Monthly Archives: May 2009

The Paradox of Deflation with Inflation

One of the primary economic arguments today is whether we will have deflation caused by the bad economy or inflation caused by the response to the bad economy.

I believe we will see deflation in many assets but inflation in staples like food and water.

It’s my opinion that we will continue to see a huge inflation in Cash prices but offsetting deflation in Credit prices. Think of the CPI as averaging the two product baskets, hence the disinformation of current low inflation being reported.

For example, bread is typically purchased with cash while TV’s are typically purchased with Credit.

We all know the distortions of the current CPI dating back to the Clinton years. To really understand the problem just simplify the basket to two goods; one a necessity and one a luxury.

2006 – Bread – $1 per loaf, 30″ Flat Screen TV – $1000
2009 – Bread – $2 per loaf, 30″ Flat Screen TV – $500

In 2006, $3000 would buy 1000 loaves of Bread and two 30″ Flat Screens

In 2009, $3000 would buy 1000 loaves of Bread and two 30″ Flat Screens

Hence no inflation, as long as you can eat a Flat Screen TV.

If you would like to learn more just Wiki “Gresham’s Law”

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