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|User Info||Pillars of deflationists' arguments disputed; entered at 2007-12-02 16:21:49|
The point of the post was to point out the flaws in the "deflationists" or dollar bulls' arguments on this board, and to stimulate debate on the question of whether dollars are going to increase in purchasing power, as most of the people on this board believe, or whether dollars will lose purchasing power. Some people found the post helpful, you apparently didn't. Most of the articles were from a discussion going on in 2004 about the "dollar short" theory propounded by Richard Russell, George Paulos and Sol Paha, and Rick Ackerman. The "dollar short" advocates believe the dollar will become more valuable due to our huge debt levels as the credit bubble bursts, the articles I quoted believe the opposite. Gold enters the discussion because obviously it would be an alternative to US dollars if the dollar loses purchasing power. The response of the gov't to the unfolding banking crisis, whether and to what extent they try to monetize the problem or not, is obviously also relevant, which is why the inflation-deflation debate enters the discussion.
Imo the articles quoted undermine the arguments made by the deflationists or dollar bulls on this board.
I disagree with your statement that the quotes were taken out of context, that the Norcini quote was ludicrous, that the comments were inconsistent, that the quotes don't reflect the main points of the authors, etc. But obviously I was expecting people to read the entire articles, as you have apparently done, as opposed to just the quotes.
The main points of the articles going one by one from the quotes I gave, were,
1) gold is not a commodity, relevant since some on this board say it is. Commodities get consumed, gold for the most part doesn't,
2) dollar bulls who believe that dollars will become more valuable as credit gets destroyed and defaulted upon are neglecting 2 points,
a) that we import a lot of our goods,
b) trade and capital flows will reverse as the US stock market declines; eg, as the US stock market declines, foreigners will sell US stocks and convert their dollars to other currencies, causing a loss of purchasing power in the dollar. Norcini even has a nice chart showing what happened to the US dollar index last time stocks collapsed,
3) US production will decline in a severe recession/depression, lessening the value of the dollar, all else being equal,
4a) the huge quantity of US Treasury and agency debt held by foreigners is another source of supply that threatens to undermine the purchasing power of the dollar,
4b) Every other country with a banking crisis has had their currency collapse,
5) When it became obvious in early 2007 that we were entering a credit crisis, did the dollar gain value as the dollar bulls supposedly would have predicted? No
6) Some members of this board seem 100% convinced we are going to have deflation and not significant gov't intervention to arrest it. Blumen points out there have been many instances of hyperinflation, so how can one be so sure it won't happen here?
7) Despite the claims of many on this board, it is in the interest of the US govt and banks to inflate their way out of the current problems, rather than to allow deflation to take hold, and this will be possible to accomplish (see previous point)
8) We're currently at war, and wars have always been inflationary.
Some of the above points are stronger than others. My own opinion, which I have stated before, is that dollars will lose purchasing power against almost everything except US real estate and US stocks. So obviously any extra cash I get is not going to stay in US dollars or Treasuries, as there are better investments. But if I had significant debt levels, which I don't, I would use the dollars to pay off debt first, as I am not certain of the eventual outcome.