Will the Deflationist vs. Inflationist Debate End Soon? 20 comments
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The raging debate between the deflationists and the inflationists has yet to be resolved. Is it possible that it might be resolved sooner than we think?
The deflationists have pointed out that a massive global economic downturn and investment deleveraging has caused us to enter a deflationary phase of the economy, causing the prices of most assets to decline. Some of this camp argue that it could last years, recreating something like Japan's "Lost Decade".
But the government is desperately trying to "reflate" the economy by guaranteeing banks, lowering rates, creating stimulus, and driving down interest rates. Inflationists say that these pure monetary actions by the government are likely to stoke inflation – possibly hyperinflation.
So far, it's done little, but these things always have a lag. Credit as measured by a number of indicators has loosened up a bit.
The key to monitoring what happens with the monetary stimulus and potential future inflation are the money supply statistics. John Williams, the economist who runs the brilliant site www.shadowstats.com, has been monitoring the "M3" or broad money supply, and he says there are some recent signs that it is accelerating. From his website:
"M3 Growth Surges. .. For December, annual M3 growth surged to roughly 10.7% from its recent trough of 9.1% in November."
Source: www. shadowstats.com
This would be an interesting development, because through December of 2008, measures of M3 had been shrinking -- reflecting the deflationary nature of the credit contraction. Williams' thesis is that it appears that this credit contraction may be waning, and that a turn in M3 will unleash the huge explosion in "M1" money supply, fueling a surge in inflation. I've posted more thoughts on this over at Futures Fanatic (www.futuresfanatic.com).
As you can see by the charts below -- M3 and M1 have been "fighting each other" -- headed in different directions. The decline in M3 has overwhelmed the surge in M1, causing deflation. But if M3 now turns up, what you have is an overwhelming surge in both measures pushing toward the inflation direction.
US Broad Money Supply (M3)
Source: St. Louis Fed M1 measure
We should watch the markets carefully over the next couple of months to see if these monetary effects start being reflected by markets. The signs would be: Rising gold prices (GLD), a weakening of treasury bonds (TLT), and a rally in stocks (SPY), with a return to more risky assets including emerging asset markets (EWM, FXI).
I posted a "Reflation Portfolio" here a couple of weeks ago in case you wanted to be positioned for a coming rebound in inflationary markets.(http://seekingalpha.com/article/113655-the-reflation-top-ten-portfolio). I have established some early positions and I would like to increase them. However, I would like some of the data -- and the market's reaction to the data -- to confirm some of these theories before I act on them further.
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This article has 20 comments:
I believe that inflation at this point has to be examined as to how it rises, if it occurs from a demand side increase, this should indicate recovery. In my business, we've kept prices generally steady and our demand has luckily stayed even enough to support the prices.
Yet another article missing the point- who is lining up, and qualifies, for this new credit? No one, that's who. If the money doesn't get past the banks, no increase in velocity.
On Jan 20 09:57 AM kelm wrote:
> The wealth that has been destroyed was largely a function of leverage.
> It showed up as GDP growth in that it was tracked as economic activity
> (houses being bought and sold etc.). The money the Fed is printing
> is not entering the economy in a manner that stimulates economic
> activity. It is at simply keeping banks from officially becoming
> insolvent. Consequently the Fed action adds to the money supply but
> debases the currency in the process. That will lead to inflation.
"Because I Say So." seems to still be the policy of the day and will continue with greater Zeal in the future.
The only certainty is that things will "Change". Whether for the better or the worse in the long run remains to be seen.
Short Term - We Are Just Beginning To Leave The Eye OF The Storm.
Gold was up $20, is up $15, ah make that $12...
GLD looks to be struggling with really heavy volume.
What do technicians call it, an intraday volume reversal?
There is a nice up gap waiting to be closed below $810.
The Obama Grace period is in action: The Dow is down over 220, the S&P is down over 31.
Wait for the market to close before getting too excited about gold. I think it will close down for the day.
