InDeflation or DeInflation – Which is it?

If you are confused about what is happening on the deflation/inflation front join the crowd. I have created two new words to add to the confusion, Indeflation and Deinflation. to help confuse you even further.

Bernanke/Geithner have stated they are more concerned about deflation. In fact Bernanke claims he can inflate the economy anytime he gets in his helicopter and throws money out for us all to spend. Quote from the Special Report on Hyperinflation at the web site.

“Attempting to counter concerns of another Great Depression-style deflation, Bernanke explained in his remarks: “I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States …”

Consumer Inflation Government Version and Shadow Stats VersionAside from minor average annual price level declines in 1944 and 1955, the United States has not seen a deflationary period in consumer prices since before World War II. The reason for this is the same as to why there has not been a formal depression since before World War II:”

Mr Volcker solved the 1970’s inflation by killing the economy and then resuscitating it. it worked but I’m not sure at what cost.

It seems deflation is very dangerous if there is a lot of debt around. That’s because the assets to which that debt is attached is decreasing in value and the debt is not.

So if you have a mortgage and house prices fall that’s deflation isn’t it? If you owe money on it you may find it is worth less than you paid for it and may have wiped out any equity you had in it.

The next thing you will hear is a knock at your door from your friendly bank manager (at least that happened before banks sold off your mortgage to someone in a little hut in Vanuatu as part of a “CDO investment” in their retirement fund).

They would have asked you to pay in more money because even though the house price may have dropped the mortgage price had not. So your leverage ratio would have been out of whack. So they want to whack you for the difference and you have to cough up the money or lose the house.

The fact that millions of home owners were/are in this position makes it a US and world problem as the credit system crashed under the weight of home “non-owners” walking away from their houses and CDOs becoming worthless in the eyes of those who traded in them.

That’s strange to us down under in OZ though. If we try to walk away from our mortgage, it follows us wherever we go. There is no getting away from it except maybe through bankruptcy or death.

In the US they trust credit-worthy people with a mortgage for 30 years. (I’m not talking about subprime or ARMS here). Maybe it’s our Aussie convict past but 3-5 years or 10 at a stretch (no pun intended) is the maximum period before a mortgage contract has to be renewed and likely higher interest rates paid on it.

But I believe even with all that the big problem is all the credit taken out by commercial property, and listed companies in an effort to boost their stock prices and pay themselves big bonuses through leveraged buyouts, and massive investments. That’s still to de-leverage or deflate, call it what you will.

Right now as I understand it much of this shaky credit is being held in by government guarantees and the refusals of banks to foreclose on highly leveraged and possible insolvent companies.

I know in Australia we have several of these zombie companies. I wonder where that $26Bn in the Rudd Bank is going to end up?

Anyway back to Indeflation or Deinflation. Which is it that is happening right now? I heard on CNBC last night someone say there is no need to worry about inflation for at least two years. Then I checked my sources to make my own decision and I find;

And the winner is, “HYPERINFLATION SPECIAL REPORT” from the Shadow Government Statistics web site. Download it and read it think about what you might do in a worst case scenario of hyperinflation. Then try to plan to survive it.

I have no idea if we’ll get hyperinflation but I think it wise to try to prepare for it.

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