Thread: Scribbler's Account Talk

Sure.

Inflation is the expansion of money and credit. Deflation is the contraction of money and credit. Many folks see the movement of prices, and infer that is the inflation or deflation -- but they are the effect of deflation and inflation.

Very quick cliff notes version:
In an inflationary environment, credit and money supply are expanding, so there is a natural tendency for prices to continue to go up, because with the amount of money and credit is growing slightly faster (hopefully) than the amount of goods. So, there is an incentive for people to buy things now -- because if purchases are postponed, the price will go up in the future. Increasing prices means that corporate revenue lines are stable, since they can count on people wanting to make the purchase now.

Deflation is a much different animal -- because the contraction in money and credit leads to people putting off purchases. As Dennis Gartman once put it in a missive -- how many suits will you sell if you put up a sign that says "suits on sale next week"? You won't sell any, because people would rather wait to purchase. Once a deflationary phenomena sets in -- people are actually rewarded for delaying purchases, and so they don't make them.. Corporate revenue lines decline, forcing them to cut prices, which can start a deflationary spiral... People expect lower prices, then they get them, so they wait longer for even cheaper prices -- and commerce altogether stops. Deflation is very, very destructive.

Most of the policies we have are trying to target deflationary pressures and encourage present day consumption. Buy a house now to get the housing tax credit. Buy a car now to get clunker credit. Even the Fed's agency mortgage purchase program is designed to get people to take advantage of the lower interest rates. Some of them are effective -- but they are short term stop gap measures. The issue real money supply and credit... and credit is contracting at a pretty good pace -- not only because of credit tightening by the banks, but also because of a lack of demand for credit.

Best,

Ken