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Pittsburg, Kansas | Hyperinflation is nearly always a deflationary event when measured in any stable currency other than the hyperinflated currency. There are numerous examples playing out right before our eyes and will be more before it is all over. I say "nearly always" because of all the events I am aware of it has always been deflationary but there might be exceptions. I just don't know.
You have to divide values in two different views. The "real" value of assets, based on an assets price to other assets. And the value of the currency. The real value of assets can be going down (deflationary) while the value of the currency is going down faster (inflation of prices).
I've given the example often, but it does not seem to take. In hyperinflation often foreigners can come in and buy assets dirt cheap with foreign currency. A deflationary scenario where the price of things are getting cheaper measured in any currency other than the hyperinflating country's own currency. Yet measured in the country's own currency prices are skyrocketing.
Countries like Venezuela are on the verge if not already in hyperinflation (depending on where a person sets the definition of the start of hyperinflation). Things purchased within the country (that are still available) are dirt cheap measured in US dollars. Yet where the real value of the local currency is determine (black market) prices are very high and rising in that currency. Venezuela by all external valuation measurements is in deflation. Yet measured in its own currency at market clearing levels for the currency they have extremely high inflation. Same thing happened in Weimar Germany, Zimbabwe, etc.
Hyperinflation is a measure of the failure of the currency. Deflation is a condition of an economy going through difficult times where goods measured in real value are going down in price yet in the local currency may be getting cheaper or more expensive, depending on how quickly the currency is depreciating. Look at China now and the value of the Yuan. Prices measured in the local currency are getting higher for most people to buy things yet their economy is diving into deflation.
You have to consider two variables in an economy when it comes to the inflation/deflation debate. If the currency is rising or falling in relation to other currencies and what the value of assets are doing on a real value basis which is not necessarily the same as the valuation in the domestic currency. Right now the USD is strong in relation to most other currencies.
Measuring an economy only in its home currency is using a one variable equation in a two equation problem. The two variables are the prices of the real value of goods compared to something that has relative value, and the value of the domestic currency in relation to that same relative value. A good example is the price of gold right now measured in about any currency OTHER THAN the USD. The price of gold has been going up. Does it mean the value of gold has went up? No. It means the value of the other currencies are going down. Prices can go up for goods in a deflationary environment (measured in the local currency) if the value of the currency is falling faster than the value of the assets are falling.
We can put a label on it of inflation or deflation, but it is rather meaningless unless one understands the underlying movements.
I'm in Bonaire right now. When the store has Diet Coke from Venezuela it is less than $6 for a six pack of 2 litre bottles. Less than a dollar a 2 litre. There is a shelf right next to it with Diet Coke from somewhere else (I presume the US or maybe Curacao or maybe Jamaca or something. It is $4 per 2 litre bottle. Over four times as high. There was a very nice family from Venezuela that just left here to go back home. The conditions there are in a shambles. They are suffering the worst kind of deflating economy yet seeing the prices of the things they need to buy go sky high. Almost nothing is available at the government mandated prices, a lot is available through the black market at extremely high prices (measured in the local currency - but as the Diet Coke example shows, pretty cheap if a person has a currency with a more stable value). Deflationary business environment. Prices rising in the local currency. Citizens experiencing inflation while in a deflationary economy. Textbook precursor to hyperinflation.
Because we do not have high price inflation rates now, it does not mean we will never have them, even in a deflationary environment. As long as our currency is the least ugly in the worldwide pack of floating fiat currencies, we will have somewhat of a reprieve as other nations suffer more than we do. But the velocity of money can change on a dime with the change of citizen attitude. After all, the value of any money (including gold or silver) is only as much as someone has faith they can use it to buy goods and services. Its valuation is totally subjective to citizens faith on it holding its purchasing power.
John
Edited by John Burns 1/9/2016 09:54
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Deflation
