There is a thin line between inflation and deflation, but I’m not sure you captured it.

The threat of deflation in INCOMES looms in the months ahead. The dynamic is unemployment leads to falling incomes leads to falling demand/prices leads to unemployment. Japan never experienced this self-reinforcing dynamic — its CPI was STABLE at a 1% decline. We, on the other hand, face instability and higher deflation rates.

So what about the “thin line”? If and when the Fed recognizes this dynamic, they will act. You say they cannot create inflation without causing people to “buy more”. This is not true. In Latin America, central banks consistently created inflation not by causing people to “buy more”, but by causing them to “buy forward”. They did this by credibly promising to reduce the value of money in the future, so people went out and bought what they could in the present. You don’t need more “real” demand in this scenario, just a credible Central Bank threat. Does the Fed have this credibility? I believe so.

Inflation and deflation are simply the two available outcomes to a debt recession. They are separated by policy, not by the state of the real economy.”


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: