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Old 01-25-2013, 07:29 AM   #1
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Deflation

Hey all - figured I'd run this by you guys. Read a post on another forum last night looking for a strong case against precious metals. The only thoughtful nugget I found was the following argument -

The US is suffering, and will continue to suffer from, a large drop in aggregate demand due to unemployment and the second dip of the recession, and things don't seem to be looking much better. This normally would result in a deflationary cycle, but since Mr. Bernanke continues to print ad infinium, this is keeping asset prices propped up. In the absence of QE-infinity, we would be in a deflationary period a la Japan.

Obviously deflation is not terrible from a PM perspective since we are HOLDING our purchasing power in metals instead of fiat. Regardless, for someone who holds cash, there could be opportunities if the deflationary cycle does kick in.

Now - I'm having trouble reconciling this for a number of reasons. Mainly - CPI inflation tends to severely understate what we see in real life. Also, a period of deflation in the US would cause some serious economic ripples, especially considering for many essential goods we now must compete with a large and growing middle class in developing nations. So, food and energy may very well inflate while consumer goods will deflate (the well-understood biflation argument). Perhaps we will see deflation due to strength in the dollar, but I'm just hitting a wall trying to reason this entire thing out.

I will note I have not looked at any data on the money supply, credit etc, so perhaps I need to do some more research. Either way, I wanted to get your opinions on the matter.

Thanks.
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Old 01-25-2013, 08:12 AM   #2
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Originally Posted by jd1123 View Post:
Hey all - figured I'd run this by you guys. Read a post on another forum last night looking for a strong case against precious metals. The only thoughtful nugget I found was the following argument -

The US is suffering, and will continue to suffer from, a large drop in aggregate demand due to unemployment and the second dip of the recession, and things don't seem to be looking much better. This normally would result in a deflationary cycle, but since Mr. Bernanke continues to print ad infinium, this is keeping asset prices propped up. In the absence of QE-infinity, we would be in a deflationary period a la Japan.

Obviously deflation is not terrible from a PM perspective since we are HOLDING our purchasing power in metals instead of fiat. Regardless, for someone who holds cash, there could be opportunities if the deflationary cycle does kick in.

Now - I'm having trouble reconciling this for a number of reasons. Mainly - CPI inflation tends to severely understate what we see in real life. Also, a period of deflation in the US would cause some serious economic ripples, especially considering for many essential goods we now must compete with a large and growing middle class in developing nations. So, food and energy may very well inflate while consumer goods will deflate (the well-understood biflation argument). Perhaps we will see deflation due to strength in the dollar, but I'm just hitting a wall trying to reason this entire thing out.

I will note I have not looked at any data on the money supply, credit etc, so perhaps I need to do some more research. Either way, I wanted to get your opinions on the matter.

Thanks.
this will not directly answer your question, but I have a friend (his wife is filipina, a friend of my wife.) He is a super-technophile, and the epitome of anti-doomer. He made a fortune in the computer-chip coating business accidentally or fortuitously (right place right time), and whenever I try to talk to him about money etc he shuts me up with technology with save us. Look Jay, do you see how much big screen tvs cost ten years ago as compared to now? Soon it will be so cheap to build stuff that anyone will be able to afford anything. He really believes this. I see a combination of inflation/deflation. What you need to live gets more and more expensive (food, energy) while the stuff you don't need and no one can afford anyway gets cheaper. It doesn't seem that there are very many economic models for peak everything/resource wars.
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Old 01-25-2013, 08:43 AM   #3
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Credit deflation typically shows in the prices of things that require credit to purchase (real estate, cars, boats, etc.). You are seeing inflation in the necessities that don't require credit to purchase.

Banks need QE to infinity to shore up the asset sides of their balance sheets [that are loaded with deflating assets (the things bought on credit / loans)]. The Fed cannot and will not stop the QE. The game will continue until it can't (at which point it the rules will change rather than ending most likely).
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Old 01-25-2013, 09:33 AM   #4
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jd1123, the thing is, nobody really knows what will happen, we are so much off the charts in so many areas. I am rather betting on the long term trends, rather than anything else, also on the universal and worldwide governmental ineptitude. Like you know, Fed cannot see the housing bubble if it is popping right into their faces (and immediately afterwards), but somehow, we now trust them with the whole economy taken on a roller coaster ride, trusting they will now know, which knob to turn, by how much, and which direction? And that it will have PRECISELY intended consequences, and nothing else will happen? Give me a break!

