Deflation Vs Inflation – The Great Debate

It’s pretty rare that I get excited about something like this as I don’t really spend a lot of timing thinking about – but in this instance, I’m really looking forward to learning more.

We’ve had some discussion in the comments section over the weekend, with a couple of very  knowledgable participants really putting out some great info.

Deflation vs inflation…..the great debate.

I for one have thrown this around on occasion, only to find myself back where I started in the first place – time and time again. I hope I don’t create a “dead-end ” here (as I generally stick to spaceships, quiet time with ants, and the search for evidence of alien life on Earth ) and am certainly “not” an economist, but I hope we can wrangle these guys ( and whom ever else ) to shed a little light, on a an area of economics – often misunderstood.

The basics:

Deflation is a “decrease” in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Deflation increases the real value of money ie…..the currency of a nation or regional economy.

Deflation allows one to buy more goods with the same amount of money over time.

*Thank you Wikipedia!” ( what you think I rattled that off the top of my head?)

Inflation is a persistent “increase” in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

So… a nut shell – looking at the value of a dollar in a given economy, and the reflection of “how much of what” that dollar is able to purchase at a given time  – no?

The questions:

Given the current monetary policy – Is the United States “currently” in an inflationary environment or a deflationary environment? And more importantly ( as we are all much more interested in the future )…..

Where do you see the United States headed next? And….(bumbuddabum bumbumbbumbbumb!!!)


Woohooo! I’ll do my best to chime in but in all honesty I’ve likely got little to add…other than my own “backward / flipped over / nutty way” of looking at it, which ultimately may not have to do much with economics as it does making money trading forex.

All opinions / views more than welcome!

Let’s get this thing licked! And thank you in advance to JSkogs in particular. A valued reader and contributor here at Kong, and from what I gather – a pretty all around great guy.



25 Responses

  1. JSkogs January 25, 2014 / 5:51 pm

    Kong thanks for the hat tip. Greatly appreciated bro. Hopefully you will keep this post open for a bit. I’ve got things to say but I’m at a birthday party with my 3 kids on my own. I’d like to make a post later tonight or in the morning when I can think a bit. Hope that’s all good

  2. slimpickens January 25, 2014 / 9:47 pm

    Dumb money tracker update:
    Email to AP subscribers 01/22 (cost for aggressive portfolio $1,000.00 per year)

    For anyone willing to fight the Fed, the break of the daily cycle trend line should indicate that stocks have begun moving down into a DCL. One could sell short or buy puts on one of the index ETFs with an expected bottom sometime around the Feb. employment report.
    Personally I’m too afraid the Plunge protection team will step in tomorrow and reverse everything again so I’m going to pass. I’ll let my Sept. and Jan 15 puts catch the move if it happens.

    Morning update 01/23: (regular model portfolio)
    As of right now it looks like the SPY will probably break it’s cycle trend line at the open.
    I will exit the stock market positions for a small loss in the S&P and what will probably be a small gain in the Q’s.
    We will look to re-enter once stocks get into the timing band for the next DCL.Currency portfolio: open

    Entered on Jan. 24
    30% position FXY $95.42
    30% position sold short UUP $21.60
    10% position sold short EUO $17.20

    Bonds portfolio:
    Entered Jan 2 Open
    10% position short TLT $101.72

    • Franklin Beenz (@F_Beenz) January 26, 2014 / 5:33 am

      Dumb money tracker indeed! A week after going long the S&P for the bubble blow off, Savage calls the S&P ‘the most dangerous chart in the world”!

      And with that, I think it’s safe to say the Mr Dumb Monkey Tracker is the most dangerous blogger/giver of financial advice, in the world.

      He did me a favor when he booted me off his subscription service for questioning his analysis one too many times.

    • Forex Kong January 26, 2014 / 9:49 am


      Sorry man….I quickly scanned the comments this morning before getting started with replies, and didn’t really notice anything “too wacky” so….I just started getting to work.

      I’ll cruise back through and look to pull a couple if need be.