Just my opinion based on my own inexpertise at trading and the fact that as soon as a 300K+ shares of GLD traded in less than a minute, most of the upward pressure ceased. IMHO
My quandary is that I want JPM, which I expected to go below $20 and is now below $20 much faster than I anticipated.
Too many selections of quality names.
Only the strong will survive, but which are the strong?
CPI has declined recently only because of the price of gasoline and oil, which receive too heavy a weighting in CPI anyway.
On Jan 20 08:29 AM JPDD wrote:
> Why do you consider shadowstats any more calibrated than the gov't
> stats?
I believe it will increase.
On Jan 20 09:59 AM patio wrote:
> "But the government is desperately trying to "reflate" the economy
> by guaranteeing banks, lowering rates, creating stimulus, and driving
> down interest rates. Inflationists say that these pure monetary actions
> by the government are likely to stoke inflation – possibly hyperinflation."
>
>
> Yet another article missing the point- who is lining up, and qualifies,
> for this new credit? No one, that's who. If the money doesn't get
> past the banks, no increase in velocity.
* Deflationists assume that we "let the banks go" and all of the credit is destroyed.
but...
* WE don't appear to be doing that. We appear to be running the printing presses overtime in a useless effort to save banks
* What happens when the government ends up having the buy all the crummy/toxic/bad assets from the bad banks that fail
* They will then be forced to monetize these assets... somehow.
Given what's happening in banker-ville today, it may have to happen sooner rather than later.
I believe, ultimately what will happen is either an informal (stealth) or formal massive devaluation of the dollar. It especially makes sense if you read your history books on FDR and you realize that Obama and Bernanke are both students of FDR.
On Jan 20 09:54 AM Kip Largo wrote:
> I am of the belief that money created through credit must hit rock
> bottom before any recovery can happen. That means trillions of dollars
> has to disappear so that pretty much what is left is the Fed generated
> money (rather than the money created out of loans). When this has
> happened, we'll be ready for growth as we will have proper reserves
> for any credit expansion, but if we try to keep massive amounts of
> credit alive by printing out money, we will only push us farther
> into bad times.
On Jan 20 08:45 AM CLH wrote:
> It appears you are whistling as you pass the grave yard. Trillions
> of dollars have disappeared as debt is eliminated. This will take
> years to repair. The govts. spending is only nickles and dimes.
I realize that. Perhaps I should have asked it like this: Why do you think that the pre-Clinton stats were any less manipulated or politicized? Do you think that the Reagan and Bush 41 administrations were above manipulating those statistics?
As near as I can tell, shadowstats is perpetuating a different set of manipulations.
I guess it comes down to whether you think there is more inflaiton or less inflation than the government reports. I believe the government consistently under-reports inflation.
On Jan 21 09:24 AM JPDD wrote:
> [Because he is counting inflation by the Pre-Clinton era measurements
> before the government started manipulating CPI with "hedonics," which
> pretty much allows them to say inflation rate is anything they want.]
>
>
> I realize that. Perhaps I should have asked it like this: Why do
> you think that the pre-Clinton stats were any less manipulated or
> politicized? Do you think that the Reagan and Bush 41 administrations
> were above manipulating those statistics?
>
> As near as I can tell, shadowstats is perpetuating a different set
> of manipulations.
On Jan 20 09:59 AM patio wrote:
> "But the government is desperately trying to "reflate" the economy
> by guaranteeing banks, lowering rates, creating stimulus, and driving
> down interest rates. Inflationists say that these pure monetary actions
> by the government are likely to stoke inflation – possibly hyperinflation."
>
>
> Yet another article missing the point- who is lining up, and qualifies,
> for this new credit? No one, that's who. If the money doesn't get
> past the banks, no increase in velocity.
My view is different yet similar to yours: The government has been understating it, but that it started when COLA was invented. That provided a huge financial incentive to play games.
BTW, Thanks for the article Scott.