The Deflation Debate Continues 19 comments
Tim Iacono
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In what continues to be one of the biggest wastes of breath and digital ink in recent memory, the debate over "deflation" continued this week with Eric Janszen of iTulip contributing one of the more stinging attacks against the "deflationistas" in some time.
Maybe someone should lock Eric and Mike Shedlock in a room together until they finally come around to realize that the only thing they disagree on are definitions and timing.
After listening to this interview from just a few months ago, I'm not even sure that Mish deserves the label "deflationista", loosely defined as those who think we are about to sink into a 1930s-style deflationary depression from which, if things go according to plan, we will all emerge sometime around 2020.
That outcome is apparently preordained, even though there is no gold standard this time around and, as a consequence, virtually no limit on the amount of money and credit that governments and central banks can create in an attempt to "paper over" the basic problems we now face in the global economy.
For that group, which includes most of the folks at Elliot Wave, I have these thoughts:
The fundamental problem with "deflationistas" is that they transfer their own apocalyptic view of the world onto the two groups who will ultimately determine whether we sink into a deflationary abyss:
a. Central banks and governments who, with a pure fiat money system, have the ability to create money and credit out of thin air with virtually no limit;
b. Ordinary consumers in the West who are innately optimistic about the world and more than willing to borrow and spend when presented with favorable terms as well as new consumers in emerging economies around the world who aspire to be as profligate as those of us in the West This probably doesn't add anything to the debate, one that, as noted above, probably isn't worth conducting anyway.
Nonetheless, it felt good to get it off my chest. Back to Mr. Janszen... He has penned another memorable piece on the subject this week:
The deflationistas apparently think what comes after post-bubble deflation is more deflation, as occurred in the early 1930s in the US but nowhere else ever since. It has not occurred to the deflationists why no similar period of deflation has ever occurred since the 1930s, or when they do confront the question they explain that the debt is really, really, really big debt this time, bigger than the Fed. Or that differences between the kind of money that the Fed prints versus the kind of money that the endogenous credit markets create when money is loaned into being by businesses and consumers means the Fed cannot impact the latter.
As we explain that in The truth about deflation, the reason no deflation spiral has occurred in any nation since the one instance in the US in the 1930s is because since then no nation has chosen to remain on the gold standard through a debt deflation. Needless to say, the US is not on a gold standard today.
...
In this crazy environment what is likely to happen, as has happened in the past, is that the bond market will figure out all at once that pricing signals it mistook for a long term deflationary headwind were actually the deflationary down draft of a collapsing asset bubble followed by a powerful inflationary tailwind that started off as Fed induced money growth years before. Anyone caught on the wrong side of the market when that epiphany finally occurs will suffer the consequences. The deflationistas can take this as their final warning from the inventors of the original deflation/inflation cycle theory.
Eric then goes on to describe his own Ka-Poom Theory of rapid inflation sometime in the period ahead, beginning shortly after everyone who is currently talking about "deflation" stops doing so as they notice all kinds of prices rising again.
The piece is well worth reading in its entirety and is highly recommended.
I'm in the process of writing something up for my weekly investment newsletter and will probably provide excerpts of the wasted digital ink here sometime next week.
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This article has 19 comments:
but before running off to the bank with an inflation theory, keep this doubt in your head as nothing is true until it happens.
And the car industry is counting on a lower class tax break for auto-financing before all is said and done to re-stimulate their circus. The money is coming. It just takes time to filter into the system. The average transit time from initial reserve growth to market is still 6 to 9 months and next spring another wave hits our food supply. That is when inflation will be noticed again.
Convenience store purchase:
1 large snickers bar
1 Peppermint Pattie
1 small bag of cashews
Total: $ 5.65
www.itulip.com/forums/...
From that article, comes this punch line:
"Ka-Poom Theory since 1999 occupies a position outside this framework. It asserts that all of the money that the US needs to create monetary inflation that deflates both its external debts and domestic private debts already resides outside the US in the form of more than $13 trillion in gross external debt to the tune of 95% of GDP. Most of that debt is in the form of US treasury bonds. All the US has to do to devalue the dollar is induce its trade partners to sell, perhaps by indicating an intention to monetize debt wothout actually doing so, causing US creditors to sell some dollar denominated securities for assets not priced in dollars, resulting in an increase in the global supply of dollars. The effect is the same as the US printing money but without a corresponding issuance of new debt and the attendant risk of hyperinflation that Roubini refers to."
Someone please explain to me how, as a holder of a US Treasury Bond, I can sell it to someone and take my proceeds in another currency, that that increases the suppy of US$?
I don't see any anything at all being created.
Emerging markets, hedge funds , financial guarantors and regulators aren't blogging about the cause of the deflationary depression of 80 years ago , they are doing the forensic accounting and fundamental financial analysis necessary to unwind the Black Swan event that has already occurred.
They have many, many theories and arguing about these theories and publishing their arguments in scholarly journals keeps them employed.
