Tuesday, February 3, 2009

Deflation Vs Inflation debate

For a well versed or well read person, these days and the investors all around the world - one question might be rendering their nights sleepless till the d-day arrives.

For the issue right now with the major developed economies is the debt deflation occuring, enabling the Fed and other major central banks to inflate the economy through various fiscal and monetary tools in their arsenal. The activity would go as along as the deflationary concerns are abound in the market - also giving Fed and other central banks an excuse to let their printing binge go on.

Let us see the events unfolding in the Fiat currency economies.

Your monetary theory states that the inflation/ deflation depends on the following three factors

  1. Money supply into the economy

  2. Money velocity into the economy

  3. Output of the economy

Thus, right now the velocity surely has reduced, due to the risk aversion entering the system, people hoarding money onto their Dollars and UST bills. In addition with all the unprecedented losses having taken place in the past year, Fed is providing money to the banking and financial industry to TRY to make them solvent. The estimates range from $3.6 trillion (Nouriel Roubini) to Goldman Sachs coming out with $4 trillion

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