simple than trying to measure every single price of all assets and services out there. It cannot be done! The expansion or contraction of money supply+credit does have an effect on prices at certain point.

Danny

It is about the amount of money in circulation against the goods and services being purchased.

In a microcosm, consider a seller with a meal, and two buyers with $1. The meal has intrinsic value (one must eat to live). One could argue that the meal will probably end up costing around a dollar, as the buyers HAVE to eat, and its all they have to offer. Now, add another buyer to the mix, but let him have $2. You now have an increase in currency against a fixed amount of assets. I’ll bet that meal will be somewhere between $1 and $2 (the buyer will be willing to offer more than those limited to $1, but may not be willing to give up everything they have).

The problem is, currency is not the only variable which can fluctuate. The amount of goods and services available can also fluctuate. The ratio of the two will generally describe whether you have inflation or deflation.

So, if the amount of money available drops 2%, but the productivity – the amount of goods and services – drops by 4%, the ratio of money to goods and services to purchase still _increases_ by 2% – inflation.

This is the mechanism though which our current recessionary inflation is happening. You would either need a substantial improvement in productivity without a comparable amount of new money (the beginning of a recovery), or the volume of money to plunge without a corresponding plunge in goods and services being offered, in order to have a deflation. While either could happen, neither are particularly likely in the present environment.

People who are predicting a big hyperinflation in the USA are actually predicting the USA will soon get into A BIG WAR. That seems remote, with Obama in office (but maybe 80% probability with Dick Cheney in office …)

perhaps you are right and we will not get hyperinflation. I was addressing the notion that it is logical to invest in property, for those who do expect hyperinflation. In fact, gold & silver are much better bets, for those having such expectations.

Finally, it is possible to have inflation on life’s essentials, while asset prices deflate. If a currency weakens, import prices go up, notably fuel, and a cycle can take hold. Once cash gets into a cycle of ever weakening, then people try to convert it as soon as they can into hard goods (or hard currency, which today is gold & silver), nobody wants to sit on a fast depreciating asset. This can be the touch-fuse for hyperinflation.

The fed has been blowing bubbles for the last 100 years (and I know you agree), and now that we have reached a plateau, you guys think we will see hyperinflation? Oh boy…

Let me get this straight! I thought inflation came about as a result of an expansion of money and credit (they blow bubbles, right?). But right now, credit is essentially drying up. For an update on credit, go out and ask your friends and see who is getting the mortgage offers they were getting years ago. Now look at how much household wealth (credit) has evaporated. Do you get the picture now? Yes, the fed is printing.. But the credit side of money is contracting at a phenomenal rate and faster than the paper money they are printing. The fed will not be able to catch up with the credit collapse. I don’t believe in looking at prices to determine inflation, but all that removed credit is not chasing goods any longer..

I am not a genius, but it seems that that credit balloon has popped and has a huge hole. And I don’t see how a deflating balloon can be inflated before it deflates entirely. Do you?

Danny

If you are holding on to silver, gold, etc because you think the USD will collapse, you are totally out of touch with reality dude, wake up. You also mention how they “manipulate” the USDX to prop up the dollar but you fail to mention what is going to make “them” stop? This is a ridiculous assumption, you need to start thinking logically here.

If gold goes up, it will not be because the dollar collapses, but again, the only thing you gold bugs know how to do is beat down on the dollar, as the dollar has been inversely moving against gold. Let me say this from a neutral standpoint, as I do not have any gold or dollar positions. Have you not seen the dollar collapse in the last 10 years. I mean, the dollar has lost about half it’s value against the EURO. HALF!!!!!!!!!!!! And you all know that the dollar floats against other currencies, right???

So, what makes you think that other countries are not printing and “monetizing” their debts?? Have they not passed their own stimulus packages.. Have they not had a housing/credit/stock bubbles, mostly worst than ours. You don’t have to be a freaking genius to know that the dollar has already collapsed ahead of all other major currencies. If the dollar is making a move, it will be higher, not lower. And if you are basing your strategy on a sinking dollar, than I suggest you revisit that strategy.

I am not betting against gold at all (I like gold), even though I expect a major pullback, but you guys are buying gold for all the wrong reasons. The stupid thing is that in the long run, gold should do well and you guys will look like geniuses. Just be ready some a nice pullback on gold and the USD rise, which should make you see reality for what it is!

Danny

There is a chronology to a currency collapse, that invalidates your logic regarding houses. Suppose in your expectation of currency collapse, you bought 5 properties at a fixed 6% mortgage rate, thus immuning yourself from seismic interest rate changes. In the event of the expected currency collapse, what will likely happen, is that the currency is unlikely to be destroyed overnight, but implodes in a slow motion whirlpool fashion.

Effectively, this means that your income, which is likely fixed (especially if you are an employee), is suddenly insufficient to meet your daily food, fuel and living expenses. As hyperinflation kicks in, both your salary and savings become increasingly meaningless and you become financially distressed. You would not want to convert your gold to cover todays expenses at $10k per ounce, because next week it will be $11k per ounce and so on. It would be squandering of stored wealth.

Regarding the properties, though your employee income, rental income, mortgages and savings are fixed, your property taxes, insurance and maintenance costs go sky high. You can add a zero, maybe two, to last years total dollar costs, but not to your available funds, which have now disappeared on buying food and such like. How can one pay bills that have increased ten, or a hundred fold, and which must be paid, when income has not moved?

In summary, hyperinflation (even when short) is hell on earth. Even if it is over relatively quickly (2 years?), you have to survive it with your investments intact, and that involves a hell of alot more than buying early, and it is in no way easy money, even if looming hyperinflation is a sure bet.