Peter Kinch on Interest Rates

[JimWhitelaw]

I heard this statement below at the last REIN meeting in Edmonton and it came to me again in an email update from the PK team. It doesn`t quite add up for me and I`m looking for some help to understand. Hopefully Peter sees this and can expand on it.QUOTE Peter:
Absolutely, however something that I think will help keep a lid on the increase in rates is the fact that the US will likely want to pay off their trillion dollar deficit in deflated US dollars - which by definition will create an inflated Canadian dollar. And if the Canadian dollar goes above par, The Bank of Canada will need to react by lowering rates.
Using the traditional definitions of:

Inflation = more dollars relative to a fixed amount of goods & services (currency devaluation)
Deflation = fewer dollars relative to a fixed amount of goods & services (currency appreciation)

Shouldn`t the statement in the first quoted sentence above say ". . . US will like want to pay off their trillion dollar deficit in devalued dollars . . ."

That is, the US Fed is going to want to pay off their debt in inflated dollars, not deflated. As $USD inflation continues, its value decreases and the relative value of $CAD increases (appreciation - not inflation of $CAD). Unless I`m missing something, that`s the only way the above paragraph makes sense.

It could be that I`m just nitpicking semantics

but in this case "deflated" and "devalued" have opposite meanings, so it`s important to understand what is really meant.

Any other ideas on this issue?

 

[Nir]

Hi, Peter is correct.

You are confusing the terms. It is not "$USD inflation" as you wrote. it is inflation in the US causing a reduction in the value of the USD. see the difference?
now please read Peter`s statement again and let me know if it still does not make sense. Regards.

* Inflation in the USA (country) = Deflated US Dollar (currency) = Inflated Canadian Dollar (currency) = Less Canadian spending (reality)
---> Bank Of Canada lowering rates. (solution in order to increase spending)

 

[JimWhitelaw]

Hi, thanks for the response.

What terms do you believe I have confused?

When I stated "$USD inflation" above, I was referring to expanded US money supply, ie, Federal Reserve creation of new debt ("printing money"). There`s no question that is happening right now at an unprecedented rate. Do you accept the definitions above for inflation and deflation?

 

[Nir]

I agree with the definitions but they were not mentioned in the sentence you quoted. deflation and deflated dollar are not the same, they are opposite!
when you changed the sentence you changed its meaning. then concluded new sentence is wrong. - you were right about that.

 

[JimWhitelaw]

There`s no such thing as an inflated or deflated currency. Any given currency only has value relative to what it can buy or other currencies it can be exchanged for.

Question: If the $CAD increases in value relative to the $USD and decreases in value relative to the Euro, using your terminology would you say the $CAD is "inflated" or "deflated"?

In reality it`s neither, it just has a varying value relative to other currencies. Which is my point, the original sentence (and you) use "deflated" in a context that makes no sense (the context being value, not scarcity).

 

[Nir]

since we are in Canada I thought it is clear Peter referred to the $USD relative to $CAD, hence the answer to your question is $CAD is inflated. sorry i couldn`t help more.