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December 16, 2008
By Tim McMahon, Editor
The monthly inflation rate dropped like a rock for the second
month in a row. Journalists touted last month's drop as "the largest monthly drop
on a seasonally adjusted basis since 1947 when the Bureau of
Labor Statistics first started tracking seasonal
adjustments".
What are they going to say this month when it is almost twice as
large? Largest drop since last month?
This is real live deflation on a monthly basis (although not on
an annual basis... yet). Basically, deflation is falling
prices (or more accurately a decrease in the money supply that
results in falling prices) while disinflation is a slowing of
the rate of increase in prices.
Are we in a deflation? Just ask yourself, are prices falling or
are they rising slower?
See the article
What is Deflation? and
What is Disinflation?
for more information.
The annual inflation rate fell from 5.6%
just a few months ago to an annual inflation rate of 1.07% this month.
So on an annual basis we have disinflation but on a monthly
basis prices have definitely fallen giving us deflation (on a monthly
basis). At this point, on a six month basis prices are down
3.88% so we have deflation on a six month basis as well.
Prices fell 1.92% this month and 1.o1% last month. So one more
month like that will put us in deflationary waters on an annual
basis with prices actually falling on a year over year basis. Because of
the parallels to the "Great Depression" this scares the Central
Bankers and they began spreading money around like it was going
out of style in order to pump up the money supply and prevent a
deflationary spiral.
Japan has been fighting deflation for almost two decades with
interest rates near zero percent. And today the FED cut
its federal funds rate to a record low of zero to 0.25 percent in
its fight against deflation.
The fight against
deflation is a very tricky battle because
during times of uncertainty the economy is
balanced on a knife edge. Logically you
would think that all you would need to do to
fight deflation is increase the money supply
enough. But the current crisis isn't
the result of a contraction in the money
supply but a contraction in the supply of
credit. This resulted from a complex
combination of derivatives (that almost no
one understands).
So fighting a credit
contraction of massive proportions with a
massive increase in the money supply will
result in the money flowing into strange
places and not necessarily into the credit
market where the shortage is. So you
could end up with bubbles in some areas and
shortages in others. So pumping up
the money supply too much could result in
hyperinflation while not enough might result
in deflation.
In the article
Why the Bailout Will Result in
Hyperinflation
Olivier Garret, CEO of
The Casey Report
makes the case that the massive extent of
the bailout will not only counteract the
deflationary forces but actually tip us in
favor of hyperinflation.
Robert Prechter of
Elliottwave said, "If inflation is a quiet
thief, then deflation is an armed burglar.
You wouldn't invite either into your home,
yet chances are that one of the two is
stealing your money right now".
The first step toward
protecting your wealth is to understand
which threat is most likely to arise today:
deflation or inflation?
See
Inflation vs. Deflation? by Robert Prechter
to hear one possibility and
read
Why the Bailout Will Result in
Hyperinflation
to get a different perspective.
The November issue of
The Casey Report
includes an excellent debate of the
arguments for each of the possible scenarios
and how best to prepare for them. It also
includes an excellent article entitled "The
Greater Depression" by Doug Casey that gives
one of the best descriptions of the cause
and results of Inflation.
Doug gives a perfect example starting
with the
supposition that the city of Santa Monica,
California, is an independent nation. "Life
is mellow, and the weather is good". From
there the government decides that Santa
Monica is not as prosperous as it ought to
be. So it begins inflating the money supply.
From there he demonstrates the effects and
the stages leading us up to where we are and
what can be done about it. I highly
recommend reading the November issue of
The Casey Report.
For more information
on Deflation see:
The Primary Precondition of Deflation --What
must happen for Deflation to take over.
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