More fascinating stuff from the very smart lady at The Automatic Earth.
Stoneleigh and Aaron Krowne battle deflationThe following is part of an on-going conversation between Aaron Krowne (who runs The Mortgage Implode-O-Meter) and Stoneleigh on the subject of deflation. It began 3 days ago when Aaron sent me an email reacting to Stoneleigh's recent article The unbearable mightiness of deflation. Civilized and well-argued discussions are a welcome delight.
Aaron: many good points. The way I understand it is that deflation is only happening in the financial economy, not the real economy. Stoneleigh: Deflation is a monetary phenomenon - the contraction of money and credit relative to available goods and services. It is either happening or it is not. Price falls in nominal terms are a lagging indicator of deflation as a price driver, but there are other price drivers as well, such as wage arbitrage, scarcity, substitutability (or lack thereof) etc. Price movements have no explanatory or predictive value in their own right as they are the net result of many factors that vary for different goods and services.
Deflation will eventually cause prices to fall almost across the board in nominal terms, while leaving them less affordable than they were before due to the collapse of purchasing power. Purchasing power will collapse as access to credit disappears and the ability to earn an income decreases drastically with skyrocketing unemployment. Lack of purchasing power will come from most people having no money. Those (very) few who have preserved their purchasing power in liquid form will find everything is very cheap indeed once we are further into a deflationary spiral.
Aaron: Many assets (i.e. cars, foreclosed houses) are transitioning from one economic sphere to the other. In the real economy (where they are bought outright, not financed), these goods have lower prices. But that doesn't mean "prices are falling" in the same sense as it would for a cup of coffee or your monthly power bill or health insurance -- and in fact all these prices are going up. Stoneleigh: Prices will fall, but as prices lag a deflationary contraction, many prices have not fallen yet. We have not yet seen the impact of credit tightening on price support for many things, but it is coming. Already we are seeing credit limits cut, cards withdrawn, borrowing against property cut etc. All that will have an effect, especially as it has very much further to go. The market is temporarily rallying at the moment, as we said it would in March, but once the sucker rally is over, the decline will begin again and the impacts will be increasingly obvious.
Much more at the link Stoneleigh has the home court advantage, of course. However, Aaron obviously either doesn't get or is unwilling to accept the implications of the fact that inflation/deflation are monetary phenomena and that DEBT IS MONEY.