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(P&I) Extreme Economics – Inflation and Deflation

February 11, 2016
Inflation and Deflation

Figure 1: Inflation and Deflation

Essay. An “inflationary economy” is one in which the “price of an income” is low and a “deflationary economy” is one in which the “price of an income” is high and most of the World has been in a deflationary economy for the last several years and the most obvious recent trigger for systemic deflation was the extraordinary “World Scale” waste of money associated with the mortgage-lending frauds in the US between 2001 and 2007 which caused the financial “crisis” of 2008 and 2009.

And similar “frauds” have rolled into China and Europe since then, further exacerbated by extremely bad loans in India, Greece, and the Ukraine, for example, and the desolation in the oil & gas industry and the mines and other resources for want of customers; please see Figure 1 above for a brief introduction to inflation and deflation and what it means (and click on it to make it larger as required).

Pray for Inflation

We say that the “price of an income” is low in an inflationary economy because in an inflationary economy the price of an income will almost certainly be higher in the future than it is now; and, of course, we hope for a better future sooner rather than later.

A prosaic example of that is the “price of an education”; no matter what the price of an education is now in terms of its costs and deferral of an income, the cost of it is low in an inflationary economy because there will be a demand for it and, therefore, increasing opportunities, wages, and rewards – an income – for the people who have the right skills and attitudes that are wanted.

In contrast, no matter what we pay for an education now, it is worth less, and even worthless, in a deflationary economy that does not need those skills and attitudes because there are no jobs for it.

And a deflationary economy falls easily into a recession or a depression and the result of “no jobs” is easily visible as a great and systemic waste of our resources in people, skills, and the demand for goods and services.

Governments and policy makers know that we are in a deflationary economy and are using monetary tools to combat it by doing what they can to “unlock” capital and force it into productive and, possibly, risky investments because governments refuse to pay premium rates for our money idly sitting in our bank accounts and government bonds (The Associated Press, February 11, 2016, Sweden’s Key Interest Rate Drops To Minus-0.5% On Disinflation Fears).

However, the unfortunate, almost visceral, intuitive response of most investors and small savers by the millions, is to buy “gold” or “houses” or stash their money under mattresses or in the corporate “safe” by the 100’s of millions and then billions, which simply defers the day of reckoning and provides yet another example of the high price that they will pay for an education.

Amen

Risk? What risk?

Our response is different. We will buy inflation wherever we can find it and just take the risk out of it.

For more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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