how will the upcoming (i think) deflation affect the coin market?

[michael]

?? what do you think? also what will it do to the price of gold?

 

any comments

 

sincerely m ichael

[jtryka]

michael,

 

if we experience deflation, i think the coin market will behave like many other markets in that prices will fall. There will be segments that might perform just fine (like coins with intrinsic value such as gold or maybe even silver). And by perform well, I mean that their prices might just stay the same while the price of everything else is falling.

 

Personally, I think deflation is a pipe dream, and has virtually no chance of happeneing. In the past deflation has occurred as a result of a contraction of the money supply resulting from the constraints imposed by a fixed gold standard. Since the end of the gold standard, these forces have been replaced by monetary and fiscal policy. Right now, interest rates are extremely low, the dollar is falling precipitously against foreign currencies, we have significant deficits (both budget and trade), and Greenspan has been growing M3 at a rate exceeding 8% per year for the last 5 years. These are not the ideal conditions for deflation. The other thing to look at is the numbers being bandied about by the press. CPI is the most notable inflation stat, but look beyond the headline number. First the core rate excludes food and energy prices (what to most Americans spend most of their money on?). Second, the way they calculate inflation is way more complex than "today an apple is 50c, last year it was 45c, so inflation is 11%." Instead it might be, "apples are still 45c, just like last year, but since they are so much sweeter this year, that improvement in quality means prices fell 5%, since you would expect to pay more for the improved quality." Notice that you still pay 45c at the store.

 

I firmly believe that we have seen remarkable inflation over the last few years, but it's been in places ignored by the CPI numbers. In the late 1990s all that extra money sloshing around the system ended up in the stock market (sure no big inflation in car prices, but huge inflation in asset values). The result is asset bubbles. When the stock bubble burst, all that liquidity started flowing even faster into housing. The economy on a global scale is a closed system, when money/liquidity enters the system it must flow somewhere!

 

Sorry to drone on about economics and such, and remember, these are only my opinions!

[Dermott]

The common viewpoint states that the coin market goes the same as inflation/deflation... up during inflation, down during deflation, up during good economic times, down during bad... however the market really hasn't done that recently. It stayed relatively flat during the market rush of the 1990's when we were in supposedly amazing economic times and has been moving in a bigtime upward manner during the current economy which has been stated to be utterly horrible.

 

While some areas of the coin market will be affected by any inflation/deflation, others won't. Currently, the super-grade later date registry coins and key date issues are driving the market. The 50 state quarters, nickel redesign, and now the hunt for the 13 V nickel are creating new interest in the hobby. The registry fad will more than likely cool down before too long as well will the excitement of new issues as coinage redesign goes through its paces and we have a new standard issue of circulating coinage. What will happen then will be a cooling off in some areas of the market, yet new ones will arise.

 

I don't think you can really look at the coin market as a whole and predict where it's going to go based on the presence or lack of inflation/deflation. You can use that for part of the market, but not all.

 

 

[michael]

wow geat replies i learned much and it is food for thought

 

 

 

 

 

 

 

i hope others can post on thgis deflation topic also

 

............... but i think the coin threads about the ms/proof70 someone just got always gets the most responses and i will not list my reasons why this happens as then i will get monster flamed.......

 

sincerely michael

[jtryka]

Well michael, I certainly appreciate your posts on the more esoteric economic topics, at least it gives me a forum to share what I do in my day job! The fact that others don't find it very interesting is not surprising since it can be a pretty boring topic. Though it is important to think about these things somewhat since they will impact the investment side of your collecting. The more emphasis you place on that aspect, the more interesting it will be to you.

[Wihlborg]

Jeff,

 

Just for the record, I like your posts on the economic side of things!

 

John

[michael]

jtryka thnaks!!! i learned much from you i think your answer sjould be in the coin world editorial page as it is important and makes people think

 

as compaired to many i have seen that are not good to me

 

sincerely michael

 

 

[Coinosaurus]

I am trying to think of a case where deflation ever occurred with fiat currency. Can't do it. OTOH, there are tons of examples where you have inflation with fiat currency. In the 1930s, under the gold standard, deflation was something like 10% a year. That's bad, but not nearly as bad as the stock market the last couple years. The point being that, all things being equal, if you are invested in hard assets & the market falls apart (i.e. the great depression), history says you are still only looking at relatively small losses. Lotsa variables in the coin market tho. If you have something rare and esoteric that you have paid dearly for, I think it would be a pretty tough sell if the market slowed down. But generic stuff is probably safe from large losses.

 

[Higashiyama]

Coinosaurus - "I am trying to think of a case where deflation ever occurred with fiat currency" -- you lobbed me an easy one there -- Japan since the late 1990s.

[Higashiyama]

jtryka -- "Personally, I think deflation is a pipe dream"

 

With 10 year treasuries at 3.5 %, the financial markets disagree, and are happy to ignore both deficit spending and 8 % money supply growth.