    • Forex Kong January 26, 2014 / 9:51 am

      This is equally hilarious as he’s now just reading here at Kong , and trading currency ETF’s.

  3. slimpickens January 25, 2014 / 9:52 pm

    hey kong…my last post is off topic…but i thought you might get a kick out of it….post it if you want, or, enjoy it yourself and delete it.

  4. slimpickens January 25, 2014 / 10:29 pm

    Kong, Like I said delete the above or edit them down, whatever. I just hope you keep calling attention to this guy. As a naïve new trader I bought into his internet hype and took his service. Sadly and ashamedly, it took several thousand dollars of losses before I figured out who he was. the guy hasn’t had a winner in the 6 months i’ve been a sub.

  5. The Seeker January 25, 2014 / 11:34 pm

    I believe in what our American forefathers created but I don’t care what system you create, it is only as good as the people who run it. They knew of the corruption of man and that’s why they tried to put in so many safeguards. The corruption and ideology of our government now makes me think that we are now seeing the last great days of the greatest country to come into existence. This is no longer my fathers country that sacrificed so much. They have now created a situation that will only get worse. I think its very predictable that they will print faster and faster. We have inflation mixed with some deflation and so I’m not sure how soon inflation will start to pick up speed but I’m sure it will.

    • Forex Kong January 26, 2014 / 9:34 am

      Great insight, as for me it’s always best hearing of these changes from someone with their boots on the ground, and not just “some news story” etc.

      I see it very much the same and imagine that yes indeed – only one generation earlier people’s pride / views / sacrifice etc certainly different, no VERY different than today’s.

      And what of the “next” generation?

      Time sure flys.

  6. Deano January 26, 2014 / 12:27 am

    This is a very complicated issue with many interdependencies, but here are a couple of the issues that are producing the current low level of inflation:
    1) QE should be inflationary with the increase in the money supply especially with very low interest rates means funds are freely available for borrowing and growth, but the problem with the US (and also Japan) is the transmission mechanism through the banking system is constrained due to poor bank performance and the new Basel 3 liquidity requirements, which means the banks are hoarding cash and applying very strict lending requirements with higher security. This is one of the main reasons that inflation remains low and any increase or decrease in QE at present will make little difference in the level of inflation
    2) Another factor is that another key driver of demand (and hence price inflation) is consumer spending, which although improving (inflationary) is not strong in the US and with poor wage growth and high unemployment is unlikely to stimulate discretionary spending as consumers remain wary and lack confidence, hence they are not looking to borrow at previous levels and use the funds available through QE
    3) The US is rapidly moving towards energy independence and higher energy exports as a consequence, which will reduce one of the key price inputs to business costs (which is deflationary) in future
    4) The ageing population and lack of major global innovation are other inputs that produce deflationary effects (they are another whole topic) as there are fewer jobs and people looking to work.

    So imho these all suggest a low level of inflation at present with a risk of deflation going forward irrespective of QE levels.

    • brosbhos January 26, 2014 / 8:17 am

      I agree on pretty much everything Deano wrote here.
      Related to point #1: “he problem with the US (and also Japan) is the transmission mechanism through the banking system is constrained due to poor bank performance and the new Basel 3 liquidity requirements“. I’m not as convinced Basel 3 is to blame. Bankers themselves know how to generate more money by investing it in the market (stocks obviously, emerging markets, or maybe even forex if they’re reading Kong), rather than injecting it in the real economy through lending. They choose no to lend, or at least not as much as they could, because it is more profitable for them to do otherwise. To me this is a key point, where the chain is broken.

      • Forex Kong January 26, 2014 / 9:07 am

        I couldn’t agree more!

        Through this entire downturn (2008) and with all the money printing that followed, all these politicians squacking and with all the Bernanke testimony / congress etc – why wasn’t it “made to happen”? As yes exactly – money hits the banks and “poof”! That’s as far as it really went!

        With such massive “injections of liquidity” aimed at “helping with the recovery” and it being so obvious that the banks where just “holding on to it” / using it for their own benefit I still don’t recall hearing a single person flat out ask the question / or put fourth a solid plan or idea saying: Make them lend! Make the banks lend out the money!

