Evidence That Big Inflation Is Coming

Big Inflation Coming

Late 2008’s stock panic has certainly had a complex and multifaceted impact on popular psychology. Mindsets and outlooks that were scoffed at as recently as 6 months ago have suddenly become fashionable. One of the more intriguing is the meteoric rise to prominence of the deflation thesis.

The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today than in any other time in modern memory.

In light of these universal falling prices, how could we not be entering a sustained deflationary period? The case may seem airtight, but I’d like to offer a contrarian view in this essay. Believe it or not, despite 2008’s price collapse there is plenty of overlooked evidence suggesting big inflation is coming. You won’t hear much about this on CNBC, but it could have a big impact on your investments in the years ahead.

Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation.

Consider this example. You live in a small town in rural Texas with 10k people and 3k houses. A small local explorer discovers a gigantic new oilfield, an elephant. Within months your town’s population swells to 20k as a major oil company partners with the explorer to start developing the find. House prices skyrocket as 20k people compete for only 3k houses. Is this inflation? No, it is pure supply and demand. Its driver was not monetary in nature.

Similarly deflation is not just falling prices, but falling prices driven by a contraction in the money supply. It is true that most modern economists would add contracting credit to this definition as well, but money is very different from credit. Would you rather receive a gift of $100k cash or a new $100k credit line? While you can spend both, money is very different from credit, which is short-term debt.

Carrying the Texas town illustration farther, imagine oil prices fall by 90% in the years after the big discovery. The oilfield work dries up and there is a mass exodus of people. House prices collapse. Is this deflation? Of course not, it is pure supply and demand as well. Lower local demand for houses drove down prices, not a contraction in the greater money supply. This distinction is very important to keep in mind.

We witnessed a stock panic in late 2008, an exceedingly rare event. The dictionary definition of this is “a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.” Panics are bubbles in fear which drive investors to liquidate everything they can at any price. They get so scared they only want to hold cash.

When all investment assets are sold heavily in a short period of time, prices naturally collapse. But this is not deflation if it is not driven by a contraction in the money supply. For stocks, commodities, and houses, prices fell sharply in the second half of 2008 because there was a sudden huge oversupply relative to demand. Many more investors wanted out than wanted in, so prices plunged. They had to fall until a new equilibrium was reached, low enough to retard supply (investors too disgusted to sell anymore) and raise demand (from other bargain-hunting investors).

Now the deflation argument is strongest for houses because most buyers borrow to buy houses. So the stock panic’s impact on credit availability definitely hurt the housing market. But the degree of impact is debatable. Sure, borrowers needed to be more creditworthy and put more cash down in late 2008 than in 2006. But the stock panic scared people so much that they may have slowed house purchases anyway even if banks were begging to give them easy loans like in 2006. Panics breed extreme economic fear, and extreme economic fear greatly slows big purchases no matter how easily they could be made.

Acknowledging that debt-financed house prices are a special case that may indeed be deflationary (contraction of credit), I am focusing on stocks and commodities in this essay. From October 2007 to November 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths of these losses snowballed in just 9 weeks during the stock panic. From July 2008 to December 2008, the flagship Continuous Commodity Index plummeted 46.7%. Almost half of this mushroomed during the stock panic.

Deflationists argue these price drops are proof of deflation, and most people today believe this. But they are only deflationary if they were driven by a contraction in the money supply. Stocks and commodities are generally cash markets. Credit such as stock margin can be used, but it is trivial relative to the market sizes. And real commodities purchased for industrial uses are paid for in cash or near-cash (short-term trade loans), not multi-decade loans like houses. So the money supply during 2008’s slides is the key.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008. But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong. When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand. If money didn’t drive it, then it isn’t deflation.

