Deflation to inflation

[Mr. Wynand]

I haven't read anything about how deflation soon turns to hyperinflation (after an excessive increase in the money supply), so how exactly does it happen?

[softwareNerd]

I suggest that anyone providing an answer should first define "soon" and "hyperinflation" with some clarity: i.e. at least by providing a range for each.

[Thomas M. Miovas Jr.]

I haven't read anything about how deflation soon turns to hyperinflation (after an excessive increase in the money supply), so how exactly does it happen?

Deflation is the result of a decrease in the money supply; inflation is the result of an increase in the money supply. Money supply, for this example, following George Reisman, means those dollars that are actually in circulation vying for goods and services. Right now, he argues that we have deflation because the actual amount of dollars in circulation has decreased relative to say a year ago; this happened because as people became worried about losing their jobs, they saved more and spent less, so their money is in a bank instead of being in circulation. Banks are also not lending out much money, as there have been more defaults to paying outstanding loans. So, even though the Feds have printed up more dollars and tried to get them into the economy, the self-interest of the bankers is preventing them from getting all of that cash into the economy (and one reason Obama is irked at them). If this situation changes, so that people are spending more and the banks are loaning out more money, those dollars will no longer be tied up in a vault somewhere, they will actually be in circulation, driving up prices. So, it all depends on the bankers loaning out that Fed cash and people spending their savings. This could change very quickly if there becomes indications that the economy will be improving and people are not so worried about their job future and the banks are not so worried about getting paid back on their loans.

Even though, yes, there are now currently more dollars out there compared to last year due to the Feds dumping a bunch of it onto the banks, so long as it is just sitting there and not in circulation it has the effect of not having changed from a year ago. However, eventually all of that extra printed cash will work its way into the economy and cause inflation -- how high depends on how quickly it gets into the economy. If it happens over a long enough period of time, there might be 5% inflation, if it happens all of a sudden, then there might be double digit inflation (hyper inflation). So, a lot of the answer depends on what people's outlook is on the future of the economy.

George Reisman, for those who don't know about him, is a highly respected economist who is an Objectivist.

[agrippa1]

Most of the money the Fed pumped into the economy since 2001 has gone directly into housing, pumping up housing prices and generally increasing the cost of living. That is, price inflation been concentrated within one sector of the economy, with the diversion of money from other sectors causing a generally stable price level there. The government's estimate of inflation includes apx 24% weighting for homeowners' housing costs, but instead of counting home/mortgage costs, they use owner's equivalent rent, which had a low or negative price inflation over the housing boom years, due to the conversion of renters into homeowners as well as the spike in rentable housing construction.

(((how do I import an image so I can show it here?)))

If you compare annual rate of change of CMDEBT (household credit market debt) to CPI change, you see a very good correlation between 1967 (as the final vestiges of the gold peg deteriorated under the burden of underlying monetary inflation) and 1983. There's a consistent 5Q lag of inflation behind CMDEBT peaks and dips. Then, in 1983, when the gov't started using OER instead of actual housing market costs, we see inflation magically fall away from CMDEBT, and stay consistently below 6%, and averaging apx 3%.

From 2003 til 2006, CMDEBT rose at annual rates approaching 12%. Using the 67-83 period as a guide, CPI should have risen at 9-11%, but because OER distorted the statistic, the gov't reported no more than 4% price inflation. Now we have home prices plummeting, but because so much wealth was tied up in the housing market, our total wealth has dropped significantly and money for other goods is not available, tied up in reliquidating asset books. Note the money multiplier:

So we're seeing deflation now as the money continues to sink into struggling banks and as retailers liquidate stock in order to stay in business or to pay off creditors once they go bankrupt. The liquidation of goods is killing manufacturing, which is falling at 10% rate, but it can't continue indefinitely. When the goods have all been liquidated, and money frees up from both financial institutes gaining health and from the global $ sell-off, we'll see a wash of dollars with nothing to buy = inflation.

[Chris.S]

George Reisman, for those who don't know about him, is a highly respected economist who is an Objectivist.

Unfortunately, I introduced my Economics professor to him (Reisman). So he's well respected, but I don't think well-known (unless my Prof is an idiot and doesn't keep up-to-date with his industry...which I'm more inlined to believe after having chatted a few times with him).

I'm trying to get through Reisman's Treatise, but I think I should start with something more for beginners! Haha