>>>>Indy Flation...Although it seems a bit lost in today's popular financial media arena, the strict academician's definition of deflation is a contraction in the overall supply of money, leading to a sharp or sometimes sudden rise in its value, and a drop in the general level of prices. In fact, you don't have to dig through dusty economics tomes found in the bowels of university libraries to find this description. You'll find it in reference sources as generic as the Webster's dictionary. In like manner, inflation is defined as a rise in the supply of money and credit leading to a rise in price levels. Interesting in that what we have had happen in the real world of the last few years at least is really a mixture of these two phenomenon, again, at least as defined from the academicians point of view. <<<
In Harry Dent's book, "The Great Boom Ahead", he had an interesting definition for inflation that has stayed with me many years that I recall when the discussion comes up. It goes like this.
"I simply define inflation as the economy's means of financing a period of high investment. In other words, inflations occurs in our economy in a period in which there is a high requirment for investment and low productivity or savings and profits to finance it. The economy simply borrows from itself or it's own consumers by raising the prices of goods and services."
Dent wrote that labor force growth correlates with inflation better than any other factor. Since there is little chance of labor force growth for many years I think the Greenspan will be fighting a losing battle against deflation. Sure he may win a battle here and there but the war will be lost as our demographics show us a decrease in the labor force as the boomers retire as we head to "The Great Bust Ahead".
Why does Greenie fear deflation so much? Because we have a tremendous amount of debt to be paid. The debt would be much easier serviced with higher inflationary dollars. Greenie may be seeing now that inflation is our only hope for paying off that debt. That same debt which was a product of his irrational exuberance to add abundant liquidity to the economy starting back in 1997. To add liquidity now means more credit creation. I don't see that coming from the business nor consumer level. Reading words coming from the Fed this last week I truly think they are now in panic mode. Sure they are trying to put on a face that they are in control and have many tools. I'm not so sure that this current intervention isn't an "hail Mary" effort just to try to get us into 2003.
Joe