This first chart is updated from an inflation essay I wrote last May (where it was explained in depth). It shows the broad MZM money supply (yellow), the annual growth in MZM (blue), and the annual growth in the Consumer Price Index (red). There are all kinds of problems with the CPI, but it remains the most-accepted definition of “inflation” on Wall Street even though it measures prices and not the money supply.

click to enlarge

Since the deflationists believe the plunges in stocks (since October 2007) and commodities (since July 2008) are deflation, this time frame is where we will focus. MZM, or money of zero maturity, is a broad measure of the liquid money supply in the economy. It measures all currency, checking accounts, savings accounts, and money market funds redeemable on demand. It does not include CDs and other time deposits.

Starting in October 2007, when the US stock markets began sliding into cyclical-bear mode, year-over-year MZM growth was running 11.9%. There were 11.9% more US dollars available to spend in October 2007 than in October 2006. This soared to 16.4% YoY growth by March 2008. The growth rate then slowed considerably in Q3’08 to 9.0% at worst, and then accelerated again during the panic to 12.6% in late December. Overall, average annual MZM growth since the stock slide started measured 13.1%!

Since the commodities slide started in July 2008, annual MZM growth on a weekly basis has averaged 11.6%. It never shrunk! If the broad US money supply always grew by at least 9% over the period of these sharply lower prices the deflationists cite, and averaged 12% to 13%, then how on earth could the stock slide or commodities slide be deflationary? Prices didn’t fall because there was less money available to spend on stocks and commodities, but because demand plunged relative to supply.

Deflation is exclusively monetary in nature. And since mid-2007, when the general credit crunch started unfolding, the Fed has grown broad money by the fastest annual rates seen since the aftermath of the 9/11 terrorist attacks. This fact is indisputable. Without a shrinking money supply, negative growth rates, there is no basis for declaring deflation. Redefining “deflation” to mean something it is not doesn’t make it so. I can rail all day about the sun really being black, not white, but that doesn’t make the sun black.

Now if you work on Wall Street, you probably believe the CPI gospel. Surely our benevolent government wouldn’t lie to us about inflation, would it? Actually it has huge incentives to underreport inflation. Inflationary expectations hurt the stock markets, and weak stock markets hurt the economy as the stock panic abundantly proved. Scared citizens are not only harder to rule over, but they won’t vote for politicians’ reelections and they won’t be able to shoulder as big of tax burden to pay for politicians’ grand spending plans.

And then there are those pesky income-redistribution entitlements that take away spending from politicians’ pet projects. Most of these are indexed to CPI inflation. Politicians want to bribe constituents for votes with pork, not pay more of “their” money in mandatory transfer payments. A higher reported CPI means higher non-discretionary spending on social security and other entitlements. So the government has all kinds of reasons to underreport inflation and it does.

Thus the CPI is a joke, riddled with statistical sleights of hand deliberately designed to downplay rising prices. In addition, it measures the effect, rising prices, and not the cause, a growing money supply. True monetary inflation is almost always higher than the CPI’s custodians lead investors to believe. Nevertheless, Wall Street wants to believe the CPI nonsense so the CPI still has mainstream credibility even when it should have none.

Even though it is perpetually understated, the CPI still makes a mockery of the deflationists’ arguments on the recent sharp stocks and commodities declines. Since October 2007, the CPI has averaged 3.9% annual growth. It peaked at a very inflationary 5.6% year-over-year in July 2008 as commodities prices topped. While it did plunge in the panic, it was still positive throughout the whole thing. 4.9% YoY in September, 3.7% in October, 1.1% in November, and 0.1% in December.

Per the CPI, the rate of headline inflation is slowing. This is not deflation. Deflation is shrinkage. Slowing yet still growing inflation is disinflation. They are very different beasts. The deflationists not only want to redefine deflation as falling prices independent of money, which is silly based on many centuries of history that defined it as purely monetary, but they have confused disinflation with deflation. They ought to buy some dictionaries to see what words really mean before they embarrass themselves further.

Regardless, if you consider inflation from a monetary-growth cause standpoint or a CPI effect standpoint, there has not yet been a single data point of deflation despite stock prices and commodities prices getting sliced in half. We may see deflation yet, anything can happen in the markets. But so far it is a myth. It was plunging demand driven by a bubble in fear that hit prices, not a shrinking money supply.

