"Inflation and Deflationary phenomenons are a direct result of the money supply"
I have found little evidence to draw me away from this view, so far. Because if you were to view money as any bulk commodity, supply and demand metrics are at play here. Just think of money as the commodity that one uses to acquire commodoties! But deeper in my notes is also this statement:
"Deflation is worse for growing an economy than inflation"
My observation is that central bankers around the world are shit scared of deflation. But I haven't questioned why the above notion is true. Until now.
This article on mises.org (another dense read), takes a couple of passes to really get the gist. Its a revelation, and has me scratching down extra notes in that little book of economic truisms. Like:
"Firms and households can successfully produce any quantities of consumers’ goods at any price level and with any nominal quantity of money"
"A fiat money regime considerably facilitates the re-distribution of resources within society. It allows the owners of the printing press and their political and economic allies to enrich themselves far quicker and at much lower cost than any other producer in any other field."
The prevailing assumption about the evils of deflation are centred around consumption and investment. Mainly, how will consumers consume and investors invest with an expectation of a fall in the monetary value of real good or service?
This first part of the question is answered simply. Profit, which is the spread between the wholesale price and its retail. That being, deflation, in an enterprise works both sides of the ledger. Just don't be holding on to stock for too long!
The second assumption are investors. They can forget capital gain. But for value investing, cash flow or capital appreciation as measures of business success, are secondary. For its year on year profit growth that ultimately determines business success. I often look at a debt/asset ratio too, just to see how much a company is burdened to its financiers. So in deflationary investment markets, the dividend becomes an investors solace.
The most interesting part of this article is the discussion of debt. Deflation is very bad for both lender and borrower, as both parties are likely to take a punishing toll. Inevitably, deflation means debt restructure. A very bitter pill for both government and finance to swallow. So all central bank tools to pursue an inflationary path are being enacted.
It can be argued that the sole reason for quantitative easing is to turn around deflating markets, like property. Two decades of economic growth has been driven by mountains of debt in all world markets. One would argue no amount of inflationary push by printing money will turn around the deflationary effects of the current fashions in paying down our debts.
This first part of the question is answered simply. Profit, which is the spread between the wholesale price and its retail. That being, deflation, in an enterprise works both sides of the ledger. Just don't be holding on to stock for too long!
The second assumption are investors. They can forget capital gain. But for value investing, cash flow or capital appreciation as measures of business success, are secondary. For its year on year profit growth that ultimately determines business success. I often look at a debt/asset ratio too, just to see how much a company is burdened to its financiers. So in deflationary investment markets, the dividend becomes an investors solace.
The most interesting part of this article is the discussion of debt. Deflation is very bad for both lender and borrower, as both parties are likely to take a punishing toll. Inevitably, deflation means debt restructure. A very bitter pill for both government and finance to swallow. So all central bank tools to pursue an inflationary path are being enacted.
It can be argued that the sole reason for quantitative easing is to turn around deflating markets, like property. Two decades of economic growth has been driven by mountains of debt in all world markets. One would argue no amount of inflationary push by printing money will turn around the deflationary effects of the current fashions in paying down our debts.
No comments:
Post a Comment