Inflation/Deflation/Disinflation
Coincident with the drop in China, commodity prices, Baltic Dry Index and the rally in US Treasuries, the implied inflation rate in the 10 yr TIPS today is falling to 1.88% from 1.91% Monday and 2% one week ago. It now is matching the lowest level since Oct ’09. Inflation expectations 5 yrs out at 1.61% is lower too but still above the recent low of 1.56%, also the lowest since Oct ’09. The inflation/deflation debate obviously gets more fuel for discussion today but at 1.5-2%, future inflation expectations are still well above zero, therefore disinflation is the more current scenario. Either way, as I’ve been saying, the discussion misses the point in that the greater the short term disinflationary trends there are, the easier for longer the Fed will be with another round of QE in the future always a lever that the Fed will no doubt use if needed. Thus, we can have both deflation/disinflation and inflation with one coming after the other.
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June 29th, 2010 at 1:15 pm
Thanks. What if the Fed is pushing on the old string? As we like to say out here in the country – just pulling it’s pudd!
June 29th, 2010 at 9:35 pm
Who cares about prices? The Austrian definition of inflation is very clear. Inflation is an increase in the money supply. What is money, you ask? Base money? M1? M2? M3? What about innovations such as credit cards tied directly to home equity lines of credit, which effectively “monetize” much of the housing stock? What about plain old unsecured credit cards, which effectively “monetizes” future earning capabilities? What about the ability to sell stocks or bonds, wire the proceeds to a bank account, and have cash in hand within two days, (assuming a mutual fund, brokerages usually have 3 days clearing periods), which effectively “monetizes” stocks and bonds? I’m not sure if M3 included money-market funds, but these already had check-writing, and thus have always been “monetized”.
Austrian answer: it doesn’t matter. Pick any definition. If the money supply under that definition went up, then we have inflation. So I’ll pick base money. Base money has gone up massively, therefore we have had massive inflation.
To repeat, prices have nothing to do with inflation under Austrian economics.