Another relevant misconception along these lines is that falling investment prices reduce money. This isn’t true. The money supply is totally independent of investment levels. Plunging asset prices do not destroy money despite some fringe deflationists actually making this argument. They claim that since stock, commodities, and house prices have fallen, money is being destroyed. But this is not how money works in the real world.

Imagine an investor buys stock for $10k. To receive his shares, his broker transfers $10k of money from his account to the seller’s. The seller now has $10k, the buyer now has shares. The money simply changed hands. Then a stock panic hits and the shares plunge 50%. The investor’s fear gets the best of him so he frantically liquidates these shares for $5k. A new buyer’s broker transfers $5k from the buyer’s account to the investor’s. Did the investor’s original $10k of cash get destroyed in this stock plunge?

Of course not. The original seller could have taken that $10k and parked it in a bank. He could still have the $10k if he wasn’t in the assets that plunged in price when demand evaporated during the stock panic. Money is a medium of exchange. Rising asset prices don’t create it in an aggregate sense and falling asset prices don’t destroy it. Sure, you can get a bigger share of the overall money pool if your assets are rising in price, but only the central bank can affect the size of that money pool. You and I can’t.

Which brings us to the title of this essay, big inflation coming. While the deflation thesis is easily refuted for stocks and commodities, the actual money-supply data the deflationists perpetually ignore offers more insights. During the stock panic, central banks around the world panicked. They fear deflation too, so they started cranking up the printing presses at phenomenal rates. The epic deluge of money they unleashed is going to filter into the real economy and drive up general price levels.

You can see this above in MZM growth. The US economy is shrinking thanks to the panic, there are less goods and services on which to spend money. Yet simultaneously the Fed is recklessly ramping broad money at double-digit rates. Sooner or later relatively more money will be bidding for relatively less goods and services, which will drive up prices. You simply can’t have 10%+ MZM growth without seeing big inflation eventually. The Fed last did this in late 2001 (panicking after 9/11) which helped initially kick start the commodities bulls.

As if 13%+ annual growth in broad money wasn’t inflationary enough, I can’t believe what is happening in narrow money. M0, the narrowest measure, is usually called the monetary base. It is simply currency (coins and paper dollars) in circulation and in bank vaults plus reserves commercial banks have on deposit with the Fed. These reserves are critical because they are the base from which all other forms of money such as checking accounts are created. The monetary base directly controls the ultimate size of fractional-reserve banking.

Until late 2008, I hadn’t looked at M0 for years. Why? Even the Fed isn’t foolish enough to change it too much. For decades it has traveled in a tight range between about 2% and 10% annual growth, with a pre-panic average since 1960 of 6.0%. M0 growth less real economic growth is one of the most basic measures of inflation. If M0 grows at 6% and the underlying economy at 3%, then there is relatively 3% more money available to spend on goods and services. This is inflation.

I was reading a book last month that discussed the monetary base’s direct impact on inflation. So I decided to take a look at M0 again. I could not believe what the data showed, I almost fell out of my chair it was so mind-blowing. Per the Fed’s own data, we have just witnessed the most inflationary event in modern history. This crazy monetary base chart will make even the most rabid deflationist very uneasy.

M0 has gone parabolic! Year-over-year in December 2008, it was up 98.9%! This is so shocking it defies belief. In late September as the stock panic started, it had grown by 9.9% over the past year. By October, this rate ballooned to an all-time high of 36.7%. In November, it rocketed again to 73.0%. And in December, it surged up to the staggering 98.9% you can see above. Ben Bernanke’s Fed has doubled the monetary base in a single year! Holy cow.

Between January 1960 and August 2008, the 48-year pre-panic average M0 growth rate was 6.0% and the range was pretty tight as you can see above. 10% growth rates were rare and often preceded sharp gains in commodities prices (mid-1970s, late 1970s). The Y2k scare led to the highest monetary-base growth rate ever to that point, 15.8% as the Fed prepared for an expected run on currency. Yet that is now dwarfed by the unprecedented parabolic explosion in M0 seen during late 2008’s stock panic.

