[DantesPeak]

If money is being thrown in to a black hole how come money supply - including or excluding real (paper) cash - is growing at record rates over the last month?

Or in simple English, the amount on deposit at banks is growing very fast. If the Fed lends directly in the commercial paper market, and the Treasury directly buys common stock, where exactly is this big deflationary black hole going to develop? The banks before long are going to see, for example, safe municipal bills earning tax free 6% when they are borrowing at 2%, and later they will start lending again, but of course not like before.

Don't get me wrong, I see the US economy heading for some kind of depression, but a hyperinflationary depression. However the recent downtrend in markets caused by the Lehman blowup are now over, and the next bankruptcy has yet to come along.

[PenultimateManStanding]

I'm not an expert, Dante, and I don't know what is going to happen. But the prices of a lot of basic things are falling. That seems to point to a 30's style deflation.

[TheDude]

Plenty of room to fall there. Graph from IndexMundi.

My anecdotal experience is that groceries are becoming way more expensive. Saw a $7 box of cereal the other day. What went into that I couldn't tell you - inflation? Increased shipping prices? Safeway stock drop? All of the above?

[3aidlillahi]

Uh oh. See that little dip at the end of the graph? That's deflation, all the way. No way it can be a market correction. Nay, we're in a '30's style depression for sure.

[DantesPeak]

I'm not disputing the price of many things, most notably homes, will drop in the next one to two years. I also expect the price of second hand goods and cars to keep falling.

However I seriously doubt that we will see a year over year fall in the CPI, or at most a very small decline. Granted the CPI is not a good indicator, that is why I talk about commodity indexes frequently.

[Alcassin]

I was thinking about the same PMS.

If the credit is unavailable the river of money starts to dry. And then? Look at this way - every dollar represents debt, when the banks are insolvent and they cannot create anymore credits due to run on bank/overselling of credits what happens?
The reserve is empty.

Everyone is in debt and nobody can take a loan. This shows us deep hole, when everyone has to pay without money. If paying debt is the first thing people do (and the cost is rising) they have less and less resources to buy something else. Since the supply doesn't react fast (the companies are not bankrupt at the moment) we have deflation. It occurs during every recession.

Still, I wouldn't say that deflationists were right. The world is in recession. It's easy to understand, but inflation is another possibility in mid-term. Providing liquidity to the financial system may cause inflation, but it depends on the cost of the credit, production, and behavior of markets.
Something that not a one can predict right now

[TheDude]

$this->bbcode_second_pass_quote('3aidlillahi', 'U')h oh. See that little dip at the end of the graph? That's deflation, all the way. No way it can be a market correction. Nay, we're in a '30's style depression for sure.

[3aidlillahi]

$this->bbcode_second_pass_quote('', 'S')ince the supply doesn't react fast (the companies are not bankrupt at the moment) we have deflation. It occurs during every recession.

[Alcassin]

$this->bbcode_second_pass_quote('', 'S')o you're saying we have deflation in every recession? We've been in a recession for the past 5 years. Yet we've seen inflation RISE from 8% to 13% in the US (real inflation, not CPI). Even CPI though has risen.

[Revi]

I don't think there will be deflation and here's why. Everyone is panicing and taking all their money out of the market. They have it all stuffed under their beds. Soon the market will ease and they will still have it in the mattress. They will start to spend it, and not put it back into the market. They will buy commodities and things they need and want. They will start to bid up the price of things again, and that will cause inflation. Oil will start to creep up again, and so will everything else.

So that's why I think it will turn into inflation. Am I right?

[PenultimateManStanding]

Of course we don't know yet. In the 70's we had stagflation. Maybe that's what we are in for again. But the most basic price, the price of oil, is way down and falling fast. That did not fall in the 70's. If the price of oil is falling fast, that should tell us something.

[eastbay]

$this->bbcode_second_pass_quote('PenultimateManStanding', 'I')f the price of oil is falling fast, that should tell us something.

[PenultimateManStanding]

$this->bbcode_second_pass_quote('eastbay', ' ')
In fact, it's up 4% right now in Asian trading.

