Are We in Deflation or Inflation?

Excerpted from the November 8 edition of Biiwii.com’s Notes From the Rabbit Hole

I would like to call your attention to an email exchange I once had with Rick Ackerman regarding a provocative article written by Rick on the subject that is now foremost in the financial and economic community’s consciousness.  Talk of deflation is everywhere now, but in this little corner of the internet it was going on 3-1/2 years ago.

The reason I dug this up is that all too often, subjects like inflation and deflation are batted around and discussed in abstract, almost cartoon-like fashion.  Inflation and deflation are buzz words in a system that creates money out of thin air in ever less successful attempts to stimulate economic growth and prosperity.  It is also relevant now because if I am known for something other than a generally negative attitude toward the Ponzinomic edifice that so many have taken for granted as a financial system, it is my current bullishness on the gold miners, a sector that most people would not associate positively with deflation.

This is my most direct point from the Ackerman exchange and indeed its premise is being tested today: 

In my view, the inflation game is played against the deflationary impulse or need to correct.  It is the Fed and other forces pushing on a string, and one day they will find the string simply goes limp and all the inflated chickens will then come home to roost.

Cluck cluck… they reside at the national doorstep.  Having been lectured recently about deflation by a gentleman commenting on a recent article and having noticed legions of ‘deflationists’ appear on the scene after the market began eating credit for breakfast, lunch and dinner, I think it is time to at least look into the subject a little more closely now that the lonely few, led by Robert Prechter, have gotten reinforcements en masse.

Don’t get me wrong, people concerned about deflation are some of the smartest I know, thoughtful people who understand the components of what an unsound economy is built on.  The great post-9/11, post-recession inflation bull market in commodities and to a lesser extent, stocks, was actually the result of successful inflation policy from the preceding crisis.  The actual inflation occurred during the depths of the economic downturn early in the decade.  The effects of the inflation were apparent for years after, with the punctuation taking the form of oil at $147 a barrel back in those relatively carefree days of summer, 2008.

Things are indeed more dicey this time around and global central banks are pushing on that string as hard as they can.  The deflation argument holds that their attempts will fail as the gaping maw of many $Trillions in liabilities just yawns wider with each attempt and says ‘gimme more’.  The inflation argument however – at least the proper inflation argument - holds that it is the act of money creation that will lead to higher prices one day and the associated rising inflation fears that will crest into the next cycle.

But first of course, there is the current and very brutal cycle to deal with.  Which is why we watch things like what deflationists call ‘the velocity of money’ in an attempt to gauge how well our official would-be inflators are doing.  This week our often watched M2 and MZM have each hitched down a notch.  On the other side of the mixed bag, the 1 and 3 month LIBOR rates have plummeted to new depths implying that somebody gave a big official cattle prod to the banks to ‘get it in gear’.  All we can do is to keep watching these and other indicators closely in trying to determine whether policy is successful (success defined as a new inflation cycle).

No matter whether or not official policy ultimately proves ‘successful’, the global economy is likely to experience a prolonged downturn as authorities feed the beast at one end and then deal with the – how can I put this… by-product at the other.  At the moment systems are breaking down and inflation effects, if policy makers are ‘successful’, will likely have to wait quite a while before taking root.

This is why I find it troubling as a gold stock trader/investor when this asset class moves in tandem with the widely touted ‘resources’ trade and even the stock market.  Raging inflation bulls want you to protect yourself from a coming inflation but do not discriminate between the monetary (currency, bonds and sometimes gold) and the economically positively correlated (commodities, stock markets and sometimes gold). 

As blog readers know, throughout the most recent inflation bull cycle, I awaited the contraction, which would be the time the gold miners become distinguished as a unique asset class.  The title of this article should actually be Deflation AND Inflation because that is what we currently have; deflationary destruction of credit/liquidity and global authorities pushing on that string.  We were never going to get active inflation policy until a well rooted deflation impulse took hold.  It is here, it is monetary and gold is outperforming, which is all the gold miner investment stance needs.