That Y2k spike’s aftermath is interesting too. By January 2000, the Fed knew the world wasn’t going to end. Yet it took it over a year to try and take out some of that excess liquidity, and it was a feeble effort. M0 growth didn’t go negative until December 2000, and this modest and brief 2-month episode was the only shrinkage seen in the monetary base since 1961. So even if the Fed tries to reverse its doubling of M0 after it stops being scared of deflation, it isn’t going to happen overnight. The money supply will be much larger going forward.

How did such a crazy inflation spike happen? After Bernanke’s Fed foolishly ran interest rates to zero to try and force investors out of Treasuries and back into stocks, it ran out of conventional ammunition to fight the panic. So it started buying securities directly, which is purely inflationary. When you buy a bond, you have to first raise the cash to do it. When the Fed buys a bond, it literally creates the money out of thin air with the stroke of a keyboard. Every security the Fed buys is paid for with pure inflation, new money.

Sure, the Fed can shrink the monetary base if it resells these securities. When the Fed sells back a bond, the buyer pays the Fed money which then effectively vanishes. It shrinks M0. So while the Fed could undo this inflationary superspike, Bernanke’s dismal pro-inflation record suggests it is highly unlikely to happen. This easy-money Fed is loath to ever shrink money even when the economy is contracting, so I don’t have any hopes that this doubling of M0 is going to be undone anytime soon, if ever.

When a central bank doubles the monetary base in a matter of months, a lot more money is going to be flooding into the real economy. It will compete for finite goods, services, and investments, driving up prices. And even if the Fed awakens from its madness and starts shrinking M0 rapidly, there is still going to be a lot more money around in 2009 than there was in 2007 or 2008. Major inflation is coming.

So what’s an investor or speculator to do? Ride the coming inflationary wave. Some of this deluge of new money will flow into beaten-down stocks and commodities. I like both since they were driven to such irrational prices in 2008. And of course the champion investment in inflationary times is gold. It has phenomenal supply-and-demand fundamentals of its own totally independent of this coming inflation which will be like throwing rocket fuel on a fire.

At Zeal we refuse to drink the deflationist Kool-Aid as long as central banks are rapidly growing money supplies. We are positioning our capital for the big inflation the money supplies are portending, not some deflationist fantasy. We’ve been aggressively buying gold, silver, and the stocks of their best producers since the depths of the stock panic in late October. The gains have already been excellent, but are nothing compared to what will happen once Wall Street finally realizes inflation is what it should have been fearing all along.

We publish an acclaimed monthly newsletter that distills all our ongoing research into real-world trading recommendations. Subscribe today and learn how to thrive in these challenging markets. We also just published a deep new fundamental report profiling our 12 favorite gold-producing stocks. With this sector still very undervalued relative to gold today because of this silly deflation scare, the opportunities in gold stocks now are awesome. Buy your report today and start getting deployed ahead of the mainstream herd!

The bottom line is inflation and deflation are and always have been purely monetary in nature. Supply and demand can drive prices all over the place, but it is only a changing money supply that can truly spawn inflation or deflation. And the money-supply data is crystal clear. The Fed is growing the fiat-dollar supply by frightening rates, all the way from double-digit broad-money growth down to a scary doubling of the monetary base!

This means big inflation is coming, it’s already baked into the pipeline. Too distracted by deflationists who have no dictionaries and hence don’t even know what the word “deflation” really means, Wall Street hasn’t realized the real threat is inflation yet. But when it does, capital should rapidly flood into investments that thrive in inflationary times. Of these, gold remains the king. Its bullish potential in the years ahead is vast.

Comments

[HILEW:]

Your comment -- "When a central bank doubles the monetary base in a matter of months, a lot more money is going to be flooding into the real economy. It will compete for finite goods, services, and investments, driving up prices" -- doesn't this instance send a message to manufacturers and service providers to rehire and crank up production to satisfy demand, thereby correcting the problem?? What am I missing?

