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Wednesday, July 14, 2010

Inflation/Deflation Wassup?

I just finished going through comments where a so-called "Master Po" argued against TIPS and in favor of gold. Parts of his argument were flat out wrong, and commenters let him know. Hopefully today ol' Master Po is considerably wiser.

In any event, there was some commentary on inflation and deflation, and since I cover this with my Econ 101 students each semester, I thought it was worth a post.
In fact we go over all the "flation" words used in economics: inflation, deflation, disinflation, hyperinflation and stagflation. Whew! I think that's all of them. If anyone knows of another one, please let me know.

The two that get most confused are deflation (overall price level is actually dropping into negative territory- ex. CPI down 2% year to date) and disinflation ( overall price level is increasing but at a decreasing rate - going from +3% rise to a +2% rise).

2 Quiz Questions
1. Has the U.S. ever experienced hyperinflation?
2. When did the U.S. experience stagflation?

EXTRA CREDIT ESSAY: Is deflation good or bad for the country? Who is helped and who is hurt?


  1. Could the 70s-80s period be considered a period of significant inflation, if not hyperinflation?

    What are your thoughts on an "inflationary deflation"; where asset prices go down (homes, stocks) and the dollar simultaneously decreases in purchasing power (regular goods are more expensive)?

  2. The 70s - 80s was a period of high inflation and high unemployment so it was a period of "stagflation". The U.S. experienced hyperinflation during the revolutionary war.

    The term "inflationary deflation" sent me to Google. I think you may have invented a new term! It definitely applies to today where we are experiencing deflation in a major hard asset class, houses and real estate, as you point out but have inflation in other parts of the economy.

    Thanks for the comment "Invest It Wisely".

  3. Hence the phrase, "Not worth a continental." :-)

    Soon to be, "Not worth a dollar/George Washington/greenback".

    Hope it doesn't come to pass, but all signs put that way, IMO.

  4. Point that way, oops.

  5. Hey Robert,

    Actually it was a certain Daniel Amerman who introduced me to the concept. He has a series that talks a lot about this. He also sells a course about it; I haven't and probably won't buy it, but even the free newsletter has been pretty interesting to read!

  6. re:David Good point on "not worth a Continental". I agree that the odds point to a serious bout with inflation sometime in the next 10 years which will be world wide and will be a major test for the survival of the monetary system. It could push us back to the gold standard.
    re: Kevin I looked at Amerman's site. He offers an interesting course on investing in an inflation/deflation environment. I however am set in my investment approach.