Deflationary forces at work : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Thought I'd share my feelings about somethin' The reason we have seen such a lack of inflation in the last 5-6 years or more, is at least two-fold... 1st....the U.S. government owes 6+ trillion dollars. The interest rates cannot go up! If they do, the federal budget skyrockets, and all available money for capital spending gets used up. As the situation worsens, it snowballs into a depression. (I have kept this extremely simple...)

2nd....We are at our peak level of consumer debt. The only reason things are "ok" is because of the information age. The expansion of the economy due to money pouring in from abroad. When Japan rebounds, it may change. Any catastrophe, such as a long overdue earthquake in Tokyo, or Y2K, will burst the bubble. When that happens, money and cash will be king, and paper assets will become paper. Gold will be a nice thing as some point in the future...feel lucky? But inlation will not storm back. On the contrary, as has happened in Japan...assets such as stock market valuations and real estate...wil devalue. hence...DEFLATION....and then Depression....10 years or or minus...problem with that, though, is that people are wierd nowadays....they will take...not work for it...

-- rick shade (, May 11, 1999



And, CPI has been increasing at only a modest rate, so that's why people "think" there's not much inflation.

Money supply has been increasing substantially -- that is inflation. In addition to foreign money coming in. A good deal of that "money" has been going into the stock market, fueling the rise. This keeps pressure off the producer/consumer price levels, even though inflation is substantial.

One can construct all kinds of inflationary and deflationary scenarios. What is and will be real? Precious metals, large jewels (1 carat plus, but not diamonds), technology independent consumer and manufacturing goods (tools, drill bits, steel shapes, auto tire valves...)

BTW, there are FOUR economic scenarios (in addition to stability):
Inflationary boom
Inflationary recession/depression
Deflationary boom
Deflationary recession

-- A (, May 12, 1999.

Help me out.

I understand the problem with runaway inflation. I rmember well the inflation of the Carter administration.

What's the problem with deflation? If prices gradually sunk to the level of 1960, wouldn't that be a good thing?

Of course, I would rather something cost a quarter when I've got a quarter than have it cost a dime when I only have a nickel.

But by and large, lower prices sounds attractive to me. Why should I be concerned?

-- GA Russell (, May 12, 1999.


If deflation just happened for no particular reason, then it might be a good thing. Usually, though, it happens when economic output is shrinking and people are losing jobs.

Another reason for concern is that deflation tends to make people want to delay purchases. Why buy today when what you want to buy will be cheaper three months from now? And when prices go down, profit margins shrink and businesses start to lay off workers to keep costs down and profits up.

The most commonly held explanation for current deflationary trends is that with much of the world in recession, world demand has dropped. Prices are being cut so that foreign goods will still have at least a few buyers. Cheap foreign goods are causing layoffs in American manufacturing, but these U.S. layoffs are being balanced out (for the time being) by gains in retail employment here.

The stock market has recently made many Americans feel wealthy, and they don't mind being in debt at record levels. The U.S. savings rate is currently negative.

-- Kevin (, May 12, 1999.

GA: GA: "A" sums inflation very well in the post above yours. Available purchasing power drives most everything related to price. The more money in the audience the better the auctioneer will do. As for deflation, your words "runaway" and "gradually" are operative. A little is fine (as with inflaton) but if your employer can't sell the product at a profit guess who gets a wage cut. Guess who's plant gets closed. A downward spiral is just as bad as an upward one. Deflation is only a bargain to those who don't have to earn.

-- Carlos (, May 12, 1999.

Rick, this is truly surreal. I've been pondering the subject of a serious Y2K deflation and the appropriate financial strategy to implement for over a year now. After recently finding this web-site and spending some time reading through various threads, I thought that I would be completely alone in my opinion that the world is most likely headed for a severe deflationary episode, rather than inflation. When I sat down at my computer to finally say something to try to get some input on this from others, there was your post.

I agree with what you said. Strong evidence that deflationary forces are already at work can be found by looking at the CRB (commodity research bureau) index, which has been plummeting for over a year now, and at the price of gold, which has been dropping since early 1996. Although prices will probably increase for certain commodities and products, such as gasoline and food, the overall value of assets in the economy will probably go down. (Any GI's out there want to buy some Yahoo! stock? How about some real estate in or near any major city in the world?)