        Some kind of program that was directly linked to QE that made the banks responsible for the lending of “x” amount or involvment in local / national programs directly stimulating job growth etc…

        But no! Just print hoard, pump , and at some point dump.

        Amazing to me. We see these tiny “micro loan” programs working in impoverished countries such as Africa and India and from what I understand….they are working great!

        Fantastic info everyone. Absolutely fantastic.

      • JSkogs January 26, 2014 / 11:43 am

        Good point bhos. ..If the question is simply are we in a deflationary environment I personally don’t think you need to look much further than fed policy. As many know here they (central wankers) have very blunt instruments to work with. If you have natural demand related inflation then transmission and lag are not as much of a concern. Example being let’s say Africa all of a sudden gets a bunch of great leaders and installs land ownership laws and resources get developed leading to a bunch of new peeps that have money….sadly we know that’s unlikely. But point being is that a new class of people would be out spending money and bidding things up. What’s more complicated is artificial inflation through QE. Basically increasing the cash supply to provide support to prices through the devaluing of money and really importantly the devaluing of debt….that’s a whole other story.

        So whether prices are stable or declining I think it’s useful to look at what the current response is. Pumping 75 billion per month into the system is a serious response to an external deflationary pressure. Increasing the monetary supply should eventually lead to an increase in prices or so the theory goes. But if you think of just increasing a pile of cash arbitrarily and what will happen …..conceivably it will take time for prices to increase as the market finds uses for this money in a stagnating environment. What’s also really important is the history of rates and why low rates are needed right now. Rate suppression is a serious signal that deflationary forces are at work because if you had natural growth you wouldn’t have to worry about keeping up.

        The point though for me is what is tradeable and what happens next. So we all know that reactions often are succeeded by a new movement in the opposite direction. So if we are seriously fighting major deflationary forces and those pressures will eventually fade by washing out previous excesses and inefficiencies then whether or not we are in for a bump the general idea should be major inflation at some point because the monetary base is freaking massive now. Sorry that was a serious run on sentence and I’m painfully hungover.

        • Forex Kong January 26, 2014 / 4:41 pm

          JSKogs – thanks again man for the input / knowledge.

          I’ve always felt / seen this inflation / deflation arguement as going round n round in circles – providing little of anything “tradeable”

          Deflationary forces indeed, but as Central banks “battle” these forces with printing presses “Inflationary activity”! I’ve always looked at is as being turned upside down. The environment from a consumer perspective sees / feels it one way, while the Central Banks “activity” reflects the exact opposite.

          You and I are of the same camp – as the arguement is futile. I look at what’s in front of me…and use what’s tradeable. Exactly.

          Well….in all honesty – glad “that’s over”! He he he……

          Not like we solved world hunger here people, and frankly…..boring as shit.

          No wonder I studied music.

          Back to the markets my friends! Back to the markets!

      • JSkogs January 26, 2014 / 5:20 pm

        Haha totally Kong. People always get so hyped about inflation vs deflation but really…..other than income erosion who gives a shite. You go back far enough and look at hard assets and you see a pretty steady line from the lower left to the upper right so whaaaaatever. Go back to making money and having some fun!

    • Forex Kong January 26, 2014 / 9:22 am

      Deano great stuff as always but I wanted to ask you…..

      Where / how is it that you’ve come to hear/believe that the U.S is rapidly moving towards energy independence?

      Perhaps my head is half lodged in the sand as well, or maybe I’m not looking / reading / researching in the right places but honestly – I’ve never really heard that.

      Fracking appears to have an endless uphill battle as I’ve come to understand, I’ve never really heard that solar has taken off ( always deemed “too expensive” ) Wind farms in the U.S ? A big winneer? Geo thermal? Tidal? Nat gas no……biofuels no.

      As I understand it the U.S only produces 40% of needed oil, with depleting stocks and rising consumption as well imports 3x as much gas from Canada as in the 70’s.

