Are we really heading towards hyperinflation or towards deflation?

[Poker Player]

I am going to summarize the argument of a video I just watched. I watch a lot of videos on Youtube that I don't think they are worth summarizing here but in this case the argument used has made me think and I want to expose it.

Why I am Betting AGAINST the Crowd on This. Alessio Rastani.

Is all the money printing going to cause hyperinflation in the next few years? No, we are more likely heading towards deflation.

We are likely heading towards an economic depression and History has taught us that recessions and depressions are deflationary, not inflationary. The previous recession we had in 2008 was deflationary:



Inflation dropped massively and the same happened in the year 2000. Instead of seeing rising prices in the next economic recession or depression we are likely to see falling prices.

Another reason why we are heading towars a recession in the nexts few years is because bonds have likely bottomed and have started and uptrend.

But what about all the money that has been printed?





Japan has been massively printing money for several years but have they seen inflation? No.

In Japan, They’re Still Worried About Deflation, Not Inflation

In a recession or a depression, the banks usually cut the supply of credits. We have to bear in mind that for inflation to ocurr we need and increase in the supply of credits. Do banks like to lend money to people during a recession? No. They know people are more likely to default and not pay them back. In those kinds of situations (recessions and depressions) they reduce the supply of credits, they make it more difficult for people to borrow and that kind of action causes falling prices.

That's why in the 2008 recession we had what was called the "credit crunch".

There is something else that happens during recessions and depressions: money goes out from risky assets to cash and the USD gets stronger.

The majority of people out there think the dollar is doomed but because they are expecting hyperinflation. All the media talks about now is inflation and not deflation. So people are expecting a crash in the USD, which is the opposite of what he is expecting. In fact, he is betting against the crowd in this point. Then he explain that as long as some technical (analysis) points are not broken he remains bullish on the USD and bonds.

So much for the summary. The truth is that I had not seen anyone talking about this. Everyone talks about inflation or hyperinflation without taking into account the credit crunch and the historical deflationary nature of the crises.

Another thing to analyze, if he is right, is how Bitcoin would behave in a deflationary environment. I believe that at the beginning of a crisis it would happen like in March 2020, that people would panic and sell fast to get cash. But once the initial scare passed, money would return to Bitcoin, which is an asset that is perceived increasingly as safe. Also, traditionally gold was a safe haven during crises, and I think it will be replaced by Bitcoin.

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[1715676842]

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[jackg]

I'm expecting a housing market crash to occur around September-November this year, if the past repeats itself, bitcoin will crash around the same time by about 70-90% like we did in 2017. After then it'll probably recover or stabalise (and if this happens, the drop will likely stay above $15k after a run off peak just before it).

What you're talking about is EVERYONE becoming stingy like they did in 2008 (every asset class seemed to have dropped around then and everyone runs to physical cash if they can). The UK started throwing money at people to try to get stuff going again around then too (ppi seemed to coincide with it).

A lot of investors that would've taken on risky investments were probably very surprised one of them paid off and just vanished for a while in the hopes they didn't lose it - with credit default swaps and other derivatives.

[Poker Player]

What you're talking about is EVERYONE becoming stingy like they did in 2008 (every asset class seemed to have dropped around then and everyone runs to physical cash if they can). The UK started throwing money at people to try to get stuff going again around then too (ppi seemed to coincide with it).

Or like they did in march 2020 money flowed out of all financial assets. The good thing about 2020 was that it recovered after a short time, with Bitcoin being the big winner.

So that was what I was commenting on in the last part of the post, which I think will happen if the author of the video is correct in that we are heading towards deflation and not inflation.

[Obito]

If they keep injecting money, they will head there some day because this is really different from what they did in the past because the stimulus as of this time is much bigger compared to recessions and housing crisis back then. It will be an implosion that will happen unless they find some solution on what to do with the large amount of money injected.

