Comments on: Inflation – not Deflation – is the Threat, Now Here’s What to do About it

By: Big Jump in Food Prices the Latest Suggestion That Inflation is Much Higher Than the Government Says

Wed, 21 Jan 2009 14:11:44 +0000

[...] Money Morning Market Commentary: Inflation – not Deflation – is the Threat, Now Here’s What to do About it. [...]

By: Greg

Greg — Wed, 24 Dec 2008 04:39:41 +0000

The notion of too little money chasing too many goods, classic deflation, tells us what happens after we are already in the ditch. Whoever wrote this article needs to wake up and look at what’s happening. People are afraid to spend money. Less money gets spent, leading corporations to cut back, which leads to less money being spent. When does it tip from a normal recessionary cycle to deflation? That’s what Fed is having a problem with. We are having a complete crisis of confidence. Banks lack confidence to lend. People lack confidence to spend. Look at what happened in Japan. It will 10 years for us to put this behind us.

By: Adam

Adam — Mon, 22 Dec 2008 16:16:48 +0000

James – “Velocity refers to the velocity of circulation, (the number of times a dollar exchanges hands in an economy). It is influenced by the price level (P).”

You have is half right. However it is a two way street. If the velocity of money changes and the supply of money does not change then the price level changes according to the change in the velocity of money.

While the FED is printing money like mad (or so it seems), it does not seem that inflation (for now) is a fear because one would believe that the velocity of money has jumped off a cliff, http://research.stlouisfed.org/fred2/series/MULT (note: this is M1 multiplier, which should correlate fairly well with the velocity of money).

By: Inflation – not Deflation – is the Threat, Now Here’s What to do About it | Geiger Index - Keith Fitz-Gerald

Thu, 18 Dec 2008 18:16:44 +0000

[...] Keith Fitz-Gerald Editor, Griger Index Investment Director Money Morning Investment News/The Money Map [...]

By: Jutia Group - Market Jitters & Political Critters

Jutia Group - Market Jitters & Political Critters — Tue, 16 Dec 2008 16:18:41 +0000

[...] future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and [...]

By: Five Ways to Profit from the New Year Rebound in Commodity Prices

Five Ways to Profit from the New Year Rebound in Commodity Prices — Tue, 16 Dec 2008 10:31:25 +0000

[...] future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and [...]

By: Investors May Be Too Optimistic About Consumer Recovery

Investors May Be Too Optimistic About Consumer Recovery — Sun, 14 Dec 2008 10:03:53 +0000

[...] Inflation – not Deflation – is the Threat, Now Here’s What to do About it (Money Morning, 12/8/08) [...]

By: James MacInnis

James MacInnis — Wed, 10 Dec 2008 19:38:22 +0000

Velocity refers to the velocity of circulation, (the number of times a dollar exchanges hands in an economy). It is influenced by the price level (P). The equation states that Y or (GDP) equals the Quantity of money (M) multipled by the velocity of circulation (MV=PY).

If the quantity of money(M) is $300 Billion and the velocity of money (V) is 5, GDP or MV equals $1.5 trillion since 5 x $300 billion = $1.5 trillion. Therefore GDP or (Y)= $1.5 trillion.

Where the money supply is increased or decreased the velocity of circulation is influenced by the the price level (P).
If increases in the quantity of money (M) are not accompanied by increases in production, prices rise because too much paper is chasing too few goods (Demand pull or classic inflation). However where increases in the money supply are in response to increases in productivity, in the short run, real wealth increases without acompanying inflation.
However, in the long run, as a result of continuing increases in real wealth and productivity along with increases in the money supply, competition for labor places upward pressure on wages and prices leading to cost push inflation.
A wage, price and income policy as opposed to monetary policy would work to control cost push inflation but it is politically unpopular, therefore moneytary policy used and this is accompanied by recessions. In conclusion, classic inflation ( too many dollars chasing too few goods) can only be controlled by monetary policy.

By: James MacInnis

James MacInnis — Mon, 08 Dec 2008 23:36:22 +0000

The metaphore, you can pull a brick across a table with a piece of string but you cannot push it in the opposite direction is quite true. Increasing the money supply and lowering interest rates is not going to entice people to borrow or purchase goods and services they cannot afford.

In spite of the fact that there is more money then ever before, the global economy is slowing. Much of the money is counterfit because it is not backed up by productivity.
Deflation is due to a decline in agregate demand. As demand falls producers are forced to lower prices. If this continues prices will fall to where it is not economical to produce and deflation places downward pressure on resource based economies as well. ( The collapse of oil prices is reeking havoc on the Soviet union). As the global economy rachets downward and inventories get used up, the shortage of goods will no doubt lead to inflation.

This is an international global problem and it will take international cooperation to deal with it.

By: Marc Abramsky

Marc Abramsky — Mon, 08 Dec 2008 18:47:35 +0000

Well Meltzer has a point. However so does every other pundit who claims deflation is not a long term threat. Yes, inflation will be a short term factor and in truth “some” of the money will find it’s way into the market. Notice I quote “some” money. Meltzer needs to refresh himself on what “debt deflation is”. The fact he’s an economist (which means he’s and academic) tells me everything I need to know. He bases his claims on traditional ways that money supply has worked on economies. You print money and prices go up right? Wrong.
I wager a bet he wasn’t around during the great depression to see that money printing had no effect on changing the course of “debt deflation” which is not to be confused with deflation by itself. It is not necessarily a bad thing to have prices for goods more affordable. However when pricing falls as a result of deleverage and bad debt, this on the other hand is not good. Meltzer would know that in deflation alone when a price falls to a specified level you will find a willing buyer who believes that price to be a deal. However when you are bankrupt you don’t have cash to buy the item even if it were a deal and low and behold you can’t get credit to subsidize your purchase either. What happens next? Prices continue to fall as supply and demand have very little correlation when debt is being realed in. In essence it’s a balance sheet problem isn’t it? Not a supply and demand problem or a money printing solution. Fear and greed move the markets. These emtions are directly related to why people buy anything. They are also the reasons why markets rarely if ever behave rationally. It is why they are not predictable.
How often are economists right about any market timing bottom or high? I don’t think you need me to state the answer. I rest my case.

Cheers.

Marc Abramsky