Jan 25 07:49 AM

[Jim Hawthorne:]

Thanks for a most controversial submission, Adam! Contrarian it most certainly is!

I agree that there is a widespread tendency to confuse simple falling prices with deflation, and you are correct to label deflation as a sustained contraction in the money supply coupled with a sustained contraction of credit. In addition, these contractions take place with an inflation rate below 0%.

By several accounts then, we entered a deflationary trend sometime back in October/early November, when real inflation dipped below the line and we saw a dramatic increase in the purchasing power of money. Credit had dried up to the extent that it appeared that nobody was lending much of anything!

Currently, and most troubling, the the 10-year TIPS yield is running at about 1.85% compared to about 2.60% for a T-bond, and this seems to imply a trending 10 year annual inflation rate breaking at about -1.0% to -1.1% annually.

So if it looks like a duck, walks like a duck and quacks like a duck, let's go ahead and call it a duck. It looks like we are in a deflationary dip at the moment.

The question is, are we about to enter into a deflationary spiral which leads inexorably to depression?

You supply some very credible reasons why Central Banks (this is, after all a global event) are doing and will continue to do everything in their power to more us back across into the inflationary lane so they can deal with the devil they know, inflation being the better choice.

Whether or not this move will once again move us way over into inflation's fast lane is the big question. There is also, as always, the thorny question of timelines. The Bank of Canada's latest report predicts rising commodity prices in expanding global markets and a rapid recovery from the current recession.

Many economists, and a few of us skeptics find this assessment overly rosy and optimistic, at least in the short term.

If you're right, Adam, and you might well be, we will witness a monumental shift away from paper assets and a tsunami of money piling into hard assets. Gold has certainly become more attractive recently. Perhaps movements in the spot price of copper and corn/soy contracts will give us the first clues as to whether or not you're correct!

Jan 25 07:51 AM

[MauDib:]

You failed to mention that every U.S. war since 1900 has been paid for with equity, not income (excl. Kuwait War paid by Japan Inc). Example, did WWII bonds retain their value 5 - 10 -15 years later? Post-Vietnam 1973 - look at inflation for the next 10 years as govt prints more money. Iraq war: average cost per soldier per year $800,000.

Also, how do you get non-manuf workers and govt workers to take a pay cut in hard times? Answer, inflate away their fixed salaries: teachers, police officers, SS retirees - print 10% more money = pay cut of 10%.

The feds have a strong incentive to inflate.

Jan 25 08:11 AM

[Barnettech:]

I follow Jim Rogers and he is saying similar things, that an inflationary nightmare is coming. I don't agree that losses in the stock market aren't losses in money supply. Stocks ARE companies. Contractions of companies revenue and stock price mean less goods and services. Although some of the losses are just due to the panic (we hope), the temporary losses are still losses for company owners until the revenue for stock holders starts coming back in (rising stock prices). Anyone who has sold while down (and not waiting for the panic to be over) has locked in a low return on investment, like a person with a good or service who only collects 50% of cash from its sale without waiting for the other 50%.

I do think inflation is coming though and I love that I Finally find a good conversation about M0 and MZM What are your sources please for this article, I'm looking for further reading.... are they government publications I can access on the internet? Your response is greatly anticipated thank you!

Jan 25 08:16 AM

[HonestMoney:]

Mish criticized this article here:

globaleconomicanalysis...

Jan 25 08:21 AM

[HonestMoney:]

From Mish, globaleconomicanalysis...


Adam Hamilton at Zeal is predicting Big Inflation Coming.

The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today than in any other time in modern memory.

My Comment: Well yes, that is convincing data. Indeed a perfect 15 out of 15 conditions experienced in the great depression are happening today as discussed in Humpty Dumpty On Inflation.

Of course Humpty Dumpty can and does pretend that deflation is specifically about money supply, totally ignoring credit. And those same Humpty Dumpties were amazed by the collapse in commodities and were crushed shorting treasuries because they did not see this coming.

