Wallstats

22 Comments

1. Tony Wang, April 14, 2009:

   I didn’t take a careful look at the reports, but there’s a very simple intuitive way to explain whether or not biflation occurs. Imagine if you have a dollar. If you expect inflation, the dollar tomorrow is worth less than it is today. If you expect deflation, the dollar tomorrow is worth more than it is today. By pure logic, it’s impossible for a dollar tomorrow to be simultaneously worth less and more than it is today, tomorrow.

   If different asset classes are inflationary while others are deflationary, there would be arbitrage until the market reaches one point, which is either inflationary, deflationary, or neither. If there’s “discrepancies” of inflation among different asset classes, that reflects the value of the asset (which might be based upon liquidity, future value, risk, etc) and not of the market having trends of both inflation and deflation.

   So unless you have recognized an opportunity in a really inefficient market that has some assets in inflation and some assets in deflation (at which point you should arbitrage and make lots of money like George Soros), the evidence for biflation is probably a conflation of indicators for something else besides simultaneous inflation and deflation.

2. Paul, April 14, 2009:

   Just wanna say, thank you so much for the graphics on inflation and deflation. As for biflation, I’d never heard of the term until now. Kudos to you for promising to tackle it this week!

   I would probably say we see biflation when things like commodities and raw materials increase because of demand increases and/or supply decreases… Basically stuff that’s inelastic.

   While at the same time the economy sucks and people are out of jobs and out of money so they’re not as into spending on stuff where the demand is more elastic, like luxury goods. So in order to stay in business or to sell, businesses drastically cut their prices - and profit margins - in order to get people to buy.

   One good example is cars - sales are hurting so they’re giving away employee discounts and other markdowns. Another example may be restaurant meals (I’ve been seeing A LOT more coupons for half price or buy one get one free) and retail clothes and accessories. Keeping inventory on hand can be VERY costly. Heck, even hair dressers are putting out a lot of coupons these days.

   But I think, inherently, biflation is harder to pin down because it happens in a state of flux. Instead of a steadily deflationary environment or a steadily inflationary environment, you’re seeing things in flux.

3. Rich, April 15, 2009:

   I have a degree in economics, and this is the first time I have heard of biflation as well. I believe that it’s a misnomer and is trying to describe the effects of both inflation and a change in supply/demand. Tony is right in that it is impossible for a currency to experience both inflation and deflation, so off the bat there can be no ‘biflation’.

   The best description that I can think of for what you are trying to describe comes from Marc Faber in his book ‘Tomorrow’s Gold.’ Hopefully I get this right.

   Think about a giant map of asset classes in the shape of a pizza, and each slice is a different class such as commodities, stocks, or bonds. In the case of ‘biflation’ you might want to include consumer goods. In the middle of the pizza is a giant pole with a cup at the top, and above that is a faucet that pumps money into the cup. Below the cup, standing on the pizza, is all of the people of the economy. When the fed pumps money it flows into the cup at the top of the pizza, and to get the money out everyone pushes on the pole to tip the cup over. So when the fed money is flowing, whichever way the cup is tipped is where the inflation goes. in today’s economy everyone is pushing the funds into commodities, so that’s where the inflation is.
   At the same time this is occurring, demand for other assets or goods (such as cars and homes) is going down, which causes the price to go down. But this isn’t necessarily deflation, depending on who you talk to (check out Monetarism in wikipedia).

   I hope that helps!

4. Vincent, April 15, 2009:

   I’m not an economist, but I closely follow the teachings of the Austrian school of economics (Mises, Hayek, Rothbard, Ron Paul, Tom Woods) due to the failure of our current illegal Keynesian system. Perhaps the confusion is based on the skewing of the definition of inflation. Traditionally inflation was defined as an increase in the money supply and deflation a contraction. An increase in the money supply (inflation) eventually results in rising prices sometimes referred to as price inflation based on basic supply and demand principles. More dollars = weaker dollars as they become more abundant. Expansion of the monetary base (inflation) fuels bubbles, devalues savings, encourages credit use, and expands debt while devaluing the currency. It is a tax which transfers wealth from those who are productive to those who use the new money first (the banks, government, and the wall street) The dollar has been devalued over 95% of it’s value against gold since 1913 and broken loose from it’s tracks since 1973 when it was completely unbound from gold. Read this excellent article about inflation which becomes very scary when applied to militarism. http://mises.org/story/3329

5. Senthil, April 15, 2009:

   I too am not an economist, but do read interesting articles when they come my way. Have you tried asking the people over at NPR Planet money? This seems like a question right up there alley.