[stompix]

You're putting too much emphasis on the credit supply and too little on the prices and consumer behavior.
In the exact link you provided about Japan you will see the main reason for deflation and why it will not go away

Some companies have been cutting prices to encourage customers to shop and dine out.
Fast Retailing Co. lowered prices of all items sold at its Uniqlo clothing stores in Japan by about 9% on March 12, saying that people are experiencing “unprecedented difficulties because of the coronavirus pandemic.” It was the first time the company cut prices of all Uniqlo products.This month restaurant chain Ootoya Holdings Co. reduced the price of its signature homestyle set meal, which comes with deep-fried chicken and pumpkin croquettes, by about 50 cents to the equivalent of $6.80. Ootoya’s same-store sales dropped nearly 30% in February during a state of emergency that expires Sunday.

You can't have inflation unless the prices of goods go up, no matter how much money you print if the demand and offer keep the same balance at the same levels you will not experience inflation. The best example in this is Venezuela, inflation isn't the result of only printing money, is the result of no goods available on the market, the increased difficulty in procuring those is what's driving that inflation, if tomorrow you would have thousands of tons of goods shipped there for free you will see suddenly the inflation rates going down as there will be no more pressure on the prices, no matter how much money gets printed as demand is satisfied there is no uptrend.

However, the experience of prolonged low growth and low inflation has become deeply embedded in people's mindset and behavior, and the assumption that prices will not increase easily has been entrenched. Recently, many analyses show that households' inflation expectations are significantly affected by their experience for a long time. For example, compared to the age group who experienced relatively high inflation, inflation expectations are lower for younger generations in Japan. They only have the experience of low inflation and deflation. In addition to the two factors that I explained, there are many others, including the progress
in globalization. Various factors are interacting with each other and working on prices. For example, when households strongly believe that prices will not increase easily, firms may become cautious about raising their prices for fear of losing their customers, and thereby try to constrain the unit labor cost or markup.

There will be no inflation without people spending, and if people are reticent on spending companies will look rather on cutting costs than on raising prices, and cutting costs mean that there is huge pressure on trying to raise wages, with no wage increase insight consumers are worry of spending, and the circle is complete.

On the other side (of the ocean), when you print money and distribute them to anyone who has a name  there is no way that money will not be spent on anything that can be bought, with a chronic shortage of merchandise on the market huge demands that couldn't have been satisfied even in normal times will of course break the balance for now, so if more airdrop checks come you will see more inflation, no matter what the FED does, they can play with the rates all day long, the bird has flown, there is nothing they can do.

[sunsilk]

He's betting the crowd because of credit? Well, if that's been the case then the inflation should have been slowed down for so long. But it's a fact that each country has to go through, inflation.

As for Japan, there is no doubt that they are one of the best economics and that's why they've defeated inflation and slowed it down. But that doesn't mean that they won't have that little percentage in the next years.

[Poker Player]

You're putting too much emphasis on the credit supply and too little on the prices and consumer behavior.

Not really. It's not me. I've been just summarizing what Alessio Rastani says in the video.

In the exact link you provided about Japan you will see the main reason for deflation and why it will not go away

Some companies have been cutting prices to encourage customers to shop and dine out.
Fast Retailing Co. lowered prices of all items sold at its Uniqlo clothing stores in Japan by about 9% on March 12, saying that people are experiencing “unprecedented difficulties because of the coronavirus pandemic.” It was the first time the company cut prices of all Uniqlo products.This month restaurant chain Ootoya Holdings Co. reduced the price of its signature homestyle set meal, which comes with deep-fried chicken and pumpkin croquettes, by about 50 cents to the equivalent of $6.80. Ootoya’s same-store sales dropped nearly 30% in February during a state of emergency that expires Sunday.

Prices go down because people don't have as much credit and therefore don't have as much money to spend. The fact that restaurants have to lower prices is a consequence of the fact that less and less credit is being given in Japan.



Source.

