INFLATION/DEFLATION DEBATE

I thought I would post on a topic that's sure to stir some dander, mostly because I just needed something to clean the comments.

My thoughts are and have been for a while that in a purely fiat system deflation isn't an inevitability, it's a choice.

The only time we've seen real deflation was in the 30's and that was because the dollar was anchored to gold (money supply was constricted). I know many will immediately jump on the Japan bandwagon but Japan didn't really experience deflation. Prices didn't collapse like they did in the 30's (a true deflation). They stagnated (except real estate and stocks which were in a bubble), mostly because Japan funded their bailouts with internal savings. They never actually resorted to quantitative easing. If they had prices wouldn't have even stagnated

The only other time than the 30's that we've seen real deflation was in late `08 to March `09.

Many have the view that we will experience deflation first then inflation, but I would point out we already did. We just went through the deflation part of the equation in 08/09. That was true deflation. Prices for virtually everything were collapsing. It lasted for 9 months.

Just like Roosevelt did in the 30's, Bernanke stopped deflation dead in its tracks by massively inflating the money supply. If deflation is an inevitability how could that possibly have happened?

I've heard all the ridiculous theories that without credit expansion we can't have inflation (actually total credit is expanding almost exponentially as the government has taken over where the consumer has left off). I'm sorry they don't hold water. Almost across the board we have had massive inflation in virtually all asset markets since early `09. All without the banks lending. Obviously the liquidity that Ben has forced into the market has landed in the financial markets first.

Let me say this again because it's important. As long as a country is willing to destroy it's currency deflation isn't an option. The key in that statement is "the willingness to destroy the currency".

If deflation starts to get a toe hold again the government could simply print money and mail out checks to every man, woman, and child. Does anyone think in that scenario deflation is possible? Of course it's not.

The deflationist's will argue that the government can't, or won't, do that. Hey they have to make that assumption because obviously deflation isn't possible if the government just starts mailing free money to everyone.

But the fact is that they can and they will, actually they already have...twice. They were called rebate checks. Anyone who thinks it won't happen again if deflation starts to rear it's head is just kidding themselves.

In a purely fiat system deflation is a choice. I would say it's pretty clear that the government is willing to sacrifice the currency to keep deflation at bay and they have been doing so ever since 2001.

For me to buy the deflation theory one would have to explain how Ben could have stopped the worst deflationary spiral in a mere 9 months and you will have to explain to me how deflation can possibly survive another bout of free money (more tax rebates or whatever they choose to call them next time).