Inflation,Deflation,Which,Infl DIY Inflation or Deflation: Which is it?

Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable{mso-style-name:"Table Normal";mso-tstyle-rowband-size:0;mso-tstyle-colband-size:0;mso-style-noshow:yes;mso-style-parent:"";mso-padding-alt:0in When starting a new work at home business it is very easy to become consumed by it. We spend so much time trying to get the business up and running that we may end up becoming burned out and lose our motivation. There is so much to learn and

"Inflation isalways and everywhere a monetary phenomenon."- Milton FriedmanOne of the most memorable and most quotedlines of the late Milton Friedman is summed up in another cliché of the quasiacademic world of the dismal science, "too much money chasing too fewgoods."Inflation: Buy NOWFriedman taught us that money is essentially agood or commodity, and its value is determined by supply and demand. One of theconsequences, and not the cause, of inflation is the increasing price of goods.When we realize that today’s money is likely to buy less goods in the future,we stop saving for the future and look for ways to spend it now. In so doingthe unsaved money increases the frantic chase to buy goods now.Inflation, in other words, occurs when moneybecomes less valuable relative to the cost of goods. This can happen when:1. The supply of money goes up2. The supply of assets goes down3. Demand for money goes down4. Demand for other goods goes upThe most common cause of inflation is when themoney supply rises faster than the supply of other goods and services.Money has value only as long as people believethat they will be able to exchange their money for goods and services in thefuture. This belief will endure so long as people do not fear future inflation.To avoid inflation, central banks are mandated to maintain price stability. Tothis end they are to ensure that the money supply does not increase too quickly.The Velocity of MoneyDeflation is the very opposite of this.Commonly deflation is defined as falling prices but falling prices are theoutcome of the underlying fault and not the cause. The cause is always andeverywhere, to borrow Friedman’s words, a decrease in the money supply. Furtherstudies show that equally important are the velocity of money, i.e. the moneymultiplier in the economy. When both these factors are in decline, recession orworse is heading full speed our way.What is ‘The Money Multiplier'?M3, which is the aggregate of a broad range ofbank accounts, has been abandoned by the Bernanke Federal Reserve since 2050,but it is still tracked by British and European monetarists. M3 startedcontracting at an alarming rate last summer warning about the direction of theUS economy a year or so in advance. This year the pace has quickened. The stockof money fell from $14.2 trillion to $13.9 trillion in the three months toApril, amounting to an annual rate of contraction of 9.6%. The assets ofinstitutional money market funds fell at a 37% rate, the sharpest drop ever.This plunge in M3 has no precedent since the Great Depression.The Money Multiplier, MM, is of fundamentalimportance in national monetary policy. In the U.S. from 1959 through September2008 banks lent out close to the maximum allowed. Then the broad money supplywas approximately equal to central bank money times the maximum MM allowed.During that period the multiplier was often a5 times factor or higher. During the great depression and again since 2008,banks have been accumulating excess reserves, i.e. not lending money, and theMM declined significantly. Through 2009 lending fell by over $100bn that was arecord 10% absolute decline, plummeting at a record annualized rate of 16%. Itseems that even before this year was underway a double dip recession, or worse,was the writing on the wall for the later half of 2010.The Road AheadRecent indications strongly suggest that aresurgence of the recession is on track now that the temporary effects of cashfor clunkers, discounts for first time home buyers, etc. have expired. CPI isheaded south along with consumer confidence.Money, as commodity, depends on consumer faithin its value. It seems the ordinary Joe has more confidence in money now thanat any time in recent memory. That is why Joe and Jane Doe are saving theirmoney in significant amounts for the first time in years. During deflation therelative value of money increases as we realize that today’s cash will buy moretomorrow as prices decline as deflation deepens. Governments despise ordinaryfolk like us, particularly this elitist socialist Obama government, while allthe time the actions of the people are clearly pointing out the road ahead -deflation.Cash is King?After a period of economic contraction theover capacity and over production that we see at the outset of the deflationaryperiod will be eliminated. At some point, be it in 5 months, 5 years or 30years, prices will get so low, and the hoarded money will be so great thatbuying will once again begin. Then we will likely see inflation get underwayand increase at an alarming rate, as there once more will be too much moneychasing too few goods.So for investors, "cash is king," isnot necessarily bad advice to follow at this time. For traders this is not theway to go. In all periods of economic activity trade occurs and markets existto facilitate that trade. Generally speaking asset prices decline duringdeflationary periods so trend following traders would for the most part beshort sellers. However from time to time declining markets are given tovolatile short covering rallies that can move quickly and to unsuspectinglevels of correction. These offer further opportunities to profit from tradingduring deflationary times. Market Profile or Auction Market Theory, offerreliable means of recognizing and understanding market structure and low risklevels for trade location.Straight Ahead: RenewedDeflation?We can expect renewed deflation immediatelyahead. The depth and duration of the deflationary spiral could well be of 1930’sdepression proportions. Through this period, the value of money will increase.Investors holding cash ready for the next bull market in assets is not a badthing to do. Traders on the other hand should continue to trade theopportunities in changing asset prices in markets that facilitate trade.Trade well and follow the trend, not the socalled "experts".