http://www.deflation.com/understanding-deflation/
Q: For the past ten years, I’ve mostly seen a lot of predictions of more inflation or even hyperinflation. Why do you guys disagree?
A: One good reason is that the consensus is calling for the opposite, and in finance the consensus is often wrong. But most of us base our opinion on the belief that the amount of outstanding debt worldwide is unpayable.
Q: I do remember hearing about deflation briefly in 2008, during the worst of the “liquidity crunch,” but not since. Isn’t the big threat over?
A: No. Remember, in 2006-2007, most people thought then that deflation was impossible. That’s when real estate peaked and dropped in half, commodities and stocks crashed 57%, and short term interest rates went to zero. Most people can’t see around the corner. We base our work on precursors of deflation, not the event itself. By the time you can see it, it’s too late.
Q: Everyone says that since 2008 the Fed has been printing money like crazy, creating inflation. Isn’t that right?
A: The Fed has monetized a lot of debt: about $2 trillion worth. But this is not precisely equivalent to printing money. The bonds the Fed holds back the money it creates. Its monetization is indeed inflationary, but not necessarily permanently so. The Fed can create new money only with good debt, and our case is that there is hardly any of that left. If some of the debt it holds begins to sour, it might have to divest itself of some of it, in which case it would have to call in the money that debt was backing. In other words, the Fed still operates as a bank, albeit a privileged one.
Q: Two trillion dollars’ worth is a lot of new money. Isn’t that the definition of inflation?
A: No. Most deflationary crashes emerge from periods of high indebtedness. They happen when the amount of outstanding credit contracts. New money can be enough to balance the retirement of old debt, and that’s what the Fed has nearly managed to do. But it hasn’t created net inflation, because at the same time more than $2 trillion worth of debt has melted away. If the Fed could create inflation at will, real estate would not be down by half, commodities would not be down 40%, and rates on T-bills would be pushing 20%, not sitting at zero. And think about it: These results have occurred despite unprecedented monetization by the Fed and record federal-government spending. What will happen when those trends slow down or reverse?
Actually do understand imploding debt is ultimately deflationary. Japan has never recovered values they saw in the 80’s.
Hard to wrap ones mind around long term deflationary trends as you see savings buy less & less.