Inflation or Deflation?

[Noah Rosenblatt]

What is in store for 2021 and beyond? With rates at record lows, stocks at record highs, the fed pumping 100s of billions into the system, what can go wrong right?

Here is my roadmap (for fun ofc):

2021 --> deflation. CBs money printing + Fiscal stimulus creates a trading environment that lifts asset prices as investors search for yield. Works until it doesnt. Fed policy errors are likely to trigger a bust at some point this year.

2022 --> stagflation. CBs keep printing to combat the bust. Sets up a longer term inflationary cycle

2023-2025 --> inflation starts to creep in. 10yr rates breach 4%. hard assets performing well. commodity supercycle in play

2026-2029 --> inflation gets out of control. a modern day Volcker is needed

M1 (DISCONTINUED)

View a measure of the most-liquid assets in the U.S. money supply: cash, checking accounts, traveler's checks, demand deposits, and other checkable deposits.

fred.stlouisfed.org

 

[John Walkup]

I was on this train for a long time. I mean, look at the spike in money supply, how could that not have a disastrous effect on prices with all that extra money sloshing around? But the fact that prices have not spiked tells me that this infusion isn't inflationary. Moreover, the fact that it's hard to get PPP funds or SBA loans means banks aren't really lending because either they don't have the capital or they think the risks are too high. Capital is not really a problem, which means credit risk is. Credit gets risky when asset prices fall, so if anything, this spike without the corresponding inflation actually suggests deflation remains a problem. Don't fight the Fed!

 

[Noah Rosenblatt]

agree! deflation is the whole they are trying to fill all those dollars into. Ultimately, watch out though. Banks tend to lower lending volume in deflationary, higher unemployment environments like today, so money velocity way way down which jives with your comment

Velocity of M2 Money Stock

View data of the frequency at which one unit of currency purchases domestically produced goods and services within a given time period.

fred.stlouisfed.org

 

[John Walkup]

Good point. On a side note is there a measure of money that's not distorted?