the great debate... inflation or deflation ??

  1. 1,816 Posts.
    I must admit it, there are convincing arguments for both scenarios...

    On the one hand, it's not hard to envision the US economy floundering under their historicly high burden of debt. With weak economic growth, and little room for further monetary stimulus, the US faces the prospect of an implosion... debt defaults leading to the fire sale of assets, and further debt defaults...

    On the other hand, the inflationists argue that the US establishment have witnesses Japan's implosion very closely... and are not going to allow the US to follow in Japan's footsteps. Recent speeches by key Fed officials (including the deputy chairman of the Reserve) emphasised this idea as policy. They've made it very clear that they're willing to increase the money supply as much as required to avoid deflation... even if it leads to a mild bout of hyper inflation.

    Can the Fed avoid deflation by continuously increasing the money supply until there's a response?

    I believe they can.

    I also believe that they don't regard this action very favourably. Under current circumstances (no signs of inlfation, but no serious signs of deflation either) they'd rather just sit back and watch. There mat be some action behind the scenes to increase M3, but not at extreme levels at this point in time (ie. if you believe 10% + is not extreme).

    ... but there will come a time when more serious action will be required.

    When will it occur?

    Don't know, but i reckon that the Fed's determination to avoid deflation will lead to very high inflation in future years.

    Given a choice between the two, the fed would choose inflation any day... and they'll get what they want.
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