The same thing can be said for other historians who argue about things like the downfall of the Roman Empire: It was caused by lead in the pipes, sexual morality or lack thereof, the German barbarians, Christianity, all of the above, none of the above ....
xsuddensam gave these statistics:
November 10, 2008
Convenience store purchase:
1 large snickers bar
1 Peppermint Pattie
1 small bag of cashews
Total: $ 5.65
There might come a time when people will become smart enough not to spend that kind of money on junk food but probably (possibly?) none of us here will live long enough to see it.
That's about the strongest reason I can think of for continued inflation.
On Nov 15 08:42 AM xsuddensam wrote:
> November 10, 2008
> Convenience store purchase:
>
> 1 large snickers bar
> 1 Peppermint Pattie
> 1 small bag of cashews
>
> Total: $ 5.65
You'll have to indulge me because sometimes my diet of yogart, tofu and veggies gets a little boring. As much as I want not to eat candy bars, I have to give in once in a while. I do remember a time when a Peppermint Pattie and a Snickers cost a nickle each. Those were the days when you could get a haircut for fifty cents and a hamberger, fries and a shake for a quarter (90% silver that is).
On Nov 15 12:23 PM carey_jim wrote:
> I think most economic historians are agreed on one thing: They don't
> really understand what caused the inflations and deflations of the
> past.
>
> They have many, many theories and arguing about these theories and
> publishing their arguments in scholarly journals keeps them employed.
>
>
> The same thing can be said for other historians who argue about things
> like the downfall of the Roman Empire: It was caused by lead in the
> pipes, sexual morality or lack thereof, the German barbarians, Christianity,
> all of the above, none of the above ....
>
> xsuddensam gave these statistics:
>
> November 10, 2008
> Convenience store purchase:
>
> 1 large snickers bar
> 1 Peppermint Pattie
> 1 small bag of cashews
>
> Total: $ 5.65
>
> There might come a time when people will become smart enough not
> to spend that kind of money on junk food but probably (possibly?)
> none of us here will live long enough to see it.
>
> That's about the strongest reason I can think of for continued inflation.
>
Sounds right on to me. Without gold & with a F/R fiat money system, there is virtually no likelihood of general deflation. Timing issues may cause some non-uniformities in different sectors (good time to buy a car, or stock, etc). My big worry is the Fed has no clue when to shut off the tap on liquidity this time around. The bias is to err on the late side, since apparently inflation is more palatable than recession. That tailwind will be more like a hurricane when it hits. Inflation protection will be the sound strategy in the long term.
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I was thinking of rich people who spend $1,000 on a bottle of wine, $1,300 for a Mickey Mantle baseball card, and whatever it takes to get their house painted on Sunday so they can watch the football game in peace.
In the 1950s the movie star Erroll Flynn paid 100 million dollars for an uninhabited island in the Pacific ocean and paid a couple of house keepers to stay on the island full time just to keep the mansion clean and the beer cold. He planned to take his friends there for big parties but he only went there a couple of times in many years and so he sold it.
When people like that are in plentiful, prices are driven up.
Who can imagine Jesus Christ or the Buddha bidding prices up? They lived on tofu, yogurt and veggies when they could get them for nothing, and on shoots and leaves when they couldn't. And if someone asked to buy the shirt off their backs, they gave it to them instead.
The rich only care about paying a fair price because they don't want to look stupid. The poor know this and wheedle as much money out of them as they can by flattery, trickery and legerdemain.
Therefore, when the rich are in the ascendancy, prices tend to rise.
The poor cheat and bargain the hell out of each other and if they can't get the price of an item low enough so they can buy it, they come back at night and steal it or destroy it.
This behavior causes prices to fall.
Now you know the true cause of inflation and deflation.
I prefer inflation and, by the way, I'll sell you my book on the subject for $1,000 and the price is firm. Hurry while supplies last because I never bargain with time or money.
I beg to differ with your generalization that the rich only care about paying a fair price because they don't want to look stupid.
I have a good friend who is a world renoun artist who couldn't sell the work when it was priced at $1,900. When it was priced at $50,000 or $100,000, it sold. How could that be? Simply, the rich don't want $1,900 work hanging on their walls no matter how good it may be. It's called snobbism.
I agree with that and up the ante:
Many snobby restaurants, hotels, spas, cruises, etc. PAY rich and famous people (or at least charge no money) to entice them into their business establishments.
It adds a new meaning to the expression "You couldn't pay me to eat in that restaurant."
"How much are you willing to pay for me to take your stuff? I'll tell everyone I bought it from you and that will help your future business, in my humble estimation of my worth."
He coughs politely and then holds his hand out demurely. "You could even put my name under your logo if you pay twice as much," he adds, self-deprecatingly.
When dollars disappear, they buy more oil, tofu, peppermint patties, and wine. Well, wine...expensive wine...now we're talking the utility of a dollar, which rich people tend to forget.