Why I think deflation wins for now

Update: Interesting comment by Karl Denninger which has me thinking quite a bit:

The fallacy of the "inflationist" viewpoint is that in order for money to circulate it must be borrowed into the economy. Only the first "turn" can come from production - all other "turns" in the MV = PQ equation must come from a loan.When debt service reaches excess income (income less necessities of life) velocity ceases and no amount of "printed" money gets into the economy to do anything.There is no solution to this problem other than the pay down or default the debt that is producing the constriction.

I would add that much that has been produced is now worth zero - like huge SUV's, mcmansions, and other luxury items - nobody can buy them. And even if they were given away for almost nothing people wouldn't take them - they wouldn't be able to afford the maintenance, utility bills, insurance, taxes, or other costs associated with these products. It's a double-whammy on GDP.

Interesting post here:

http://jessescrossroadscafe.blogspot.com/2009/06/price-money-supply-inflation-and.html

and here:

http://www.doctorhousingbubble.com/deflating-our-way-to-prosperity-five-major-sectors-of-our-economy-pointing-to-deflation-education-wages-housing-stocks-and-automobiles/

The conclusion is that there will be big-time inflation.

I tend to disagree for a few reasons. I'm not an economist but I try to use common sense.

Supply of pretty much everything has increased (and will be high for a long time). Demand for pretty much everything has gone down (and will continue to go down for quite a while). This will cause a wave of deflation on its own.

The Fed and the US Government are pumping trillions of dollars into the economy. But where is that money really going? Is the increase in money supply really making to the people? I don't see it. Bond people are getting nervous. I think the bond market wins over the equities and commodities markets. Stock crash is very bad, bond crash is catastrophic.

Look at unemployment. 500,000 people are losing their jobs each month. The median salary is somewhere around $30K - $40K, higher in California which is cratering. With jobs being lost and more people out of work wages can only go down. Also, this is a double hit to states as they lose tax revenue and have to pay out unemployment, food stamps, etc. This can only be deflationary.
People are now saving more and using their money more efficiently (e.g., avoiding luxury purchases). Remember that the GDP is based on 70% consumerism. When money is being removed from circulation (consuming) this action also has to be deflationary.

The US dollar could be devalued (from massive deficits and printing of money). However, most other currencies are in worse shape than the US dollar. I just don't see the US dollar going the way of the Iceland krona. The entire world would collapse if that happened. Also, the debt holders (China, Suadi Arabia, Japan, etc.) all have a vested interest in not seeing the US currency collapse. There will be lots of back-door deal-making among countries to keep some sort of status quo.

The banks like JPM and GS are gaming and propping up the markets (stocks, commodities, etc.) with TARP and other free money. At some point these games will end and the stock market, commodity prices, and other markets will fall dramatically. This will be more destruction of (paper) wealth which will be deflationary.

Housing will continue to deflate (regardless of what the government does) for at least two more years. Also, thousands of mcmansions and commercial properties will end up being abandoned and bulldozed down. There just isn't going to be a market for all of them. Not very many people can afford $2000+ for mortgage or rent (let alone maintenance or maintenance fees). The huge oversupply of houses will continue to cause deflation for a long time.

Commecial real estate, becuase of oversupply and ineffecient properties built is cratering which will cause more deflation.

Tax revenues are plunging and local, city, state governments are going to find ways to increase taxes (hotel taxes, registration fees, increase in traffic tickets issued, gas taxes, you name it). Instead of people using the money to buy stuff it will instead be going to the most inefficient system there is - governments. This will also be deflationary. Governments are going to have to let people go too (especially if other countries decide not to finance our debt as much) - there is no way for the entitlements to continue without some sort of reductions. More unemployment, more deflation.

Loaning of money is decreasing too since fewer people can qualify - this will be deflationary.

Increased bankruptcies and foreclosures also are deflationary as assets are sold off at a discount.
Sure, the government will create public works projects and such but it will not be enough to offset the rampant unemployment and contraction of the economy, it is only a band-aid.

Because of energy costs increasing (mostly due to maniplation and speculation by financial institutions) there will be some inflation in some areas - gas prices, food production, etc. But this increase will also take away money from other consumerism which will increase deflation of other assets even more.

I just don't see the inflationary pressures and I see a whole lot of deflationary pressures. The money being printed up by the Fed and the US Treasury just isn't going to make it into the consumers' pockets any time soon (if ever).

The argument seems to be that if everyone was given $100,000 of freee money then the dollar wouldn't be worth as much - hence inflation. The problem is only very few people (the already very rich) are getting their hands on the newly printed money - and I don't see how that would cause inflation for the typical US citizen.