I can put all that I think will happen in some rather self-consistent narrative (and it looks bleak), which makes me somehow willing to bet on it. But what will really happen - nobody knows

I do have "superoptimistic, technology to the rescue" guy around me, we spent countless hours arguing - in our case, at the end of the day, he is always out of arguments, but adamant in his hopes. But heck, he might be right. It just doesnt seem like there are too many chances/reasons to believe "all is good/will be even better"

If we rule out some fantastic, out of the blue "free energy" revolution (fusion at least), we (as civilization in it's current form) are pretty much fucked, going forward. And even WITH that hypothetical new infinite renewable energy source, it is very much debatable, if we can continue our current money paradigm.

And when the monetary systems collapse, bad things tend to happen to people's wealth, that has been stored inside the freshly-collapsed system.
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Old 01-25-2013, 10:28 AM   #5
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math doesn't lie.
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Old 01-25-2013, 12:42 PM   #6
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We've been lucky with "tech to the rescue" for quite awhile, but surely some of it is just that - luck. Can't count on luck too terribly much.

I don't think even free energy would save us at this point, we'd just use more to make a bigger mess if we don't grow up as a species.

A counter argument for your friend. Sure, things in tech get cheaper all the time. And, as they do, companies go out of business as well (Dell?), because it's hard to profit on super cheap stuff. And it's hard to pay people enough to make cheap stuff such that you have paying customers, in the larger view.

Let's suppose I'm a big-time capitalist. I can and want to build a (few) big factory that makes everything we need robotically. Then I don't have to pay anyone - this tech is "in sight" now. But if I don't employ any humans, there's no one to pay for my goods and I get no return. We are bumping into that ceiling right now, I believe. So, if I'm a smart capitalist, I don't go there - A big question in my mind for a long time now is how do we get there from here - to the star trek world where no one has to work, but somehow everyone still has a home, eats and so on. Capitalism fails at the transition, and doggone it, no other system I'm aware of works at all, so how do we get there?


And of course, this doesn't apply at all to food and fuel, what most people mainly need.

On the other hand, humans generally have a pretty doggone long history of somehow "muddling through" or we wouldn't be here now - and it long precedes the tech revolution, the industrial and so on. What we learn is that not everyone survives and thrives, but a few do, almost no matter what. I guess the point of thinking about this at all is to improve one's chances of being in that latter class.

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Old 01-25-2013, 12:46 PM   #7
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Math only doesn't lie if all the (un)stated assumptions are true, and they aren't always.
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Old 01-25-2013, 01:53 PM   #8
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The key of this argument is that nobody bothers to differentiate between increased efficiency in production and monetary theory.

It is the exponentially increased cost efficiency in production, in tandem with technological progress, which acts to commoditize most products over time.

It is (bad) monetary theory which first gives us inflation, and then presents us with the spectre of deflation. HELLO--you cannot have deflation without first having inflation, in a better time they called it the law of causality. But it is the collapse of philosophy which has made possible the collapse of economic thought.
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Old 01-26-2013, 11:05 AM   #9
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I had to join your forum to weigh in here regarding inflation. Here is something I wrote some time ago and still is valid today as there can be no deflation because if there is any, it's over for the worlds' economy.

I wrote this description of the world’s biggest financial problem so people could understand "in layman’s terms" why we are fucked ! Please chime in if you can add to the understanding here. I use the dollar in the description of Credit Default swaps for a basis as they could be denominated in any fiat currency.

Understand that the dollar is the defacto “Reserve currency – Petrodollar” that the world uses to transact business. As that dollar becomes more encumbered with "leverage" its ability to be a store of value has less conviction and faith. The "only" value that a fiat paper currency can retain "is" that conviction and faith.

So, let's look at the reason all faith will be lost in that currency at some point in the future. Since the creation of the FED in 1913 the currency (Dollar) value has been controlled through inflation/deflation. In 1944 the U.S. Dollar through the Brenton Woods agreement was granted “exclusive reserve currency status”.(that status meant that any country wanting to buy oil, food or commodities would have to buy dollars “first” and then they could go into the world market to make their purchase “on” the world market (with those reserve currency notes) also it meant that "If" any country lost faith or trust (through debasement or any other reason) in that currency they could go to "any" central bank in the world and trade that paper currency for physical Gold of equal value.
(Good as Gold) In 1971 Nixon suspended Brenton Woods and took us off the Gold Standard telling other nations that they could not "now" exchange the dollar for Gold as previously promised.