      Don’t say nuclear as 80% of the Uranium is imported!

      What have I missed? And what of the continued pressure / goal of mixing things up (war?) in the Middle East?

      My outlook will hit the skids if you’ve found out they’ve got alien technology well into development, and already have a never ending source of clean power – my ego too as I should already know that!! (perhaps they found that “thing amajig” when my saucer crashed)

      • brosbhos January 26, 2014 / 2:08 pm

        Interesting point indeed. I tweeted this link regarding solar earlier today, comments seem to be a relevant source of knowledge, even though i haven’t read them all. www .

      • Deano January 26, 2014 / 5:25 pm

        Hey Kong,
        The energy changes and large resets in current accounts can be sourced from a number of places, but have a look at one of the major sources, the US Govt itself:
        Horizontal drilling is just as important as fracking and the US has lots of stuff in the ground to go around for the next 200 years, (or so it seems). This probably underpins long term USD strength but is deflationary domestically.

        • Forex Kong January 26, 2014 / 5:47 pm

          You know how I feel about data out of the U.S …..and the gov??

          I dunno Deano……It’ll be pretty tough to win me over, but keep er coming my friend.

          • Deano January 26, 2014 / 7:14 pm

            I hear ya Kong and I ain’t from around those parts so am just picking up on a few sources from afar. Leave it to you and other more learned folks to get to the bottom of it, cheers.

  7. Deano January 26, 2014 / 1:09 am

    Just came across this article which provides another perspective. Interesting stuff.

    • brosbhos January 26, 2014 / 8:18 am

      Great link, it really does add some perspective. Thanks.

  8. Andre January 26, 2014 / 4:31 am

    Money is a good just as much as anything else. Deflation is an increase in the value of money (relative to everything else). Inflation is a decrease in the value of money (relative to everything else). This has two elements, namely the “money” and “everything else” (a big topic with countless variables so it’s more productive to focus on the “money” element). To make things simple, it helps to define “money” as “that which you are required to use to pay taxes”. And while we like to think of “inflation” as a rise in the cost of a specific basket of “things”, namely those things that an average person needs for daily living, that is only a limited view of what inflation is. When the price of treasury bonds rises, that is inflation also. When it falls, that is deflation also. Same with stocks, with houses, with college educations, other currencies, bonds, etc. There are both inflationary and deflationary pressures on the USD but overall the United States is clearly in an inflationary environment. The system is NOT broken or clogged, it is working exactly as intended. If they want the cost of living to rise, all they have to do is bid up those things that make up the cost of living (EBT cards?). Now the question is, will the USD rise or fall in value?

    Now this is a complex question without a simple answer but the essentials in this case are these:

    The US government is able to pay ANY debt in USD as it controls the printing presses; that doesn’t mean it will, but it can. The USD is, after all, simply a “tax credit” and they can hand those out at will. Private entities, as well as smaller public entities, do not have that luxury. This means credit expansion (an inflationary wave) can easily turn into a credit bust (a deflationary wave). So ask yourself if debtors (public and private) are able to pay back their USD debts. If they are not, the USD will rise in value. If they are, the USD will fall. See Japan’s experience when their private credit bubble burst. And then compare their experience again as their sovereign credit bubble explodes. I can’t say what will happen in the US as there are too many moving variables, but a key thing to watch is budget deficits.

  9. JSkogs January 26, 2014 / 12:28 pm

    Inflation is probably the most important thing for a money manager to understand in my opinion. It can devalue a debt load…..give a lift to hard assets….Screw up govt debt if there is foreign ownership. …blah blah blah. The best speculators work with inflation and know how to exploit bad or good policy and how it relates to price

    • JSkogs January 26, 2014 / 12:35 pm

      Also pertinent is that just because a deflationary environment exists it doesn’t mean cash is king because central banks are very activist. Meaning they will stave off deflation….thereby causing consolidation. ..and then inflation because it’s needed to keep the system working.

      Someday the issue of the middle class and real incomes will come to a head due to erosion and then the monstrous reset will occur

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