Comments on: Case for Deflation-Part 2 http://blog.sli-smsf.com/2009/10/02/case-for-deflation-part-2/ Sharing Simple Strategies for Self Managed Super Funds Mon, 09 Jan 2012 12:01:43 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Mervyn Jacobi http://blog.sli-smsf.com/2009/10/02/case-for-deflation-part-2/comment-page-1/#comment-541 Mervyn Jacobi Mon, 05 Jul 2010 20:40:55 +0000 http://blog.sli-smsf.com/?p=883#comment-541 If you look in the web at "tax history of the US", "Tax history of Australia", you will see that the previous recession in the Us was in the 30's, the same as it was in Australia, but with the same cause - low top tax. Australia escaped from the recession - although I believe it was really a depression. by increasing the top tax to a level to restrain the greedy from grabbing excessive incomes ie our top tax was raised to 66.6%, which fixed the recession and it stayed there suscessfully for 20 years. The idiot treasurers since then, have progressively lowered the top tax again and a recession was achieved 3 times in the last 30 years. Choosing a treasurer is definitely not for a millionaire or lawyer, their greed or training does not cope with that type of expectation. If you look in the web at “tax history of the US”, “Tax history of Australia”, you will see that the previous recession in the Us was in the 30′s, the same as it was in Australia, but with the same cause – low top tax. Australia escaped from the recession – although I believe it was really a depression. by increasing the top tax to a level to restrain the greedy from grabbing excessive incomes ie our top tax was raised to 66.6%, which fixed the recession and it stayed there suscessfully for 20 years. The idiot treasurers since then, have progressively lowered the top tax again and a recession was achieved 3 times in the last 30 years. Choosing a treasurer is definitely not for a millionaire or lawyer, their greed or training does not cope with that type of expectation.

]]> By: Christina http://blog.sli-smsf.com/2009/10/02/case-for-deflation-part-2/comment-page-1/#comment-50 Christina Fri, 02 Oct 2009 08:29:19 +0000 http://blog.sli-smsf.com/?p=883#comment-50 Hi Dean Yeah, the book is an interesting read and goes into a lot more than I can cover in a blog post. I will try to cover some of the points you raised with what was in the book and some of my own thoughts: 1) Re deflation, to me it is the result of supply exceeding demand. The current manufacturing facilities were set up to anticipate increasing demand. When demand (spending) decreases instead, there is over production and to get sales, you have to reduce prices. Eventually some suppliers will go out of business and supply will equal demand and then prices can start to go up again. So deflation is temporary. 2) Re inflation. As you rightly pointed out, governments want inflation coz it makes it cheaper to pay their debts. They will print and create more M0 but total money supply is still contracting as people don't want to borrow and banks are reluctant to lend. Private debt is going down faster than (govt debt + printing) is going up. That is why we are getting deflation instead of inflation. 3) Re commodities, there will not be much need for them in the short term when production is not going up. Initially, some people may buy them to stockpile because of the fear that dollars will become worthless (I was one of them) but commodities are not of much use if they just sit around and some commodities like oil is expensive to store. Eventually they have to sold cheap if supply exceed demand. Harry Dent also anticipates deflation of commodity prices. He also believes in a 30 year commodity cycle which is due to peak in 2010, but that is another story. Prices will go up again once a new equilibrium in supply and demand has been reached. Deflation will happen in the shake out period and the deflationist investment plan is to stay in cash or cash equivalents until prices stop deflating and they will be in a strong position to buy at a bargain when that happens. A more aggressive plan would be to use your cash to buy inverse ETFs that can profit when the market goes down. I just open a position in SH which is the Proshares ETF that inversely tracks the S&P500. This was a recommendation by Harry Dent in his Sept 11 update which fits in with my investment strategy. I was also more worried about inflation before but I think I am leaning towards the deflationist camp now but I am still holding a small stash in SLV just in case I am wrong. The deflationist plan of staying in cash will be disastrous if there is hyperinflation and dollars become worthless. All the best in your investing in 2009-10, it will be a tricky year ahead. Hi Dean
Yeah, the book is an interesting read and goes into a lot more than I can cover in a blog post. I will try to cover some of the points you raised with what was in the book and some of my own thoughts:
1) Re deflation, to me it is the result of supply exceeding demand. The current manufacturing facilities were set up to anticipate increasing demand. When demand (spending) decreases instead, there is over production and to get sales, you have to reduce prices. Eventually some suppliers will go out of business and supply will equal demand and then prices can start to go up again. So deflation is temporary.

2) Re inflation. As you rightly pointed out, governments want inflation coz it makes it cheaper to pay their debts. They will print and create more M0 but total money supply is still contracting as people don’t want to borrow and banks are reluctant to lend. Private debt is going down faster than (govt debt + printing) is going up. That is why we are getting deflation instead of inflation.

3) Re commodities, there will not be much need for them in the short term when production is not going up. Initially, some people may buy them to stockpile because of the fear that dollars will become worthless (I was one of them) but commodities are not of much use if they just sit around and some commodities like oil is expensive to store. Eventually they have to sold cheap if supply exceed demand. Harry Dent also anticipates deflation of commodity prices. He also believes in a 30 year commodity cycle which is due to peak in 2010, but that is another story.

Prices will go up again once a new equilibrium in supply and demand has been reached. Deflation will happen in the shake out period and the deflationist investment plan is to stay in cash or cash equivalents until prices stop deflating and they will be in a strong position to buy at a bargain when that happens. A more aggressive plan would be to use your cash to buy inverse ETFs that can profit when the market goes down. I just open a position in SH which is the Proshares ETF that inversely tracks the S&P500. This was a recommendation by Harry Dent in his Sept 11 update which fits in with my investment strategy.

I was also more worried about inflation before but I think I am leaning towards the deflationist camp now but I am still holding a small stash in SLV just in case I am wrong. The deflationist plan of staying in cash will be disastrous if there is hyperinflation and dollars become worthless.

All the best in your investing in 2009-10, it will be a tricky year ahead.

]]> By: Dean http://blog.sli-smsf.com/2009/10/02/case-for-deflation-part-2/comment-page-1/#comment-49 Dean Fri, 02 Oct 2009 06:15:46 +0000 http://blog.sli-smsf.com/?p=883#comment-49 Interesting stuff Christina, Of course there are areas where spending will increase due to the aging boomers, healthcare for example. This sits well with my flexible roadmap that the ultimate lows for this secular cycle will come between 2014 and 2018. I really wouldn't want to be a buy and hold investors for the next 5-10 years, unfortunately that is what most people are via their managed funds and super accounts. If you couple the demographics with the absolute need to revert to saving after the credit implosion it seems probable that there will be less spent in real terms in modern economies. However, I don't see how that necessarily leads to deflation. Industrialised governments around the world need inflation to dig their way out of debt. The printing presses are running hot, commodities of all kinds will be become scarce as the 5 Billion don't haves strive to become haves. Interesting stuff Christina,
Of course there are areas where spending will increase due to the aging boomers, healthcare for example.

This sits well with my flexible roadmap that the ultimate lows for this secular cycle will come between 2014 and 2018. I really wouldn’t want to be a buy and hold investors for the next 5-10 years, unfortunately that is what most people are via their managed funds and super accounts.

If you couple the demographics with the absolute need to revert to saving after the credit implosion it seems probable that there will be less spent in real terms in modern economies. However, I don’t see how that necessarily leads to deflation. Industrialised governments around the world need inflation to dig their way out of debt. The printing presses are running hot, commodities of all kinds will be become scarce as the 5 Billion don’t haves strive to become haves.

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