Here is the key to it's downfall:

The U.S. dollar (debt) from 1971 through around 1995 was able to be removed from a balance sheet with little implication through accounting techniques claiming (debt) as a loss and could be written off through tax levy accounting and that was the end of it.

Here (around 1995) comes Blythe Masters from JP morgan and she creates what is called a "Credit Default Swap" This is essentially an insurance policy on a default to pay back a debt or loan. So, let’s say for shins and giggles Greece is lent 1 trillion dollars by another country. They promise to pay that money back at a set interest rate over time. The CDS (Credit Default Swap) enables financial institutions to purchase a put (Default insurance or a bet against the underlying asset (loaned debt or CDO – Collateralized Debt Obligations) never being paid back. This would be OK if only "ONE PUT" was taken out against the chance of that debt not being paid back. The problem "of the whole planet situation right now" is that this debt can be leveraged by 100 "PUTS" or in layman’s terms (for each dollar that was lent to Greece there are $100 betting against "each" one of the dollars lent, that it will default and not be paid back) So, now you have 100 Trillion dollars leveraged against the default of a 1 Trillion dollar loan. So, now Greece cannot pay back the loan (CDO-debt) triggering the CDS from the default on the CDO and now everyone that bought a "PUT" wants’ to get paid on their bet. The next problem is that those financial institutions that sold those "PUTS" are only required to have a 6% reserve (Money held in escrow to pay claims) So, in reality those institutions only have .06 cents per dollar to pay those claims and not the “whole” dollar "required or needed" to pay those claims. Remember that JPM has a 44 to 1 leveraged balance sheet so they have $2.64 to pay $44.00 worth of claims.

This is why all of these bailouts are created so "NO ONE" is allowed to fail "Triggering" these Credit Default Swaps. The original debt is maintained through interest payments from "newly created" debt (bailouts) because the money to pay those claims does not even exist.........Yet.
So, you say why can’t they just unwind them.
Answer, is that you can't because everyone that purchased these "PUTS" on “CDO’s” wants’ to get paid because they are classified as an asset on "their" balance sheets.

When the discussion turns to CDS/CDO's at parties, I ask if anyone can explain them so that we can have an educated discussion. No one can, so I give this analogy and everyone sees a little better what the problem is. I know it's not a perfect description but conveys the basis.
Previously posted on ZH;
So, GK wants to buy a house, so GK goes to Joe banker and says hey Joe can you lend me a 100K to buy this house. Joe says sure GK here is your 100K you can pay me back over time with interest.
Then Joe gets back from the closing and says to himself, Hey "what if GK doesn't pay me back, I will be out a 100K. So, Joe calls Allstate and talks to Al the broker and says, "Hey Al I want to buy a 100K insurance policy incase GK doesn't pay me back. Al says sure Joe here is your 100K default insurance policy (CDS). Then after Al gets off the phone with Joe, Al says to himself "wait a minute" "what if Joe doesn't pay me back" and Al quickly calls jerry at AIG and says hey jerry I need an insurance policy for 100K incase Joe doesn't pay me back. Jerry says sure Al here is you CDS for 100K incase Joe the banker doesn't pay you. Then Jerry gets off the phone with Al and says "wait a minute" "What if Al doesn't pay me back and then he quickly calls Zurich and talks to Chad and says "hey Chad" "I need to purchase a 100K policy against Al not paying incase GK defaults on his mortgage. Chad says here you go Jerry a 100K CDS for you and the Chad says to himself........................................... ....................you see were this is going.
So, let’s say this goes 20 CDS contracts deep. So what we have is 2,000,000 dollars worth of credit default swaps written on a (CDO) 100K depreciating asset that is now only worth 60K. Now the leverage went from 20 to 33 because of the deflation in the housing prices. (That’s why there is no mark-to-market)
Now GK's employer just called and is laying GK off "permanently".
The problem is now that the financial institutions that wrote all these CDS's (a ton of American banks) were only required to have a 6% reserve on this 100K worth of exposure (each). So, you see the money does not even exist-yet (our anti deflationary kryptonite backstop and tribute to JS for the saying "QE to infinity") to pay these claims and all these entities must be bailed out to stop the contagion before wiping out everybody.