There is a very interesting discussion of deflation in Ch. 11 of "The Great Reckoning" by Davidson and Rees-Mogg. In it, they list nine danger signs of impending deflation (this was written in 1993):

1) Rising percentage of debt to nominal GDP. 2) A record of extraordinarily high returns in investments made a decade or more ago. 3) Debt compounding faster than income. Toward the end, people begin to borrow with abandon. 4) A falling ratio of M-2 to the monetary base. 5) A falling ratio of money supply to debt. 6) M-3 more than twelve times greater than the treasury's stock of monetary gold. 7) Overextended collateral (the ratio of financial assets to tangible assets in an economy). 8) Foreign debt defaults. 9) Financial scandals.

I'm not an economist, and I'm not sure about #4 or #6, but all of the other conditions listed seem to be extant now. (Basically, they just seem to be describing a credit bubble).

Furthermore, I've always heard the classic definition of inflation as "Too many dollars chasing too few goods." But what happens next year? What happens if a substantial amount of those digital dollars whizzing around the planet at the speed of light come to a grinding halt or disappear altogether? What if there are problems with the check clearing system, which processes $2 trillion in transactions DAILY? These conditions will reduce the number of "dollars" in the ecomomy.

Additionly, people who lose their jobs will have to sell off their portfolios to pay their debts (for a while) and purchase necessities. This will further reduce the number of "dollars" in the economy, since most people think that the number at the bottom of their quarterly investment statement is how many dollars they have when deciding whether or not to buy a new SUV or some such thing.

On the other side of the equation, if things get bad, people will want to sell everything they own that isn't a necessity (like that new gas guzzling SUV - their "goods") to try to raise cash for food. And all that crappy consumer junk that nobody really needs (more "goods") will also be for sale, as well as their rapidly declining investment portfolios (as mentioned above), and the houses they can no longer afford to make payments on.

What this all means is that we will probably have too few dollars chasing too many goods, causing falling prices, which is deflation.

Here's where I'm going with all of this: Q: As an investment vehicle, what is gold? A: An INflation hedge. If we have an inflationary environment (as in the 70's), the price of gold (in dollars) goes up.

Q: If we have DEflation, what happens to the price of gold (in dollars)? A: The price of gold goes down.

Q: Why does a 1 oz. US Gold Eagle coin say $50 on the front of it?

-- Clyde (, May 12, 1999.

The person who said money is going "in to the stock market" is just plain wrong. For every buyer of stock there is a seller. The buyer has handed over money for a piece of paper and some legal rights, the seller receives the money. Therefore there is no less money around after a purchase of stock than before, it's just someone else's money.

The serious worry ought to be how much of the rise in stockmarket valuations is supported by borrowed money? Ie Joe Public gets a loan for say $10K, invests it in the stockmarket, sees it's worth $20K a year later, feels $10K richer, goes on a spending spreee ... fine, just as long as he sells that stock in time! Those who don't will suddenly discover that they have stock worth less than $10K (probably much less!) and a debt to repay. So they tighten their belts, the economy contracts, companies go bust, Joe loses his job, can't pay the interest any more, gets bankrupted, loses everything.

This was the 1930s and could easily be the 00s as well. The chap who was all-cash when the market collapsed did quite nicely, though!

-- Nigel Arnot (, May 12, 1999.

I must say that one of the most amazing books I've read is the book mentioned above, "The Great Reckoning." I read the 1st edition when it came out, and darn near every prediction is coming true. A deflationary spiral is just like that described above, it is happening in Japan now, has gone on there almost ten years. In such a spiral, everyone delays buying any non-essential good, and this seriously depresses the business environment. In addition, I do not believe any economist really has a clue as to how to reverse a deflationary spiral. With an inflationary spiral, just raise interest rates and shrink the rate of growth of the money supply. But you cannot force folks to buy stuff just by dropping interest rates! You can only prevent them from buying by raising rates! Dropping rates is just what Japan has done for years, with little result. Economists call this "pushing on a string."

In the 1930's for a while the real interest rate on T-bills was negative. Folks actually paid the US Treasury to hold their $ for them. Most everyone alive in the USA today has never experienced a serious deflationary spiral, and thus have a hard time coming to grips with what one entails. Bad bad JuJu, and not easily reversible. Most folks now believe that it was only WWII that really ended the Great Depression.

-- Tennessean (, May 12, 1999.

Gold In A Deflationary Economy - XIII - May 3 - Ascani

-- Alan (, May 12, 1999.

