Sunday, January 13, 2013

Inflation & Deflation - "How It Works"

Just fascinating what utter bull financial commentators can get away with typing week after week

And now for something completely different...  Source 17 Oct 2003

Over the past 800 years there have been four waves of inflation.
Turner, in his usual characteristic way is stating something he read somewhere as fact. In this instance he refers to a theory known as The Great Wave" from David Hackett Fischer  From a review:
"Endowing four waves with a predominant position in price history misses the significance of all sorts of convulsions, big and small, which fall outside their horizon. 
Yet the past 800 years are dominated by sharp, short-run ups and downs, caused by seasons, climate, and monetary convulsions, with later trade cycles adding new dimensions. It is in this sense that Keynes, and most price historians, are right; it is in short and medium patterns, a range from a few months to several years, that most people lived out their lives and understood their fates."
Fischer tries to substantiate his waves by a curious jumble of stories, often irrelevant, anecdotal, and buttressed by observations, which, not to make too fine a point, flutter around the reasoning of a school book. 
A style we believe Turner has taken to like a fish to water..
Thus we read that the "general crisis of the 17th century I was the era of neo-Calvinism - the narrowest, darkest, bleakest, and most pessimistic form of Christianity that has ever been invented, more so even than the theology of Calvin himself", and "the laws of neo-classical economics are unable to explain the price history of the American candy bar in the 20th century".
Turner continues on with his facts of life:
The final wave, the one you have lived your whole life in, is coming to an end now. 
It began in the mid-1890s and may well already be in its dying moments. 
Inflation Asset prices 2001-2011 

Inflation happens when there is too much money chasing too few goods, and that means the price of things  goes up, while the purchasing power of money goes down. 
See above.
Inflation can be made far worse by governments who spend more money than they raise in taxes, creating deficits which have to be financed by selling debt, usually through bonds. All that debt and all those bonds serve to dilute the money supply, also making currency worth less.  
All of us today are conditioned to inflation. Every year we have expected things to cost more; for our houses to go up in value; for our salaries and wages to increase. In fact, virtually all labour agreements in place today have an escalator clause in them for inflation.  
I know of none that have a clause adjusting pay lower when inflation turns into deflation. Big mistake. Inflation is ending now for many reasons. In the short term it’s because powerful economies like those of Japan and the United States have been in decline, creating less demand for products and services. 
It’s also because the technological revolution we are now in has dramatically increased productivity, causing lower input costs for everything from computers to cars to furniture, and therefore lower prices. 
** Lower prices except for food, housing, energy, fuels, clothes, education, medical costs.. etc ad infinitum.
And you can blame globalization, as free trade removes price-hiking trade barriers and makes the world’s economy function better than every before.  Of course, there is also Nine Eleven, SARS and mad cow disease - events which depressed economic activity, reduced demand and spending, and resulted in inventories shooting higher, bringing prices down.  
That’s why a 2003 Ford F150 truck, for example, or a topend Mercedes S500, are far better vehicles than models in earlier years, and yet they cost less money.  
So, deflation is the opposite of inflation. In an extreme form, it can be unbelievably destructive, as happened in the Great Depression of the 1930s. The value of real estate fell so far, so fast that people abandoned houses worth less than the mortgages upon them. Wages and salaries plummeted, and men were happy to find work for $1 a day. The price of everything kept falling, so people stopped spending - because things would be cheaper in a week or a month. 
But this deflation will be different, since the world is a far more controlled place than it used to be, thanks to central bankers and coordinated international fiscal and monetary policy. No, in this wave of deflation, we can actually have a growing economy, since the new technology is allowing productivity to shoot higher.  
Classic stuff. Exponentially increasing credit creation and cheap money from central banks at the time, government statistics figures that show "no inflation" and yet asset prices continually go up in this world of high productivity and deflation.. :)
Also, the absence of inflation means that there’s no reason for interest rates to climb, and cheap money is helping to make everything more affordable - even real estate, which is in the final advance of this cycle. In fact, interest rates are now at a 50-year low, and likely to stay at this level for several years to come. 
Maybe even decades. That’s bad news for people trying to grow their money through fixed income assets like GICs, bonds, savings accounts or Canada Savings Bonds (which now are paying less than the inflation rate). 
Here Turner actually states the fact that he still misses, real inflation higher than stated interest rates is called negative real interest rates, it does not matter what Government figures put out, the Market will react to the perceived truth.
It’s good news for stock markets and investors in them, because falling costs help boost corporate profits.
Here he means hopefully it is good news for stocks, or more precisely, mutual funds
The real danger in this picture, however, is a four-letter word we should all dwell upon: d-e-b-t.  
In times of inflation, debt becomes increasingly easy to repay since earnings are rising, and yet the debt is fixed. In times of deflation, both earnings and asset values decline, but the debt does not.  That means it gets harder and harder to repay. It’s a lesson learned in anguish, seventy years ago. 
Food for thought when you fill out the next mortgage application. 

Garth Turner’s Investment Television airs nationally Sundays, on the Global network.Internet,
If anybody should happen to have any old VHS videos of "Investment TV" lying around, we would dearly love access.


  1. The only prices I care about are food, housing, energy, fuels, clothes, education, medical costs.. etc ad infinitum

  2. well stop it, that's not important.

    always remember.. "There is no evidence of inflation" :)