I used a house as an example and it actually is a physical asset. Most of the CDO's are written against debt (paper, but classified as an asset on balance sheets with "no" underlying physical nothing) Here is where the problems lay. The “DEAL” that they are trying to close is a perfect "orderly" transaction with a 70% haircut (what is perfect and orderly in a panic once these start triggering). It's the reserve of 6% that is the problem. Let’s take our old friend JPM that has a leveraged balance sheet of 44 to 1. If they are in the wrong chain position on the CDS loop and let's say that they have to pay out 5x of that leverage but only receive 2x of the leverage back. ???????????????????

Where does the money come from to pay that net 3x's exposure? (it does not exist...yet, remember the 44 to 1 leverage) hence the bailouts to keep this thing from going full balls out.

There it is, and it's called "Contagion"

So the/any deflation will trip the balance sheets into default causing the printing of even more fiat currency to try and save the system.
This can be proven by the labeling of the 70% haircut on Greece’s debt not being classified as a default, hence delaying the massive printing of money to honor them.

Any deflation will transition into

Hyper-Inflation
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Old 01-26-2013, 11:17 AM   #10
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Welcome to the forum stockjockee. That sounds about right to me. Sometimes two sentences (my previous post) isn't enough to fully explain the situation. Bottom line is that the Fed (and consequently other central banks) has (have) no choice. QE will continue until it can't (until the current fiat/debt/CDS system breaks).
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Old 01-26-2013, 11:25 AM   #11
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Originally Posted by PMBug View Post:
Welcome to the forum stockjockee. That sounds about right to me. Sometimes two sentences (my previous post) isn't enough to fully explain the situation. Bottom line is that the Fed (and consequently other central banks) has (have) no choice. QE will continue until it can't (until the current fiat/debt/CDS system breaks).
Agreed as they may say they are stopping QE to the public but that would be a lie. You remember the 16 Trillion of off balance sheet loans to the foriegn banks that Benny and the Ink jets did not want to identify to congress when asked ?

Same thing will happen as they will say they are quitting printing and just do it off balance sheet. We will see next week from the FED meeting.

"Everything is an illusion until the Kaleidoscope lense breaks and that lense is the American Dollar"

quote by me today !
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Old 01-26-2013, 01:58 PM   #12
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Well done.

Welcome to our forum.
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Old 01-26-2013, 07:45 PM   #13
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Hey welcome aboard stockjockee !

Thank you for reminding me of what I had learnt and kind of forgotten .......

Hard to see how they can keep a lid on things but they have to somehow shut down the crazy CDS casino .......

Or never agree theres been an actual default

change the rules, presidential emergency decree ?

interesting times ahead eh ?
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Old 02-12-2013, 06:32 AM   #14
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Originally Posted by Jim Sinclair :
There is no way that any entity, be it private, public or both, is going to manipulate away the debt situation faced today.
There is no way that the US is going to become a net exporter of energy in amounts that could even slow down this rate of growth in the debt.
There is no way this flat line recovery is going to turn into a boom in business.
There is no way that the unemployment figures are going to have a sustained improvement short of all the unemployed giving up hope and shifting to the underemployed list.
There is no way that you can set such records in increased liquidity and not have explosion inflation regardless of business activity.
There is no way that the Fed can liquidate its holdings of treasuries in an orderly manner without collapsing the Treasury market.
There is no way the Fed can liquidate any toxic paper it took on from banks internationally in the crisis of 2008.
There is no way the Fed can step away from QE which would mean higher interest rates without collapsing the flat line so called economic recovery.
...
http://www.jsmineset.com/2013/02/11/there-is-no-way/
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Old 02-12-2013, 11:45 AM   #15
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Fantastic post, thanks! let me add my $0.02

Originally Posted by stockjockee View Post:
I had to join your forum to weigh in here regarding inflation. Here is something I wrote some time ago and still is valid today as there can be no deflation because if there is any, it's over for the worlds' economy.
I don't know if it is "over", but it is going to be a massive reset.

Originally Posted by stockjockee View Post:
Understand that the dollar is the defacto “Reserve currency – Petrodollar” that the world uses to transact business. As that dollar becomes more encumbered with "leverage" its ability to be a store of value has less conviction and faith. The "only" value that a fiat paper currency can retain "is" that conviction and faith.
...the faith, that seems to be (long) lost, everywhere but in our deluded, western societies. Dollar as a reserve currency, is being sidestepped around the world as we speak, with different countries engaging in direct trade agreements/currency swaps. I seem to remember reading somewhere, that about 50 countries are engaged in one kind or another of direct trade agreements, that sidestep the dollar. Not a small chunk, huh? HEck, It seems that even the UK has entered into an agreement with Chinese, to swap Sterling directly for Renmibi, AFAIK.