Gold, Inflation and the Internet

"I don't know of any subject that is more universally misunderstood and misreported than inflation. Virtually every day we see the market commentators and economists on CNBC marveling at how the US economy continues to show strong growth with minimal signs of inflation. The current situation can be likened to an elephant hiding behind a matchstick, where inflation is the elephant and the matchstick is the CPI. For some reason most financial reporters seem incapable of seeing the elephant. . . .

"Since the link between gold and the US dollar was severed in 1971, we have not seen deflation in this world (or, as far as I know, any other world). Based on the current actions of central banks, and assuming no return to sound money (money convertible into gold or silver), the chances of anything greater than a deflationary blip occurring in the future are somewhere between nil and zero.

-- Alan (, May 12, 1999.

"Gold increases in value during a deflationary environment."

That statement is simply incorrect. Gold (and commodities generally) increase in nominal value in a period of inflation. (e.g., priced at a $100 today, and $101 tomorrow). This is true of all commodities (i.e., you could buy a car today for $1,000 and sell it tomorrow for $1,100 if you wanted to capture inflation, but the market for cars isn't as liquid as the market for gold).

Because of these charactoristics, precious metals are often a hedge investment for inflation for what financial analysts call "shotguns and canned goods" investors.

Now, in a deflationary world, the reverse is true. The price of gold, like the price of goods generally, goes down.

This post is intended for informational purposes only and is not intended as investment advice under the Investment Advisors Act.

-- Jeff Donohue (, May 12, 1999.

"Since the link between gold and the US dollar was severed in 1971, we have not seen deflation in this world (or, as far as I know, any other world). Based on the current actions of central banks, and assuming no return to sound money (money convertible into gold or silver), the chances of anything greater than a deflationary blip occurring in the future are somewhere between nil and zero."

Ahem, look to the current world. In real (as opposed to nominal) terms, we ARE in a deflationary economy.

-- Jeff Donohue (, May 12, 1999.


I'm a GI who IS planning to buy some urban real estate in the near future. My plan is to buy Manhattan for $24 in gold eagles in 2001.

-- Prometheus (, May 12, 1999.

Question for Jeff,

The statement was "gold increases in value during deflation."

How is value measured? Is it by comparing it to dollars, or by how much in the way of goods and services it can buy?

As a store-of-value, gold (and silver, etc.) seems okay, whether there's inflation or deflation. But non-perishable food, property and other hard assets are also a store-of-value (minus depreciation or wear and tear).

I guess my question comes down to: today an ounce of gold will buy 100 loaves of bread -- will it buy more or less than 100 loaves of bread in a deflation?

-- Dean -- from (almost) Duh Moines (, May 12, 1999.

Couple of questions:

1. If we are anticipating a deflationary period with "few dollars chasing many goods" then why are GI's buying up food & sundries now instead of later when those goods would be less expensive in a deflationary cycle. This forum & other Y2K GI's have said buy, buy, buy now because later will be too late. If foreign countries have a problem with production or international transportation is slower, more expensive due to closing of Panama Canal, price of oil,etc. would not that drive up the price of goods we see in our stores.

2. If gasoline goes up in price, i.e. oil, then that drives production and transportation of many goods. That has an inflationary effect.

3. Regarding...the comment that we're in a deflationary period now ... look around. I look around & I see real estate that has increased in value, I see health care prices, insurance premiums rising, collectibles & antiques rising, restaurant prices increasing. The only thing I can see going done in price is computer goods and most times the price point stays close to the same level but you get more for your money.

4. Consider the variable of war which I think has an inflationary effect on the economy. Look at the current state of the world and seems more instable for us since the 1960's Cuban missile crisis.

5. Who said that the chances for deflation/inflation are 50/50. Basically no one knows...too many variables. Also it depends in what part of the country you live in. During the 70's & early 80's most of this country was hurting...NYC & other Northern cities defaulting on bonds, California real estate mkt. collapsed, etc. Alot of people moved to Texas, Okla, CO, etc. while oil boomed and the economy & populations exploded until oil prices dropped & banks closed in the mid to late 80's. Has oil prices dropped the rest of the country recovered and the Central SW tried to diversify or went under.

