Deflation Now; Inflation's Coming

There are a couple ongoing debates regarding deflation vs. inflation, one which we should be more worried about. Last July, with crude oil aiming for $150 per barrel, most people were worried that hyper-inflation was just around the corner.

But now that most commodity prices have been virtually cut in half and global economies are shrinking, inflation fears have been replaced by fears of deflation.

The other argument is, in my opinion, more just a matter of “chicken or the egg semantics.” Some are pointing out that inflation really isn’t rising prices, and deflation really isn’t shrinking prices - but that these are actually accelerating or decelerating money supply growth.

As far as I’m concerned, when I see gas stations dropping prices twice within one hour like I saw this past weekend - that’s deflation. Even if central banks around the world are flooding the global financial system with liquidity. And this deflation is bound to stick around for a while.

But this past weekend, I saw something else that was shocking and has convinced me that the current deflation will soon be replaced by serious inflation. That was these charts produced by the good folks at FinancialSense - Jim Puplava and company. Charts that accompanied their audio broadcast for the week ending November 8th. I suggest you pull them up and take a look yourself. See one of these above, along with the one from ShadowStats.

Comments

[Vox Rationalis:]

No analysis? Fine.

The world's banks have been deleveraging for some time, as they have reassessed their risks and sought to raise their capital levels. This deleveraging is a direct reduction in the monetary base (M3 specifically). The rapid infusions by central banks are meant to stem the drop in M3 by providing the added capital the banks needed to raise.

The trick comes on the other end, when the banks wipe out the excess risk and seek to raise their leverage. That's when inflation becomes an issue. The preferred investments by the central banks are designed to prevent this inflation automatically, as the banks will seek to redeem these shares and their high dividend rates as they return to a more normal operating state.

There are other problems, but the structure of the preferred bank infusions makes clear that the Fed/Treasury are aware of the longer-term implications of what they're doing.

2008 Nov 17 08:04 AM

[Kelly Liebe...:]

"There are other problems, but the structure of the preferred bank infusions makes clear that the Fed/Treasury are aware of the longer-term implications of what they're doing."


Oh yes...If they are so aware of what they are doing , please tell me why we are in this mess in the first place? They have NO idea what they are doing, which is why the bailout hasn't worked and why companies are going bust at record numbers. Notice the jobless numbers? There is no "plan"... just a series of last ditch efforts to plug a dike with your remaining 4 fingers.

The entire globe is facing a financial meltdown and the dominos will continue to fall... Invest in Walmart and Target, they will be the only stores people will be shopping at this Xmas.

2008 Nov 17 09:32 AM

[carey_jim:]

Human economic (and other) behavior is too complex to fit into simple theories.

Our need to predict the future and to understand the world causes us to provide explanations and predictions but our models are always simplified and often completely wrong.

Look back a few years at the financial headlines, line up the prognosticators in a police lineup or take a look at their mug shots.

They don't want you to do that because they are right about fifty percent of the time and wrong about fifty percent of the time. I can achieve that record of success by flipping a silver dollar.

We love to talk about these things and probably can't stop ourselves. Whatever the case, complete silence and skepticism would be depressing (deflationary?)

So keep talking but don't expect me to believe you or follow your advice. (Don't expect me NOT to follow it either. I still have my silver dollar ....)

2008 Nov 17 12:07 PM

[Still Renting:]

Caray_jim,

Although I really agree with a lot of what you said, some of this stuff just is NOT rocket science. Too many people with a vested interest were caught allowing their own interests cloud what would have otherwise been clear observation.

I, and no small number of experts were warning us - years ago - of exactly what is happening. There is now even the famous video of Barney Franks, Babs Boxer, and others saying Fannie and Freddie are just fine while others were describing what is happening now.

Heck, a guy at Freerepublic bumped one of MY posts from September of 2006 warning that this could become as bad or worse than the Great Depression. It was obvious to me then. So many "cast in concrete" economic laws were being violated that it was plain that, barring the invention of something really helpful, like a DeLorean that could travel through time, everione was buying up tulip bulbs as fast as possible.

This one really is not an "opinion" thing. It was really quite obvious to anyone paying attention. It was like betting on a football game between the New York Jets and your local high school football team.

2008 Nov 17 05:21 PM

[Louis Paquette:]

Guys,

I appreciate the comments and I understand where you are coming from.

I would just like to mention - that this "article" was pulled out of a larger article, and I agree it doen't really offer that much on its own.

The point I am attempting to get around to making - but is omitted here - is that while gold looks lackluster now - with the way the money supply is being goosed (as shown in these charts) - that sooner or later - I am guessing that concerns about Deflation will soon turn into concerns about Inflation, that interest rates are going to have to be raised and that this will have a positive impact on the Gold price. This coincides with a theory Peirre Lassonde is proposing and some others and I agree.

My point is that this may not be a good time to give up on gold.

Cheers,

Louis

2008 Nov 17 06:10 PM

[Gilbert A...:]

Bonjour Louis,

I don't know where gold will be in the next 6 month. 200 or 2000 $.

I expect it will be 2000. Even in that tricky game.

Because it is a tricky game. Did not some bankers and central bank done a job on gold in August ?

There is so much price difference between the''paper asset'' and the real McCoy....Mint stores are in back order mode.


What we mostly forget in the debate about gold over In-falation or de-flation and monetizing debts, is that serious political crisis beside economics are worsen too.

Pakistan is very unstable, the Iranian showdown is not over, Caucasus is on the middle of another confrontation with Russia, and piracy is endemic close to the Red sea, where so much of our oil comes from.

Joe Biden warn us about a crisis in the months to come to test Obama, an every high ranking officials around the globe agreed.

Oil producers in North America might be also a good investment.


Best luck to you all,

Gilbert

2008 Nov 18 12:40 AM

[Louis Paquette:]

Gilbert,

"I don't know where gold will be in the next 6 month. 200 or 2000 $."

I know what you mean. On the one hand with all commodities deflating as they are, and looking at a ten year chart, sometimes I wonder if gold can move up.

The thing I am looking at now is this almost unprecedented money supply growth. It's not that I thing gold is going to go up as much as the value of each dollar is going to fall they way the authorities are printing the stuff.

I agree with this Peter Cooper when he writes::

"Money supply out of control
Another banker today showed me a chart of US money supply growth over the past few months, and highlighted a 111% increase. This compared with something like 15% money supply growth in the early 1930s as the US authorities grappled with the Great Depression.

There is an absolute tsunami of money coming into the system. What happens when the supply of something exceeds the demand? The price drops. And that is exactly what is going to happen to the US dollar - the authorities are about to inflate away their debt problem."

Source: seekingalpha.com/artic...

2008 Nov 19 02:29 AM

[Louis Paquette:]

Gilbert,

I agree regarding the geopolitical situation being potentially very unstable...

See how that oil tanker was taken by pirates a couple days ago. And I agree about Pakistan - very concerning that they have something like - 50 nukes? - and could fall to the taliban any time...what will happen then?

(I wish we could edit these posts...excuss a couple obvious errors above!)

Cheers

Louis

2008 Nov 19 02:36 AM