6. Michael, April 15, 2009:

   I do follow the economy closely and read extensively on subject matters pertaining to it, but I’m an engineer (my Ph.D. is in Chemical Engineering), not an economist, so I’ll explain this as an engineer. When you have inflation, the supply of money is growing faster than the value of available goods. When you have deflation, you have the opposite. Both of those could be considered, despite their desirability, relatively stable states of economic equilibrium. The term “biflation” is really just referring to an unstable equilibrium state where inflation is shifting to deflation or the other way around. Both APPEAR to be happening, but the only options available are that one, the other, or neither are happening. “Biflation” is just a term being used to describe a state of economic being where no one is sure what is going on or where things are going to go. I’m not sure how you’d make a graphic out of that.

7. Chris Corliss, April 15, 2009:

   Hi, I majored in econ undergrad (I know… pretty prestigious) and I had never heard of biflation before. Is this something the guys at Mint proposed (mint’s great btw)? I would recommend NOT doing a graph on biflation. My reason is that you are an extremely talented visual teacher. By focusing on a quite small topic that you don’t fully understand (mostly cause no one does) you are wasting some of your potential to illuminate the crucial concepts that are well established but still elude 90% of us.

8. Fred Dupont, April 16, 2009:

   Monetary inflation + Assets deflation + LAG / No Fix point of reference…
   That’s a pretty tough equation to illustrate in a static way.

   I’d like to work with you on that.

   Fred

9. Jess, April 16, 2009:

   Ok, so is biflation a verifiable economic state?

   Or is it just defined as a period of flux?

   I am also curious as to any opinions on the Fekete paper, it’s quite interesting, even for non-economics people, such as myself.

10. Jon, April 16, 2009:

    This site is amazing. I love reading the comments from ‘I’m an economist’ and ‘I’m not an economist’ and especially Rich’s visualization of inflation as a cup overflowing above a pizza. That’s the perfect example of the importance of visualizations to complex issues and the need for this site and the amazing visualizations you create. Kudos to all of the above posters.

    I’m going to keep my $0.02 out of this, but I agree with others that biflation seems like a poor term being used to combine inflationary effects with supply/demand pricing into a single uber-term. Much better to explain how supply/demand pricing works in conjunction or against inflation/deflation instead of trying to use biflation as a Unified Theory of the inflation/spending universe.

11. Alan, April 16, 2009:

    The best description of macroeconomics that I’ve read is by Jude Wannisky’s “The Way The World Works”. I highly recommend it. In his masterpiece of economic understanding, Mr. Wannisky explains how the Electorate participates in both the “money economy” and the “barter economy” and how taxes act as a “wedge” from the former to the latter.

    Perhaps an alternative graphic presentation of a currently “hot topic” might be the tensions between “tax rate” and “tax revenue”? Wannisky credits an economist named Arthur Laffer with the observation that “There are always two tax rates which yield the same revenue”. At 0%, there are no revenues, and at 100%, there are no revenues. Somewhere between is the mid-point at which either an increase or a decrease in the tax rate causes a decrease in tax revenue. This is the challenge of all Representatives of an Electorate — maximizing the tax revenue.

12. Jan, April 18, 2009:

    I appreciate your important work and that’s why I’m taking the time to respond. Here is my take on the biflation question. Economics is as close to a physical science as a social science can get. The peer review process ensures that concepts like biflation are carefully vetted and analyzed. These standards ensure that we are as close to the truth as we can get about a subject. Otherwise, we are open to being mislead by ideas that seem to ring true, but lack sound intellectual footing. I get the sense that you feel Fekete is on the cutting edge of this subject, and others haven’t caught on yet. However, as someone who has studied economics, and has an engineering background, I agree with those above who say that the term biflation is imprecise and misleading. I hope that you will apply your talent and credibility to a more worthy topic.

