Comments on: Looming Inflation a Matter of Fact, or Faith?

By: stevieo

stevieo — Wed, 03 Dec 2008 02:06:02 +0000

The mechanism isn’t so much debtor vs creditor nations but in how new bank notes (central or otherwise) are financed. If they’re financed internally, it’s not inflationary because money’s just moving from other internal sources. It’s inflationary if it’s financed externally because there’s a net addition of bank notes (loosely speaking, money substitutes) internal to the economy. It follows that it’s the debtor nations that are financed externally, so they have inflation. Creditor nations finance internally (even to the extent that they can finance other nations) so they don’t have inflation.

A second point is worth making. An increase in credit or notes or money substitutes is never deflationary. The deflation Japan had and we’re having is the result of credit collapses. It’s just that all the new credit being created by the Treasury and Fed–and previously by Japan–are financed internally, so it can’t offset the deflation of the credit collapse.

Finally, is the US a creditor or debtor nation? I think some thought on that point would prove the point that it’s not so much creditor vs debtor as where the financing comes to fund the inflationary policies (which is what Treasury and Fed are trying to do–keep prices from falling) after a credit collapse.

By: Ruth Smith

Ruth Smith — Tue, 02 Dec 2008 23:43:43 +0000

The ~2006-2010 business cycle is still in its deflationary depths. Almost all commodities have been taken down and the dollar has rallied. The inflation question will be answered when these 2 classes (and gold, in particular; it has also held up the best, since it has also been a safe haven play) reflect it, i.e., dollar weakens and commodities move up from a solid base. We are likely 12-18 months from such a phenomenon, since that time will start discounting an upswing in the business cycle. Cash, govt. bonds and bear funds are still winners. KISS.

By: Don

Don — Tue, 02 Dec 2008 22:35:16 +0000

Aaron:

As it regards loss of confidence: what matters most is not confidence, whether found or lost, so much as what explains or lies behind the loss or finding of confidence.

Confidence is a matter of perception. Certainly perception forms outlook, and as a result can form outcome. But it is even more true that real material forces shape perspective, and thus determines whether one is confident or not. In this sense, then, confidence is more a matter of effect than cause.

Sometimes said forces take time to settle in, and a confidence game can delay or conceal those forces. Consequently, emphasis on confidence often reflects more a matter of marketing, public relations, shaping opinion, etc., geared as it is towards forming expectations.

But in the end, confidence found . . . can easily become confidence lost.

By: Stuart

Stuart — Tue, 02 Dec 2008 16:26:08 +0000

Yes, the value of a currency is dependent upon confidence in that currency. A central bank buying its own currency is damaging to confidence in that currency. Ourboros.

By: Aaron Krowne

Aaron Krowne — Tue, 02 Dec 2008 14:59:51 +0000

My recent research suggests that severe inflation ultimately hits debtor nations due to a loss of confidence — not due to money printing and increase in “money velocity” per se.

There are no counter examples. Japan is not a debtor nation. Most of its debt is to itself.