You can't have inflation unless the prices of goods go up, no matter how much money you print if the demand and offer keep the same balance at the same levels you will not experience inflation. The best example in this is Venezuela, inflation isn't the result of only printing money, is the result of no goods available on the market, the increased difficulty in procuring those is what's driving that inflation, if tomorrow you would have thousands of tons of goods shipped there for free you will see suddenly the inflation rates going down as there will be no more pressure on the prices, no matter how much money gets printed as demand is satisfied there is no uptrend.

You might have a valid point here. I haven't found reliable data but I don't thing they are giving many credits to people in Venezuela. Supply and demand have to be factored in the equation.

There will be no inflation without people spending, and if people are reticent on spending companies will look rather on cutting costs than on raising prices, and cutting costs mean that there is huge pressure on trying to raise wages, with no wage increase insight consumers are worry of spending, and the circle is complete.

Yeah but here we go again. If people get credit people will spend more, so companies will raise prices instead of cutting costs.

[stompix]

Prices go down because people don't have as much credit and therefore don't have as much money to spend. The fact that restaurants have to lower prices is a consequence of the fact that less and less credit is being given in Japan.

You say that people don't take a loan to spend and thus they have no more money to spend.
I say people are reticent on spending and thus they don't take loans.

The low demand for loans is a result of decreased will to consume and to spend, not the other way around, you can have zero interest mortgages if people don't want to buy a house they will not. The interest rate comes into the picture and tries to fix this by offering cheap loans, but if even cheap loans are not stimulating consumption then there is zero you can do, you can't force people to spend money. Well, you can by outlawing everything they own and forcing them to change everything in their house, even the house but we're still talking about normal measures, not gulag-style economic reforms.

Now, to the numbers:
https://www.bloomberg.com/news/articles/2020-10-09/japan-s-savings-rate-hits-20-year-high-as-govt-cash-gets-banked
Japanese are saving, they are not spending, they hold $9.7 trillion in house savings, they have money to spend but simple, they don't want to, they have no incentive to take loans and to spend more, simple as that.
Besides, there is a huge difference in mentality, offer a loan with a two-year grace period and then 0 interest loan to people from Japan, Canada, Germany, Mexico, and Botswana and let's see how many will and what will they spend it on. 

[Ucy]

Your own version of "deflationary" shouldn't be confused with "Deflationary Currency" Or currency that reduces in supply, which is exactly what Bitcoin does.
I think Inflation can occur when demand for basic goods and services exceed supply. So if you are printing alot money for particular goods and services esp those that are in high demand, make sure you reproduce enough of the goods and services (without compromising on quality) to meet the demands else there will be inflation.
I think you could experience deflation/decrease in price of luxuries or things people don't typically need, during financial crisis.

[palle11]

If they keep injecting money, they will head there some day because this is really different from what they did in the past because the stimulus as of this time is much bigger compared to recessions and housing crisis back then. It will be an implosion that will happen unless they find some solution on what to do with the large amount of money injected.

I think you seem right in some way especially when money are printed and uncontrolled , this will definitely increase the price of goods because consumers may have excess money in circulation to throw around few goods. Plenty money chasing few goods will cause a hyperinflation and that is what this may come to in near future. But against contributors writing about possibility of bitcoin crashing either because of inflation, I don't think say rather we may have more price increase because investors would run to acquire assets which bitcoin is one of them for investment and this will push demand more.

[The Sceptical Chymist]

You can't have inflation unless the prices of goods go up, no matter how much money you print if the demand and offer keep the same balance at the same levels you will not experience inflation.

I get what you and OP are saying, but what happens when the citizens of a country like, say, the US suddenly have a lot more cash in their pockets as a result of all of the government/institutional policies that put it there (like stimulus, unemployment benefits, and who knows what else)?  They start buying lots of things, and the price of those things starts to rise--and that includes investments like stocks, real estate, and crypto, too. 

I'd argue that this is precisely what has happened in the past few years, and I don't doubt for one minute that the rampant money printing has played a part in it.  The government has been giving money away like it's toilet paper, and they wouldn't be able to do that unless they were in control of the money supply.