Originally Posted by stockjockee View Post:
(Good as Gold) In 1971 Nixon suspended Brenton Woods and took us off the Gold Standard telling other nations that they could not "now" exchange the dollar for Gold as previously promised.
...looks, walks and quacks, like a default, to me

Originally Posted by stockjockee View Post:
So the/any deflation will trip the balance sheets into default causing the printing of even more fiat currency to try and save the system.
This can be proven by the labeling of the 70% haircut on Greece’s debt not being classified as a default, hence delaying the massive printing of money to honor them.

Any deflation will transition into

Hyper-Inflation
pretty much, my thoughts as well, they will keep printing no matter what, until the whole circus comes crushing down on our heads

Welcome to our "think positive" little forum
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Old 02-13-2013, 10:27 AM   #16
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Originally Posted by bushi View Post:
Fantastic post, thanks! let me add my $0.02


I don't know if it is "over", but it is going to be a massive reset.


...the faith, that seems to be (long) lost, everywhere but in our deluded, western societies. Dollar as a reserve currency, is being sidestepped around the world as we speak, with different countries engaging in direct trade agreements/currency swaps. I seem to remember reading somewhere, that about 50 countries are engaged in one kind or another of direct trade agreements, that sidestep the dollar. Not a small chunk, huh? HEck, It seems that even the UK has entered into an agreement with Chinese, to swap Sterling directly for Renmibi, AFAIK.


...looks, walks and quacks, like a default, to me



pretty much, my thoughts as well, they will keep printing no matter what, until the whole circus comes crushing down on our heads

Welcome to our "think positive" little forum
A few add-ins to your response.

You mentioned that countries are sidestepping the reserve currency/Petrodollar. I agee 100% and thats why oil has to keep going up for two reasons:

1) There are less and less countries using it for oil trade. So the price must keep going up because the OPEC countries have based their country budgets on at least $90.00 oil prices. As the dollar is printed like toilet paper they are going to want more and more dollars for their oil.

My little quote:

"There are more dollars being printed today, to buy that same barrel of oil it was yesterday, tomorrow"

2) As the price of oil continues to go up as less and less is used (world consumption), the price will support the dollar. There is more oil in the world as a glut then there has ever been in history. If we applied supply and demand (price discovery) the cost should be going down.

(Thats why Iran/ME is used as a war scare to regulate the price of oil. If Iran was allowed to put their massive oil reserves on the world oil markets the price of oil would plummet from even more "Glut" killing the American Dollar/Petro-dollar)


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Old 03-15-2013, 11:12 PM   #17
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I think the unemployment rate still not control because everyone here is unemployed or working at a low payout.SO how it is possible that he pay their debts.And why mostly bank close their branches if they don't bear any loss.Its just a fake picture that they showing to general public.
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Old 03-18-2013, 04:56 AM   #18
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The idea that deflation is bad is a myth perpetuated by banksters and governments.
Falling prices benefit everyone and increase the living standards of everyone. The only rebuttal you'll ever hear to my claim is that it hurts exports, but this is also not true because falling prices means production is cheaper as well, so you can afford to compete internationally. Conversely, you can ask, how does inflation improve exports? It doesn't of course, and look where it has brought us today.
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Old 03-18-2013, 06:06 AM   #19
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Mike - there are two types of deflation:
Quote :
...
Monetary economists distinguish a benign deflation (due to the output of goods growing rapidly while the stock of money grows slowly, as in the 1880-1900 period) from a harmful deflation (due to unanticipated shrinkage in the money stock). The gold standard was a source of mild benign deflation in periods when the output of goods grew faster than the stock of gold. Prices particularly fell for those goods whose production enjoyed great technological improvement (for example oil and steel after 1880). Strong growth of real output, for particular goods or in general, cannot be considered harmful.
...
http://www.cato.org/sites/cato.org/f.../pdf/bp100.pdf

The Fed is currently fighting deflation in the credit (debt) supply - ie. the harmful deflation.
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Old 03-18-2013, 07:15 AM   #20
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I assumed we were talking about price inflation.
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