 

With respect to the money supply, keep in mind that in Japan it has been growing much much faster.

 

Economists have been slow to believe in deflation because they have never analyzed an economy with aging demographics. Aging demographics plus excess capacity due to the potenial for almost unlimited growth in China is creating very severe downward pressure on prices. With regard to demographics, of course they are much more severe in Japan, Germany, and some other European countries than they are in the US, and it is probably our relatively young (comparatively speaking) demographics, coupled with our generally liberal (free) economy that will prevent us from following into the deflationary spiral that Japan is now in.

 

However, do not underestimate the demographic factor when thinking about the potential for very low inflation in the US. The baby boom has put off saving as long as they can, and the long predicted (but always deferred) increase in savings rate is about to occur. If baby boomers do not save, they will be destitute. The increase in savings rate in the US will probably mean, in the short run at least, that (1) funding the deficit will not be too big a problem, (2) the US trade deficit situation will improve, (3) consumption will drop but Asian countries will continue to pump out goods, and all of this will create tremendous deflationary pressures.

 

With respect to coins -- this will likely prevent an overall broad market increase, but deflation does not imply negative real economic growth -- the US economy will be relatively healthy through this, and coin prices will be highly driven by true numismatic demand. (as opposed to demand caused by novices rushing into the market, as might happen during an inflationary panic)

[jtryka]

Higashimaya,

 

You raise some interesting points, but let me provide some additional things to think about.

 

With 10 year treasuries at 3.5 %, the financial markets disagree, and are happy to ignore both deficit spending and 8 % money supply growth.

 

Examining the 10-year yield in a vacuum is probably inappropriate, you must examine the yield curve, as well as the underlying fundamentals of each market. I think the current low yields on treasuries has has much, if not more to do with the shift in assets among investors as it does with the underlying fundamentals of the economy and inflation/deflation. We have a huge balance of payments deficit, which requires by definition an increase in net foreign investment into the US economy. In the 1990s, much of the inflow of foreign capital went into the US equity markets, with some shift from fixed income as well. Now, with the equity markets in turmoil, most of that inflow is moving to the fixed income markets, and with higher demand relative to supply, prices of bonds increase thus pushing down yields.

 

With respect to the money supply, keep in mind that in Japan it has been growing much much faster.

 

There are many extreme differences between the US and Japan. First and foremost is the cultural differences the seem to push the Japanese towards saving, and the Americans towards consumption. If you look at it, from our founding as a nation, we have been ingrained with an inherant consumption mentality. We need more land, gold, resources, etc, we go and get them, Manifest Destiny. There was no, waiting east of the Mississippi until we saved enough to expand, we just went. I know this is a simplistic example, but it illustrates the mind set. We are a nation of consumers, and we rarely think about the future, until the future is staring us in the face. Second, compare the economies, the last time Japan had a trade deficit was probably the last time the US had a trade surplus. And look at the nature of imports and exports, Japan tends to import raw materials and other necessities such as food, while the US imports more in the way of luxury items, like TVs and Lexuses. The main reason that the Japanese increase in money supply has not increased prices is because people take the extra cash and don't spend it. In the US, we spend it, but over the last decade, the places we've spent it have been unusual, first stocks, then real estate, and who knows were next.

 

However, do not underestimate the demographic factor when thinking about the potential for very low inflation in the US.

 

This is an extremely important point that many people (including economists) miss. However, there are a couple of items that bear mentioning here that should help to mitigate the effect of the boomers. First, there is an echo boom, though smaller, which should help. In Japan and many European countries, there is just declining/aging populations in absolute terms. Second, and this is probably the key, is the effect of immigration. New immigrants have a much broader impact on the US economy than anywhere else on the planet. Japan, and other developed nations have more restrictive immigration policies, as well as lower demand to enter their nation (how many people are dying to leave their homelands to emigrate to Ireland?). This is the wild card that will most certainly impact overall growth in the future.

 

Finally, I just want to emphasize that inflation or deflation in a fiat currency system are significantly based on the measures employed. When more money enters the system it must go somewhere, and inflation by definition must occur somewhere. It's just a question of whether that inflation is properly being measured.

 

[Higashiyama]

Jtryka --

 

It is interesting, because I essentially agree with everything you have said, but still come to a different conclusion. We'll have to discuss when I'm in Seattle this summer!

 

Your comments on measuring inflation are interesting. I believe that most "experts" (including Alan Greenspan?) believe that typical measures have overstated inflation, and have not adequately reflected changed in consumption, and the effect of quality improvements. I would be interested in seeing references to the reverse argument. The ultimate conclusion on this issue may well depend on income -- people who are relatively better off (and who value much better and safer automobiles, high end electronics, etc) may find that inflation is overstated. With housing being a possible caveat, I think if you take a $ 50,000 income in 1970, and inflate it to about $ 350,000 today, the $ 350,000 buys a lot more. Perhaps this is not true if you start our at a lower amount.