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Five Things You Need to Know: Inflation vs. Deflation... Still


That there still exists an ongoing debate about inflation or deflation pains me. Clearly, I have failed you.


1. Inflation vs. Deflation... Still

That there still exists an ongoing debate about inflation or deflation pains me. Clearly, I have failed you, for one discrete order of pricing occurrences does not cancel out the other. It is tempting to think otherwise, of course, because inflation is associated with "a general rise in prices" while deflation is misunderstood by many to be, simply, a binary construct of the former.

Perhaps that is why we live in such confusing times; 10 years ago we left behind two decades of inflation of the money supply, a hyper-velocity credit expansion, coexistent with productivity gains driven by technology, etc etc. Today we live in an age of choked-up inflation. We cling to a desperate framework for credit expansion even as we simultaneously, even secretly, repudiate the same. The velocity of desire for credit has fallen. The net result is a mash-up of inflation/deflation/stagflation, like some weird music and dance overlaying a late '90s sitcom.

Nevertheless, the macroeconomics of co-existing "-flations" aside, it is still possible to understand pricing. The Billion Prices Project @MIT was created to do just that; collect prices from hundreds of online retailers worldwide. The picture below may help soothe the antagonism between the head and heart, the disparity between the world and the wallet.

2. New Social Paradigm: Debt = Suicide

Late last week, while we were ignoring business and finance in favor of preparations for the penultimate End of the World year, 2011, Bloomberg reported on the horrific story of a 30-year-old mother of two from the Indian village of Mondrai who poured two liters of kerosene on herself and lit a match. According to the article, the woman had argued with her husband the day before over how to repay multiple loans from microlenders.

India is presently the global hub of microlending, with $5.3 billion in microloans as of September 30 data, according to Bloomberg. But with microloans comes microdefaults, in the aggregate. On an individual level, what is small can come to feel enormous. Which partly explains why more than 70 people committed suicide in India's fifth-largest state, Andhra Pradesh, between March and mid-November.

This is important to note, particularly the kicker at the end, "selling debt is like selling drugs":

Microcredit has become "Walmartized" by unrestrained selling of cheap products to the poor, says Malcolm Harper, chairman of ratings company Micro-Credit Ratings International Ltd. in Gurgaon, India.

"Selling debt is like selling drugs," says Harper, 75, the author of more than 20 books on microfinance and other topics. "Selling debt to illiterate women in Andhra Pradesh, you've got to be a lot more responsible."

That viewpoint is precisely why the velocity of desire for credit has fallen. In the global credit deflation, it is possible to make a near infinite amount of credit available, but if no one wants it...

3. You May Not Be Aware...

You may not be aware: Jonathan Swift created one of the first, and most successful, microlending operation in the world in Ireland, called the Irish Loan Fund, to assist the immobile rural poor who faced severe undercapitalization. The Irish Loan Fund survived for nearly 200 years before disappearing in the mid-20th century. For comparison's sake, it took less than one-third of that time for all the banks in Ireland to fail under the weight of bad loans. At its height, the Irish Loan Fund made about 500,000 loans per year.

4. Optimism: The Re-Birth of Privatization

Among the many problems in financial journalism and reporting.... and blogging -- the constant need to manufacture crisis, the pointless polarization of things which are not remotely binary, the constant logrolling -- there is also the dogmatism of Anti-Government (Unless I Or My Firm Directly Benefits From It). Which is why on some days one sees nothing but screed after screed decrying The New Socialist State, The Coming End of Freedom, and so on and you get the idea. It's all out there for you if you need it.

Lost in the dogma, however, is what happens when government over-expands, when things which should be private become public and, ultimately, fail: a correction ensues. The "market," whatever the hell that means, adjusts. For example, see this piece from the New York Times over the weekend on "A Push to Privatize Pennsylvania Liquor Stores." (NB: If one believes the wingnuts, this piece could never have been written, appearing as it does in the New York Times).

Kevin Harley, a spokesman for the incoming governor, Tom Corbett, said that while privatization would face opposition, "I think we can get it done."

"The system is better than it was, but it is still a government monopoly," Mr. Harley said. "The question will be whether selling wine and spirits is a core function of government."

As city and state budget woes continue into 2011 and 2012 (if we get last that long), then we should expect to see many services that were formerly government-run fail and become privatized. Take note: If you focus on the negative aspects of cities failing, of states running massive budget shortfalls, then you will miss the ultimate impact these failures will have on the economy. This is a bullish thing.

5. 2012: The Prequel

It's the penultimate year! 2011. Welcome. No wonder birds are falling from the sky in Arkansas. (And now dead fish are floating in the Arkansas River... hundreds of thousands of them.) Why? Oh Lord, why? Is this the prequel to the world-ending events we are told will unfold in the year 2012? Perhaps. Last week I wrote a bit of speculative fiction on what all this might mean for markets for The Awl. Again, it is fiction. Did I mention that it's fiction?

By May it was estimated that around 100 million people formerly classified as delinquents, defaulters, and deadbeats had taken up 2012 as a rationale for walking away from their debts. They called themselves The 12 Repudiators. That's 12 as in 2012, The End of Days.

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