Wednesday, November 09, 2011

Inflation vs Deflation .

Inflation vs Deflation
Andre Willers
9 Nov 2011

“Where have all the flowers gone ? “ . Pop song circa 20th century.

Synopsis :
The world is heading for a major deflationary episode .
Keynesian inflation has not worked (Quantitive Easing) , and there is good reason to believe that it will not work in the future .

Over-exuberant deregulation threw out the baby with the bathwater .

Financial institutions like banks , insurance companies , investment funds , Governments , etc then treated the Financial Credit Market like a commons .

A Tragedy of the Commons ensued .
Every institution and individual tried to maximize their profits , never mind the cost to the commons or the collective .

Many participants knew they were heading for a precipice , but could not stop . If they tried , they would simply be fired or voted out , and replaced by somebody more amenable and greedy .

Why simply printing money hasn't , and won't work .
Recent inflationary money creation (Quantitive Easing) resulted in the extra money ending up in the banks' balance sheets , propping up their rotten loans , or being invested in developing economies (like China , India) .
It does not come into local circulation , causing inflation .
It causes deflation , as extra capital in high-return economies lowers the cost of goods further .

The Hidden Axiom of Keynes :
There must be a protective capsule around the State doing the inflating .
This is to prevent the new money simply haemorrhaging out and to protect the recovery of industries .
In the 1930's this was taken for granted .

This is not true today .
Capital flows around with no hindrance , and sticks to the highest yield economies .
WTO rules prevent any protection of local industries .
A true Tragedy of the Commons .

What can we say about inflation ?
There is not nearly enough new money coming into consumers' pockets to cause significant inflation .
Commodity prices bubbled up , benefitting only multinational mining companies .
All that extra stimulus to production means that the prices of goods will fall , ie deflation .

Save , save ,save !
The new motto of governments .
The penny has dropped that they cannot just print more money . The only product they sell is regulation , and they have failed at it . So , they will encourage people to save and then tax that .

Hence the spate of “Occupy” revolutions brewing .

The Ostrum Revolution .
Also known as The Fairness Revolution .

What is a poor state to do ? (And Poor is the operative word . Bankrupt would be more apt .

1.Protectionism :
There is a great temptation to implement protectionism . A Keynesian Capsule . But trade is 90% of wealth . Living standards will fall to below Medieval levels (something like Albania in the USSR period.)

2.Authoritarian approach .
A Fascist swing , with protectionism , impoverishment , militarism and regional wars .
This happened after the 1930's deflation . WWII .

3.Ostrum Commonwealths :
Use Ostrum rules to bypass the Tragedy of the Commons or Authoritarianism
This is the only new ray of light after humans have wrestled with this problem for millennia .
See “The Ostrum Game” Oct 2011

This ties in with a completely new factor : Social Media .

The Fairness Revolution .
Ostrum rules are self-assembling using social media .
Note the Arab Spring , OccupyWallStreet and others .
Google “Molly Catchpole” to see what is happening .

Summary :
Deflation is much more likely than inflation .
Do not buy big capital items (like cars) .
In a year or two , they will be much cheaper .

Now you know where the flowers went .
The banker's cow ate them .

Andre .


Appendix A
For the historically minded :

Reinhart and Rogoff (two American economists) studied the history of financial crises from 1200 AD onwards . (Entitled “This time is different”)
They found that if
1.Government Debt / GDP > 90%
2.Government Debt / Annual Fiscal Revenues > 350%

Then they stop circling the plughole and start spiralling inwards . A financial crisis follows .

The situation for some major nations in 2010 was :
State – (Debt/GDP)% – (Debt/Revenue)%

CutOffs: 90-350

US- 95-584
France- 89-179
Ireland- 99-478
Greece- 149-382
Italy- 123-267
Spain- 54-187
Portugal- 97-235
UK- 79-194

Source : An excellent article “The August Crisis” by Sandy McGregor of Allan Gray

The effects of massive Quantitive Easings on US debt levels can be seen . As discussed , it had little effect . The money was soaked up by bank debts and export of capital .

You can make up your own mind about the rest , but Italy looks very dicey , especially with their leadership . Ripe for Revolution . But remember , about half their economy is off-book .
A break-up of the EU is most likely to start in Italy , although Ireland is seriously considering it .

Like WWI , the first to start will trigger the rest .

They really need a Super Heroine like Ostrum .


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