But that's as far as I'll go with my opinions, since I'm no economist and I'm not going to pretend I have all the answers.  What I do know is that we do have inflation, and it's pretty easy to see that prices of goods and services are increasing at a rate that hasn't been seen in years.

[Hydrogen]

Japan has been massively printing money for several years but have they seen inflation? No.

In Japan, They’re Still Worried About Deflation, Not Inflation

Yen value would show inflation on FOREX exchanges if japanese mints printed the yen at higher rates in contrast to international currencies. The reason that hasn't happened is due to practically every nation on earth printing fiat in increasing volumes.



Inflation may be most visible in the elevated cost of consumer goods. A 2 liter bottle of dr pepper costed around $1 close to 10 years ago. Today the same bottle costs $2.

Banks announced they would try to contain inflation by keeping expansion of the monetary supply locked inside of hedge funds and investment bank trading loops. Which could prevent some of it from spilling over into markets.

[Tytanowy Janusz]

Oh... This guy is smarter than anyone ... predict deflation ... wihtout knowing what deflation is? on this picture we had 1 deflation in 2009. All this drops are not deflation. Its disinflation (decrease of inflation) ... not deflation. So if he bets on short term disiflation ... i can agree with that but I would not expect long term deflation.

In a recession or a depression, the banks usually cut the supply of credits. We have to bear in mind that for inflation to ocurr we need and increase in the supply of credits. Do banks like to lend money to people during a recession? No. They know people are more likely to default and not pay them back. In those kinds of situations (recessions and depressions) they reduce the supply of credits, they make it more difficult for people to borrow and that kind of action causes falling prices.

Inflation depends on money supply and how fast money circulates. And banks like to lend money all the time. No matter if its deflation of inflation time.


Inflation is not that bad when we have interest rates higher than inflation. What is sick is that we have real interest rates equal -5%! Thats the lowest since 1980!


https://www.longtermtrends.net/real-interest-rate/

[Poker Player]

You say that people don't take a loan to spend and thus they have no more money to spend.
I say people are reticent on spending and thus they don't take loans.

I repeat that I don't actually say that, I summarize what Alessio says in the video, which sounded plausible to me. Now, you make me doubt. It sounds to me like a question of which came first the chicken or the egg.

Japanese are saving, they are not spending...
Besides, there is a huge difference in mentality...

Perhaps the inflation problem is more complicated than it would seem at first glance.

What I do know is that we do have inflation, and it's pretty easy to see that prices of goods and services are increasing at a rate that hasn't been seen in years.

Yes, it is clear that there is now inflation. What I am not so clear about is whether in the future there will be a crash like the one in 2008 or worse, whether there will be inflation or deflation as the video says.

Oh... This guy is smarter than anyone ... predict deflation ... wihtout knowing what deflation is? on this picture we had 1 deflation in 2009. All this drops are not deflation. Its disinflation (decrease of inflation) ... not deflation. So if he bets on short term disiflation ... i can agree with that but I would not expect long term deflation.

No, I don't think he thinks he is smart. He sounds quite humble. He always uses "What I believe it is more likely.." and similar sentences to make his predictions.

Morover, the difference in nuance between deflation and disinflation does not invalidate his argument.

Inflation depends on money supply and how fast money circulates. And banks like to lend money all the time. No matter if its deflation of inflation time.

They like to lend money but in recession they don't lend it (or don't lend as much as they would like), as I said above, no matter what they like or dislike.

[jaysabi]

The majority of people out there think the dollar is doomed but because they are expecting hyperinflation. All the media talks about now is inflation and not deflation. So people are expecting a crash in the USD, which is the opposite of what he is expecting. In fact, he is betting against the crowd in this point. Then he explain that as long as some technical (analysis) points are not broken he remains bullish on the USD and bonds.

