Monday, April 29, 2013

This is why we will go back into deflation.

When the recession first started a lot of people said we would be exactly like Japan. A lost generation. Of course I never believed this. I would tell myself - the US is nothing like Japan. They have many complicated social issues that impact the economy. Like a low birthrate and an aging population. I mostly still believe this except when it comes to deflation.

You see, I feel inflation and deflation in the US is poorly understood by most people. Myself included. I don't have an education in this stuff. So feel free to correct me. This is just how I see the world based on trying to navigate a world based on manipulation.

Over a year ago I asked the question "How can Japan print so much money and not have inflation?" Here in comments. I think everyone on earth is confused as to why we aren't in massive inflation. In that same post I speculated the only way for this to occur is if the economy never gets better. I believe this now more than ever.

Inflation is too much money chasing to few goods and services. To date - there have not been too few goods and services. Quite obviously there has been too much money printed, but the second half hasn't triggered yet. I believe this is one reason we don't have massive inflation.

Another reason I speculated that inflation might not be likely was because as soon as Japan printed the money - people or companies buried that money in the ground for whatever reason. If that money never enters the monetary stream - no inflation.

It's hard to understand how this works unless you are in a real world market situation like I was recently. I just shaved off two and a half points off my mortgage. This was a lot of money by any ones standards. I could finally buy that truck I've been wanting to for many years. But, an odd thing happens when you actually have the money to do so. You don't. The economy is so terrifying - you hoard the money instead because you feel the market could fall out at any moment. And it isn't like Americans haven't been through a very traumatic event. The psychology of homeowners I believe has changed. If you managed to keep your shit - you now feel like you need a much bigger buffer. Ta da... no inflation.

I know lots of people will tell me there is in fact hidden inflation. Maybe so. Many times these instances can be explained as situational inflation. I don't dispute there is inflation in areas. I still believe we are headed back into deflation despite my belief earlier in the year we'd finally triggered inflation. There still aren't too few goods and services.

Perhaps you disagree with me. I'm happy with that. It's never good to be too invested in your point of view to not listen to other opinions. There is a good chance I'm not right, but this sort of validation makes me think I am.

Drop in Borrowing Squeezes banks.

Businesses Hoarding Cash Is the Latest Blow to Lenders; 'We Didn't Expect the Wall We Hit'.

"Outstanding loans by the biggest banks to U.S. companies declined 9% in the first two weeks of April compared with the end of March, according to Federal Reserve data. The slip followed a 2.7% rise in the first quarter, the smallest quarterly gain in two years."

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