[Alcassin]

$this->bbcode_second_pass_quote('Revi', 'I') don't think there will be deflation and here's why. Everyone is panicing and taking all their money out of the market. They have it all stuffed under their beds.

[shakespear1]

You guys may enjoy the discussion here on this subject

iTulip - Deflation

$this->bbcode_second_pass_code('', 'No Deflation! Disinflation then Lots of Inflation

The "Ka" phase of "Ka-Poom" has officially begun

by Eric Janszen

There will be no deflation. I repeat: there will be no self reinforcing spiral of debt defaults, an irreversible collapse in the money supply and a decline in the general price level. Central banks will never again allow the rate of inflation to fall below short term interest rates, nor fail to supply sufficient liquidity to meet the demands of financial markets. There will be no repeat of a 1930s US depression or the grinding 1990s Japanese deflationary recession. Instead, we will experience something new, with elements of deflations, and inflations and stagflations past – rhymes of past verses of economic misfortune – but unlike any of these past episodes except equally unpleasant. I call this new process "Ka-Poom Theory."')

[MrBill]

[align=center][/align]
PMS I have to agree. We are seeing a huge amount of disinflation and deflation at the moment. Asset prices are falling in real inflation adjusted terms. Even commodities are falling in US dollar terms. This is a process of deleveraging. Stock markets have lost $25 trillion since this credit crisis started. That is just equity prices and does not include house prices or other assets. The apartment building I am looking at buying is down 25-percent per door so far this year. The credit crisis and banks unwillingness to lend is winnowing away the potential pool of buyers. [align=center]
[/align]
Cash is king at the moment. That is now. However, a government's response to disinflation and deflation can always be inflationary is they flood the market with free money. So long as real interest rates are negative it will encourage fresh borrowing, but it does very little to help those that already have debts to repay. [align=center]
[/align]
If they default it just puts a hole in someone else's balance sheet. Like the bank. That is happening right now, which is why governments and central banks around the world are flooding the market with liquidity as well as taking direct stakes in financial firms to shore-up their capital ratios. They can only lend that fresh money is they have the equity on their balance sheets. And if they find a willing and credit-worthy borrower that is. Banks are not going to lend any money if they think they will not get their capital back. [align=center]
[/align]
a good link:
All of Inflation’s Little Parts

[Revi]

Not everybody thinks that it will be deflation forever. Here's a commentator from CNBC:

http://www.cnbc.com/id/27159117

I listen to all these commentaries, but I have no idea now what will happen.

I thought it would be an inflationary problem. I thought that oil would be at over $200 by now, and gold would be over $2000.

[evilgenius]

Like I said I think the old system is broken. I think the CB's of the world are stuffing the channel expecting a return that can't come. Any appearance of success along those lines is only desperate hedge fund managers trying to cover before they are exposed as bankrupt. Sure if the CB's catch on they will be able to change this, but they are awfully busy right now.

The next big thing inflation wise will probably be localized inflation brought to you by the onset of supply disruption. If you need anything that is delivered just in time from far away I would run out and snatch it up because soon no ship will be sailing. They won't sail without guaranteed lines of credit and neither will they sail at a loss, which is what will happen if commodity prices comes down much further.

[MrBill]

$this->bbcode_second_pass_quote('', 'T')he next big thing inflation wise will probably be localized inflation brought to you by the onset of supply disruption.

[Quinny]

I agree. It's a bt like trying to re-pressurise the central heating when the boiler won't light. If you've got a major leak no matter how much water you put in it won't get the system going. All the bad debt is like a big blackhole that just can't be filled.

$this->bbcode_second_pass_quote('evilgenius', 'L')ike I said I think the old system is broken. I think the CB's of the world are stuffing the channel expecting a return that can't come. Any appearance of success along those lines is only desperate hedge fund managers trying to cover before they are exposed as bankrupt. Sure if the CB's catch on they will be able to change this, but they are awfully busy right now.

The next big thing inflation wise will probably be localized inflation brought to you by the onset of supply disruption. If you need anything that is delivered just in time from far away I would run out and snatch it up because soon no ship will be sailing. They won't sail without guaranteed lines of credit and neither will they sail at a loss, which is what will happen if commodity prices comes down much further.