Another thing to analyze, if he is right, is how Bitcoin would behave in a deflationary environment. I believe that at the beginning of a crisis it would happen like in March 2020, that people would panic and sell fast to get cash. But once the initial scare passed, money would return to Bitcoin, which is an asset that is perceived increasingly as safe. Also, traditionally gold was a safe haven during crises, and I think it will be replaced by Bitcoin.

Hyperinflation is very unlikely, people have been warning about it in the US since we left the gold standard and despite never being right they still warn about it.  But deflation is equally unlikely, if not more.  We just don't have a monetary policy where deflation is likely to occur.  You're not going to have wide-scale falling prices while the money supply is increasing.

As for bitcoin in a deflationary environment, it would suffer greatly.  All the recent price appreciation of bitcoin is based on the false premise that the dollar is doomed to fail or be inflated to meaninglessness.  If a period where the dollar is getting stronger (deflation), Bitcoin is not likely to have nearly the speculative appeal it has today.  It is only the relative economic prosperity of those buying bitcoin that allows it to increase in price.  We see this every time there is an economic shock, bitcoin falls much faster than other assets- gold, real estate, equities, etc.  Because at the end of the day, Bitcoin is only based on speculation, so when people are economically afraid, there is no appetite for that speculation anymore.

[Tytanowy Janusz]

No, I don't think he thinks he is smart. He sounds quite humble. He always uses "What I believe it is more likely.." and similar sentences to make his predictions.

Morover, the difference in nuance between deflation and disinflation does not invalidate his argument.

When inflation drops from 10% to 5% we have disinflation but prices still goes up. Just a little bit slower. During deflation prices goes down. May we see disinflation in next few years? It is possible. Will we see deflation? I dont think so.
And when he shows disinflation on chart and call it deflation and based on this he assumes that we will see deflation .. it invalidate his argument.



Paper mark after WW1. They also had moments of disinflation, 2 years with 0 inflation, even moments of short term deflation. But in total after 5 years all savings were devaluated. What about recesion argument? Adam Fergusson in "When money dies" book describe a situation when a group of protesting people tore a policeman off his horse to kill the horse and tear off pieces of meat in the middle of the square to have something to eat.

I agree that fiats wont collapse in 1 day. We may see a inflation of 5-10% for 2 years. Then disinflation for another 2-3 years. And than massive inflation for another 2 years. Short term disinflation or even few months of deflation does not change the fact that being bullish on fiats is not the best idea.

Being bullish on this chart:



-95% in 100 years.

He brings DXY chart saying that as long as DXY chart looks good, he is bullish on dollar. Well inflation is not only US problem. Its all around the globe. Everyone prints. USD crash will not end in America. Whole word will crash because USD is a reserve currency and, what is also important ... almost every asset is evaluated and mostly traded against dollar (starting from gold, bitcoin, silver, oil, wheat, gas ... everything)
Excessive strengthening of the currency in relation to other currencies affects the economy of the country and its competitiveness in many industries. So gouvements wants its money to be as bad as others. So if few big prints because they need to, others print because they have to. So DXY chart has nothing to do with inflation.

He bring japan that fight with deflation saying that it is printing a lot since decade. M2 money supply in japan pumped by 20% in 10 years. M2 money supply in US pumped 20 % in 7 months... from 02.20 to 09.20 ... so what are we talking about here.

[jaysabi]

-95% in 100 years.

That's really irrelevant for all practical purposes because people don't hold cash for 100 years, so nobody suffers the inflation rate this chart shows.  Anyone with significant assets have their wealth in assets other than cash; equities, real estate, alternative investments, etc.  And the dollar will never suffer the type of volatility that bitcoin suffers on a daily basis, so how bitcoin is going to be a "safe haven" for inflation when it has greater price volatility than the USD by several hundred times is something that bitcoin maximalists never have an answer for.

