A question

[Trevor]

That's weird; I thought we were stupid, spoiled and selfish

I sometimes find it hard to see how things could get worse in Washington, but those people never cease to amaze me, and I'm confident they'll find a way to surpass my expectations once again. That's about the only thing they're good at.

[Trevor]

I've looked back on periods of deflation in the United States and it seems like rapid inflation can happen during the crisis war, the worst case being our civil war, but not during the economic crash that precedes the crisis war.

[vincecate]

Vince, seriously, this brought something to mind. I posted some information about the Weimar hyperinflation where it said there was a 50% deflation before the hyperinflation. After that, you said that there has never been a deflation in a fiat currency except for Japan, which has had a mild deflation. Also, about a year ago, I posted some information about a 20-30% deflation in England that occurred while England was off the gold standard in the early 1800s, along with links to the Bank of England web site and a book that had a chart of the deflation.

Ok. I count a temporary deflation before hyperinflation like the tide going out before a tsunami comes in. To me it is not really a separate phenomenon but part of the hyperinflation process.

Also, while off the gold standard but returning to the gold standard is not really "pure fiat" in my mind. Yes, if you are trying to return to a gold standard you can get deflation.

Really I think the market in the early 1930s was abandoning the Federal Reserve Notes for a gold standard and that was the real cause for the deflation then.

So let me try to be more precise. I don't think there is any historical double digit deflation of a pure fiat currency that was not part of attempting to return to a gold standard or leading up to hyperinflation. Would you agree with me if I word it this way?

I think there are over 100 cases of hyperinflation in a pure fiat currency, resulting in the death of those currencies. If we just look for years with double digit inflation I think we are in the thousands. So it seems clear to me that the danger of double digit inflation, or even hyperinflation, is orders of magnitude greater than the danger of double digit deflation in a pure fiat currency. An investor wisely playing the odds should invest for significant inflation not significant deflation.

[Higgenbotham]

So let me try to be more precise. I don't think there is any historical double digit deflation that was not part of attempting to return to a gold standard or leading up to hyperinflation. Would you agree with me if I word it this way?

I would. Wording it that way opens up the possibility for the 30% deflation in this crisis period that John has predicted, so I don't see a huge conflict there. I believe that in order to get to hyperinflation quickly, the US would need to see a severe deflation like the one that occurred in Weimar. All fiat currencies have historically led to hyperinflation and you know I've said that's one of the only things I can state with 100% certainty; the only question is when. The US is something like 98 years into that process or, if someone prefers, 78 years or 40 years.

[vincecate]

So let me try to be more precise. I don't think there is any historical double digit deflation that was not part of attempting to return to a gold standard or leading up to hyperinflation. Would you agree with me if I word it this way?

I would. Wording it that way opens up the possibility for the 30% deflation in this crisis period that John has predicted, so I don't see a huge conflict there. I believe that in order to get to hyperinflation quickly, the US would need to see a severe deflation like the one that occurred in Weimar. All fiat currencies have historically led to hyperinflation and you know I've said that's one of the only things I can state with 100% certainty; the only question is when. The US is something like 98 years into that process or, if someone prefers, 78 years or 40 years.

While I agree that there is the possibility of temporary deflation just before the hyperinflation, I am not a short term trader and would never try to time it even if I thought the odds of it happening were much better than I do. If Weimar had maybe a year of deflation the US dollar might only get a few weeks. Maybe what we have right now is as good as it gets for the dollar. I think things will happen far faster this time because information flows far faster now. Hyperinflation is the period after inflation gets to over 5% per month and before the currency is completely destroyed and nobody uses it any more. In Weimar people did not understand what was going on for years. People will not stay so clueless so long this time. This time before we even get to 5% per month the news sources and blogs will be buzzing about hyperinflation trying to explain it, everyone will read up on hyperinflation. As they do they will bail out of the dollar right away. It won't take so many years for the dollar to get destroyed.