IMHO, it won't be a blanket deflation or inflation. It will be more regional occurences. Cities might not be a great choice for real estate but rural locations might see an increase in demand. Areas with problems with electricity or nuclear or chemical plants would see a decline but parts of Texas & Okla. might see a resurgence if their grid which is separate from the Western & Eastern grids.

Please comment.

-- texan (?, May 12, 1999.

Dean said that I said "gold increases in value during deflation."

As you can see, I did not say that. I said "Gold increases in NOMINAL value during inflation." Its REAL value may go up, down, or sideways.

This means that, in dollar terms, the price of gold goes up in periods of inflation (e.g. [using false numbers], it is $100 today, $110 a week from now, $120 two weeks from now in a period of inflation). This shouldn't surprise anyone. The price of toasters (and cars, and elephants, and beer) does as well during a period of inflation (i.e., a toaster costs $60 this week, $70 next week, and so on).

Now, if you have two assets which each are impacted by inflation (or deflation), in real terms (relative to one another) they will buy the same number of each other. Thus, if you have $100 of gold which buys 50 pounds of bread (which tells us that bread costs $2.00 per pound at that time), when the nominal value of your gold goes to $200 (in an inflationary world), it will still buy 50 pounds of bread (because the cost of bread will be similarly impacted by inflation and will increase to $4.00 per pound). Having a liquid asset in an inflationary world that tracks with inflation is a way to perserve wealth.

Now, there are two variables which impact this analysis. First, inflation (and deflation) does not impact all assets equally. However, there is no clear indication that it impacts gold less (or more) on average.

Second, there is demand and supply. This could be impacted by, for example, the sudden need for gold in industry (as part of circuits or something), which would on average increase prices. Or it could be impacted by a growing demand for gold as a perceived "safe investment" for y2k. This demand hasn't materialized, or maybe hasn't materialized yet. Note, however, that the perception of gold as a "safe investment" has been on a decline for 10 or so years: again, not because of any change in the nature of gold (gold is gold) but due to the demonstration of other "safe" investments outpacing gold. Even if investors view Y2k as a crisis (rightly or wrongly), they may not necessarily buy gold (in which case you're left with the asset as it was absent Y2k, which hasn't had a great track record lately).

(This is an interesting peice of y2k psychology: supporters of gold [those who bought it before now] WANT people to panic and buy into gold, or else its value will continue on its current trend).

Or it could be impacted by something like Russia selling its gold (or the U.K. selling more of its gold), which would on average decrease demand for gold.

-- Jeff Donohue (, May 12, 1999.


Though the CRB index has been declining, the West is experiencing disinflation (declining inflation). This is NOT deflation (yet). And most developing nations are actually experiencing inflation in their local currency as their raw material exports bring less and less on the international market and they are forced to devalue their currencies to stay competitive with other exporters. Gold may (and obviously can) decline during periods of disinflation. But disinflation is not to be confused with deflation, which the West (including Japan) have yet to see during the post-war period.

Can you name any nation that recently has had a negative cpi for, say, more than a quarter or two? The G7 central banks absolutely cannot permit true deflation to take hold and will do everything they can to prevent it, including pumping money supply growth far in excess of GDP -- exactly what Japan, the US, and Europe are doing, right now. Doing this staves off deflation. It also creates asset bubbles, misallocates capital, and sows the seeds for future debt default and/or inflation.

Gold is a commodity. However, gold is also the "money of last resort". Everyone knows this, and, in spite of their current protestations, so do the central banks. Global deflation will cripple money as we have come to (only recently) know it. For these reasons, gold serves as a store of value in periods of both in both rising inflation and true deflation.

-- Nathan (, May 12, 1999.

Sorry, Nathan, I misspoke. I shouldn't have said "we" are in a deflationary economy. We are in a strongly disinflating economy. Continental Europe, on the other hand, has an inflation rate which is slightly below zero. That is deflation in my book.

Regarding gold, you posted "gold is also the 'money of last resort'. Everyone knows this, and, in spite of their current protestations, so do the central banks." I disagree with that assertion, and would argue that its simply mercantalist thinking. The money of last resort is whatever has demand. Gold may have had a historical purpose, but it has since been eclipsed.

Of course, the real bet with be with your dollars, wouldn't it? If you believe that, I'm sure you are increasing your gold holdings. I am not (I'd short sell, if anything). I guess, like everything else on this usenet group, we'll see soon enough, now won't we!

-- Jeff Donohue (, May 12, 1999.