[Tytanowy Janusz]

That's really irrelevant for all practical purposes because people don't hold cash for 100 years, so nobody suffers the inflation rate this chart shows.  Anyone with significant assets have their wealth in assets other than cash; equities, real estate, alternative investments, etc.

https://wolfstreet.com/2018/06/12/dollars-purchasing-power-drops-2-9-in-may-from-year-ago/

-20% in 10 years No one hold cash that long? So if you were about to buy a house from your own savings (not using a mortgage) ... saved 200k$ in 20 years ... you just lost 40k on inflation ...

The present system puts handcuffs on our hands. It makes us unable to go beyond a certain level. If you have 1 mln $ on your bank account you are paying 4000$ monthly in devaluation of your savings ... If you earn 6k$ monthly, spend 2k$ monthly on everyday spendings, rest 4k covers inflation ... that's pretty much your limit. You will not have more than 1 mln$ in present purchasing power.

And the dollar will never suffer the type of volatility that bitcoin suffers on a daily basis, so how bitcoin is going to be a "safe haven" for inflation when it has greater price volatility than the USD by several hundred times is something that bitcoin maximalists never have an answer for.

Gold pumped 2x in 10 months. Dumped 20% right after. Is gold a bad safe haven because its more volatile than dollar? no because dollar continusly goes to 0. Short term volatility does change anything.

[Poker Player]

That's really irrelevant for all practical purposes because people don't hold cash for 100 years, so nobody suffers the inflation rate this chart shows.  Anyone with significant assets have their wealth in assets other than cash; equities, real estate, alternative investments, etc.  And the dollar will never suffer the type of volatility that bitcoin suffers on a daily basis, so how bitcoin is going to be a "safe haven" for inflation when it has greater price volatility than the USD by several hundred times is something that bitcoin maximalists never have an answer for.

I agree.

Actually Alessio is talking about the short term, not about being bullish on USD for the next 30 years.

Within the long term downtrend, if you guess correctly when there are going to be some short upward spikes, you can make money on the short term.

Anyway I think Tytanowy Janusz argues well and has worked the posts and that's why I have merited him.

And no, I don't think the disinflation/deflation issue invalidates the argument, in the same way that Alessio talks about recession or depression, which are not exactly the same thing, as having the same effect on the granting of credit and therefore on inflation.

[jaysabi]

That's really irrelevant for all practical purposes because people don't hold cash for 100 years, so nobody suffers the inflation rate this chart shows.  Anyone with significant assets have their wealth in assets other than cash; equities, real estate, alternative investments, etc.  And the dollar will never suffer the type of volatility that bitcoin suffers on a daily basis, so how bitcoin is going to be a "safe haven" for inflation when it has greater price volatility than the USD by several hundred times is something that bitcoin maximalists never have an answer for.

https://wolfstreet.com/2018/06/12/dollars-purchasing-power-drops-2-9-in-may-from-year-ago/

-20% in 10 years No one hold cash that long? So if you were about to buy a house from your own savings (not using a mortgage) ... saved 200k$ in 20 years ... you just lost 40k on inflation ...

The present system puts handcuffs on our hands. It makes us unable to go beyond a certain level. If you have 1 mln $ on your bank account you are paying 4000$ monthly in devaluation of your savings ... If you earn 6k$ monthly, spend 2k$ monthly on everyday spendings, rest 4k covers inflation ... that's pretty much your limit. You will not have more than 1 mln$ in present purchasing power.

First, your math is wrong.  It would take you 20 years to lose 40k on 200k at this inflation rate, but if you had the $200k 20 years ago, you already would have bought the house and not experienced the inflation loss.  Which is my whole point.  Who holds $200k in cash for 20 years?  Nobody, because if you do that you're not very smart.  

Second, -20% in 10 years is appropriate for an asset that is designed to slowly depreciate over time. Compare that to bitcoin which loses 20% in less than a week on a regular basis and there's no comparison.  

Third, the handcuffs on macro economic prosperity created by the gold standard is much greater than the current system, which is why the world changed.  I'll take the current system over the former 100 out of 100 times.