Monday, 5 October 2009

We won't see major fast deflation in the UK or US

The inflation deflation issue is really starting to drive me crazy. My favorite economic commentators seem divided on the issue. Steve Keen, Karl Denninger, and Max Keiser are all saying that there will be deflation while Peter Schiff and Mark Faber are still insisting on hyperinflation. Ultimately it will be down to politics because the politicians are in charge of the printing presses and there is no limit to how much can be printed. Certainly of the government did nothing then there would be massive sharp deflation. So one could argue that on the spectrum from massive deflation to massive inflation, almost anything is possible. But I'm going to stick my neck out here and rule out a section of the spectrum: Substantial fast deflation is very unlikely. The reason I have come to this conclusion is twofold: Firstly if significant deflation were to be allowed then too many people would be unable to make their mortgage repayments. This would lead to an outcry so large that politicians would immediately be forced to create more money. Secondly, the government's debt repayments would effectively be giving too much away. The numerical ammount that must be paid to existing holders of government bonds is fixed, this means that if we had deflation then each dollar that the US government paid out would become dramatically more valuable in terms of US goods and services.

Please note that at the moment I am not ruling out any other part of the spectrum, there could indeed be deflation, but if that happened then it would be a very long slow drawn out process like in Japan.

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