More analysis, including a technical look at the US Dollar and a full fundamental and technical write-up of young gold miner Jaguar Mining (JAG)  follows for subscribers in the November 8 edition of Notes From the Rabbit Hole.

 

Comments

[Dan Perkins:]

"Inflationoidiation" - One who is genetically programmed towards the threat of inflation and cannot let go of the idea no matter what.

This really is not that difficult: Every asset class on the planet is getting significantly cheaper by the day. Global economies are dying on the vine. Unless the fed simply starts pumping a trillion a week directly into US households, there is absolutely no way on earth to grow any aspect of any economy faster than wealth is being destroyed. All the money the fed and treasury are pumping out is just shoring up balance sheets, it is not going into the economy as growth or cash directly to the citizenry and driving up prices. It is sitting in banks awaiting doomsday!

How on earth do you deleverage and decrease the value of the dollar at the same time! Will we get inflation when we hit rock bottom? Perhaps but at a very slow rate - concidental with the very slow rate of growth of the economy as it eases out of this mess!

If you are worried about China or Japan selling dollars; don't - the dollar is gaining value - as happens with deflation!

2008 Nov 11 09:06 AM

[marxbites:]

When the Fed pumps new fiat money debt receipts into the economy in SIX MONTHS that are equal to the the entire amount printed from nothing under Sir Alan's "guidance" over EIGHTEEN WHOLE YEARS,

IS THAT then enough new money created to chase a level amount of goods to raise prices?

Will oil rebound? PMs? Food?

Lets not forget that FED policy can take 6-12 months for it's interventions to take effect.

JPMorgan and the British Crown and their Int'l Banker cabal are moving to consolidate world banking & government.

If history repeats, and boy does it ever, we should ALL be on the defensive and watch for a false flag event the NWO/Banksters will use against us.

A Reichstag Fire, Lusitania, USS Maine, Pearl, Tonkin Gulf, WMD's or Nukes are likely right around the corner as the NWO assholes continue to rob the world blind, and whats left of our retirement accts are next in their sights, like gold under Stalin's good buddy FDR.

2008 Nov 11 10:01 AM

[John Lounsbury:]

L-Bow - - -

Excellent comment.

The monetary theory of inflation states that inflation is caused by the creation of too much money. Inflationists look at the current massive printing of money and predict runaway inflation. They are missing the fact that the money being printed was actually spent in the past and can not be used again unless obscene leverage is allowed to resurrect. With the demise of the investment bank class, we are left with only the lower leveraged commercial banks. Thus, the new money is disappearing into the black hole of deleveraging.

The risk of inflation occurs if central banks overshoot the amount of new money needed to just fill the "gaping maw" (Gary Tanashian's words). Once the tipping point is past, inflation can rise again. Where is the tipping point? It must be after assets have stopped deflating, beacause as long as the assets backing the paper lose value, the need to replace the money already spent continues. To do otherwise would put the finacial system into bankruptcy (assets worth less than liabilities).

When will the current asset deflation stop and inflation risk return? That is the (multi-) trillion dollar question. I don't believe anyone has the answer at present.

2008 Nov 11 10:37 AM

[Marc Courtenay:]

Thanks Gary. To me the heart of your article is in the statement, "The title of this article should actually be Deflation AND Inflation because that is what we currently have; deflationary destruction of credit/liquidity and global authorities pushing on that string. We were never going to get active inflation policy until a well rooted deflation impulse took hold. It is here, it is monetary and gold is outperforming, which is all the gold miner investment stance needs."

2008 Nov 11 01:18 PM

[Troz:]

There are two factors that determine the maximum amount of money/credit that can be in circulation at any given time. One is the amount of leverage banks can have which is going to shrink on the whole due to new regulations. The other is the size of the Fed's balance sheet, which has more than doubled since the crisis began and continues to grow at an alarming rate.

In other words, the base money supply (Fed's balance sheet) is growing while the multiplier (leverage) is shrinking. I don't have enough information or expertise to know for sure what the end result will be, but my hunch is that it will be inflation because that is the clearly the bias of the Fed. I am highly skeptical of the Fed's ability to "mop up" excess money before the damage has already been done.

2008 Nov 12 01:51 AM