Also, Nathan, if gold is the "currency of last resort," why did the Central Bank of the U.K. just sell off its reserves?

-- Jeff Donohue (, May 12, 1999.


Can you post a link showing Europe's slightly negative cpi? Which countries? What are real estate prices generally doing there? How about wages? Service costs? The European markets?

You must understand that the central banks are doing everything in their power to maintain the illusion of stability in the fiat money system they've created and foisted upon the world. So, it is understandable that, after decades of relentless propaganda, one holds the opinion that gold's monetary role has been totally subordinated. It hasn't. Taken in this light, the BOE sales proposal is simply more of the same. What is different is the rising level of desperation accompanying each successive gold sale proposal. If and when the paper system blows up, it will first try to take gold down with it. It will use gold as a last resort tool to maintain the status quo. But it won't succeed, for fiat currency is the antithesis of a gold-based standard.

Then there are sales and there are sales. Will the gold sales actually occur in the quantities proposed according to the schedule proposed? Will physical gold be delivered upon payment, or simply a paper promise of gold for some "future" delivery? Assuming delivery is even possible, in order to bid, what restrictions on delivery, if any, will be required? The BOE might not even have the physical gold it is proposing to sell in its possession. They may have leased it out, either physically or on paper, requiring termination of the lease contracts in order to unencumber the physical gold if and when physical delivery is required.

-- Nathan (, May 12, 1999.

Post a link? No. It was in The Economist several weeks back.

As for your other assertion, Nathan, I suppose we'll see quite soon, won't we?

-- Jeff Donohue (, May 12, 1999.

Soon -- debatable. Sooner or later -- yes.

-- Nathan (, May 12, 1999.

The Great Reckoning scared me to death 5 years ago...let alone now! It is a great book!

-- Moore Dinty moore (, May 12, 1999.

Thanks for a fascinating thread.

-- BigDog (, May 12, 1999.

I'm not trying to suggest by this post that deflation is here and accelerating. But I did just take a look at the wholesale/producer price index over the years and found something noteworthy.

Producer prices in the U.S. were lower in 1997 than they were in 1996, and they were lower in 1998 than they were in 1997. That's two years in a row that the producer price index declined. You have to go back to 1962 and 1963 to find two years in a row when wholesale prices were unchanged, and you have to go all the way back to 1937 and 1938 to find two consecutive years of decline in wholesale prices.

-- Kevin (, May 13, 1999.

Prometheus said: "I'm a GI who IS planning to buy some urban real estate in the near future. My plan is to buy Manhattan for $24 in gold eagles in 2001."

Sorry, Prometheus, I wasn't clear. I too, plan on buying some real- estate in a couple of years for pennies on the dollar. People who were in a position to do that during the great depression did very well for themselves after it was over. My point was, would any GI's want to buy it now, knowing what they do? Your reply confirms my point: that asset values will decline considerably - deflation.

texan asked:

"1. If we are anticipating a deflationary period with "few dollars chasing many goods" then why are GI's buying up food & sundries now instead of later when those goods would be less expensive in a deflationary cycle. "2. If gasoline goes up in price, i.e. oil, then that drives production and transportation of many goods. That has an inflationary effect"

Necessities will go up in price because they will be scarce. You should get what you need now so you don't have to go looking for it later. It's all the other non-essentials that will decline in price.

I also mentioned in my post that I thought prices for certain items, including gas, oil, etc. would go up. I think that the energies are going up in price now because of Y2K induced stockpiling (more demand), and will continue to rise next year because of disruptions in production and distribution (less supply). If there is a severe energy crisis next year, along with a depression, the increased cost of production and distribution of goods will cause the price of necessities to go up, and will cause companies that make consumer junk to go out of business.

But *overall*, I think we'll probably experience deflation. I'm looking at the big picture. . . if you were to add up the total value of all of the assets in the country: equities, real estate, big ticket items, collectibles, etc., and compare it to the total value in a few years, I bet that the value will be a lot lower in a few years. A smart person who has a little extra money left over after taking care of their survival needs should cash out now (into either currency or gold, I'm still trying to decide) and go shopping in a few years (sell high and buy low).

-- Clyde (, May 13, 1999.

Thanks everyone for a fascinating thread - you may be interested in one I've just started - "Tony Blair and the BOE Gold Conspiracy" - actually an amalgam of three related articles.


-- Andy (, May 15, 1999.

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