29 October 2008

The truth about deflation - An iTulip.com must read!

The truth about deflation - iTulip.com Forums: "With all of this panicking into dollars we get asked a lot about deflation. 'Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100.' The reason is that we are 100% certain that dollar appreciation that we call 'Ka' as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cost $2,000, although there will be plenty of cheap used cars for sale, and gold will not go to $200. Here's why.

The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.

This ain't deflation

We're not nit picking terminology here. We’ll show you what a real deflation spiral looks like: nothing whatsoever like the deflation we are seeing today that we have long forecast and call disinflation to distinguish it from the run-away deflations that occurred under the gold standard in the pre Bretton Woods era.

Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold to inflate the money supply to stop deflation, especially in times of war. If you are a government and need to inflate and there's no war to fight, then make something up–like a oil shortage in the 1970s."


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