13. Wayne, April 22, 2009:

    i’ve never heard of “biflation” until now, and from reading the wikipedia example i don’t think it’s that complicated. the article says it’s simply:

    “…the state of an economy where the processes of inflation and deflation occur simultaneously. During this period there is a rise in the purchasing prices of commodity items and a fall in the purchasing prices of non-commodity items.”

    think back to when gas (a commodity) was $4/gal, and $150/bbl oil caused food and other commodities to go up in price too. our paychecks weren’t increasing, so cash was tighter and we spent less on cars, computers, etc (non-commodities) causing mark-downs… even before christmas 2008?

    that might be an extreme example, but probably one we can all relate to easily.

    i think one other poster has already pointed out that biflation is likely a state of disequilibrium.

    as for other assertions from the wikipedia article…
    (biflation being preceded by in increase in the money supply by a central bank…) that may have come from a textbook, but i think that’s not quite true as it is worded now that money and goods can cross borders so easily; not to mention that credit can be extended without increasing the money supply. the commodities boom (where metals futures soared) was fueled in part by overbuilding in china. and the money for that came from all the 401k and sovereign wealth funds… key parts of the shadow banking system that helped get us into our current mess. so in that sense, replace “central bank” with “shadow banking system” and it might still hold.

    anyway, i echo the previous poster who suggests you apply your talent and credibility to a more worthy topic…
    something nobody understands…
    the shadow banking system, for example?
    (see “return of depression economics” by krugman)

    good luck!

14. Rob, April 22, 2009:

    I am not an economist, I am a derivatives trader. Understand that some of your previous posters are correct in that inflation is the increase in the money supply and deflation is a contraction of the money supply. However, your Professor Fekete makes a very interesting distinction between electronic money and physical money. If the electronic money isn’t used to create additional loans, which it isn’t, it is being held at the federal reserve as excess reserves, then the increase in the monetary base will not be recognized in the money supply since it is being offset with a self imposed increase in reserve requirements. Two ways to get that money into circulation which would increase all price levels, turn it into physical money or loan it, which in both cases would take it out of excess reserves and increase the money supply. However, if the monetary base can be contracted before it gets turned into physical money or loans, then inflation will be avoided. Last thing, you are dead wrong on deflation. Deflation is not a bad thing, it is actually really good for savers and producers, but bad for risky lenders and debtors. I think if we encouraged more savers and producers we would all be better off.

15. Mark E Berry, May 1, 2009:

    So why don’t you do Stagflation?

16. Ron, May 24, 2009:

    I didn’t read eveyone’s comment so maybe I’m repeating someone else. A rise or decrease in price is only a REFLECTION of an decrease or rise in the money supply. The first comment got it right. The manifestation of more or less dollars would be expressed in the value of the dollar and it’s future expectation. Our dollar is worth about 4 percent what it was when the Federal Reserve was created in 1913.

17. bard, June 1, 2009:

    I found this page by typing in “biflation” (for what that’s worth). I agree with tony & rich and others–biflation’s a misleading\informal term. However, I think when things begin to get worse\anon, you could essentially pretend like biflation is exactly what’s happening and you might end up with a reasonable answer as to how vulnerable our financial system is. I think there are reasons it will behave like a “biflation” scenario because valuations are still way off, there are more job losses to come, and so on–things will behave in a more bipolar fashion.
    But I would not want a graph with my name on it that said “biflation” without a nod to semantics. The “biflation” idea is kind of like when the point of view changes the nature of the thing you’re looking at.

18. Chris, July 23, 2009:

    I work for a investment company in Amsterdam and it is quite interesting to hear big stories about biflation in The Netherlands and Luxembourg. Just because a word or definition exsist, does not mean that it always be helpfull in the future. The Biflation-theory looks really plausible to me.

19. James E, August 22, 2009:

    Maybe biflation visually is like a wave starting to break as it curls in toward the beach. The top with the $20 million dollar houses and the $1,000 bottles of Balsamic vinegar start curling under toward the seabed, that’s the deflationary stuff that was credit fueled. While the beans and rice and gasoline at the base of the wave start rising up toward the peak. And that’s the basic commodity prices rising? I dunno. I’m having trouble visualizing biflation too.

20. BceмиpныйAнгeл, August 24, 2009:

    Люди в таких вот случаях так говорят - Без капусты животы пусты.

21. Shirley, August 26, 2009:

    I had come to the conclusion that inflation/deflation is probably a category error. I suspect that biflation is a bit like stagflation.

    Perhaps flation is like gender; we started out with the idea that there are just 2 types, and now know that there is a whole rainbow. So, to biflation we could add transflation and interflation.

22. Феликс Сычев, August 26, 2009:

    Спасибо автору за интересную информацию