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[SilentOne]

Bonds and 'flation

"When it comes to deflation we think we have, over the past 6 months, heard/seen it all. At various times and in various publications it has been explained to us that falling interest rates are a sign of deflation and that rising interest rates are deflationary; that a rising oil price is deflationary and that a falling oil price is a sign of deflation; that despite the obvious evidence of inflation in the performances of the US$ and the prices of most commodities over the past few years, this year's counter-trend moves in the currency and commodity markets are signs of deflation (as if any market ever moves higher or lower in a straight line); that a falling gold price reflects deflationary pressures while a rising gold price is a sign of deflation because gold is money and during deflation the demand for money increases; that even though a rising oil price is deflationary due to the additional burden higher energy prices place on consumers, when Walmart reduces the same burden by importing a lot of cheap stuff from China the effect is also deflationary.

So, Mr Greenspan, you can proceed full-steam ahead with your inflation agenda because no matter how much INflation you promote there will be plenty of analysts/commentators who will continue to refer to DEflation as a clear and present danger and who will, therefore, unwittingly assist you in the critical task of managing inflation expectations. After all, figuring out how to inflate has never been a challenge for the Fed and nor will it ever be as long as there are no objective limits on money creation. Instead, the real challenge for the Fed has, on occasion, been to figure out how to inflate whilst keeping inflation expectations in check."

Ahem to that!

cheers,

john

[Not Too Swift]

I saw this too, and I was surprised by it. A while back Saville also said that you can tell when deflation is winning by watching the dollar because it will be rising. That hurts debtors. A falling dollar bails them out. By that measure, deflation has been winning slightly since January, and the fed has slightly been losing its battle against deflation. I have been surprised that the dollar has held up so well this year. I would have thought that the fed would have kept it on its downward course through to the election. The other scenario that I keep in mind is that the fed may have a target range on the dollar and we may be in the middle of it now. (Remember McTeer's Goldilocks price range on gold from $300-$400/oz?) That could be part of their attempt to engineer a soft landing. But if so, I think it means we will get a recession and a nasty market decline.