In light of these universal falling prices, how could we not be entering a sustained deflationary period? The case may seem airtight, but I’d like to offer a contrarian view in this essay. Believe it or not, despite 2008’s price collapse there is plenty of overlooked evidence suggesting big inflation is coming. You won’t hear much about this on CNBC, but it could have a big impact on your investments in the years ahead.

My Comment: I am not sure what Hamilton means by "sustained". We have been in deflation for about a year, and maybe it lasts another, or five. Then again, perhaps we drift in and out of a slow growth recessionary period much like Japan for a decade. We have to take this one step at a time.

Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply.

My Comment: That last sentence puts the cart in front of the horse. Inflation is not rising prices; rising prices are a result of inflation (an increase in money supply and credit).

Acknowledging that debt-financed house prices are a special case that may indeed be deflationary (contraction of credit), I am focusing on stocks and commodities in this essay. From October 2007 to November 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths of these losses snowballed in just 9 weeks during the stock panic. From July 2008 to December 2008, the flagship Continuous Commodity Index plummeted 46.7%. Almost half of this mushroomed during the stock panic.

Deflationists argue these price drops are proof of deflation, and most people today believe this. But they are only deflationary if they were driven by a contraction in the money supply. Stocks and commodities are generally cash markets. Credit such as stock margin can be used, but it is trivial relative to the market sizes. And real commodities purchased for industrial uses are paid for in cash or near-cash (short-term trade loans), not multi-decade loans like houses. So the money supply during 2008’s slides is the key.

My comment: What deflationist has argued that commodity price declines are proof of deflation? Can I have a name? Most mainstream media is concentrating on prices.

More to the point, no single indicator alone can constitute proof. However, 15 out of 15 symptoms one might expect to see in deflation should be ample proof for anyone.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008. But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong. When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand. If money didn’t drive it, then it isn’t deflation.

There is the humpty dumpty argument again. And again I reply that it is foolish to ignore credit (debt). Debt is actually more important than money simply because it dwarfs base money. And much of that debt cannot be paid back and that is why banks are failing.

Come to think of it, I need to add bank failures to my list. That makes a perfect 16 out of 16 things.

The key point in this rebuttal is that money supply does not have to shrink to cause deflation unless you insist on a humpty dumptyish definition that has no real world practical application.

Here is a practical application: There is no money to pay back loans. What cannot be paid back will be defaulted on and the default avalanche has been triggered. Once an avalanche starts, it is impossible to stop.

That avalanche of defaults amounts to deflation if it exceeds the expansion of money supply.

Banks are attempting to hide the avalanche by not marking their books to market. Citigroup alone is sitting on over $800 billion in SIVs of dubious value. However pretending credit will be paid back does not make it so, just as ignoring an avalanche does not stop it.

Hamilton goes on and on with straw man arguments about what deflationists believe. In practice I do not know a single deflationist who believes the strawman Hamilton is rebutting.

Hamilton also talks about various money supply charts as if they are proof of inflation. Here is my rebuttal.

Base Money % Change From A Year Ago



Hamilton's definition shows there was massive inflation during the great depression, starting in 1931!

Of course that is ridiculous. But it is what one must conclude if one defines inflation as an expansion of money supply alone.

That chart shows why it is foolish to look at one indicator as proof of inflation. A more practical approach and a more practical definition, gives more practical results.

Soaring base money supply is not proof "Big Inflation Is Coming" soon, just as it was not proof that "Big Inflation" was coming in 1931. There cannot possibly be any other logical conclusion when confronted with the data.

Mike "Mish" Shedlock
globaleconomicanalysis...
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Jan 25 08:23 AM

[SW Richmond:]

'...we refuse to drink the deflationist Kool-Aid as long as central banks are rapidly growing money supplies.'

I refuse to drink it also, and I believe you are watching the correct indicators. Pundits disagree about whether or not deleveraging and the resultant destruction of credit is in fact destruction of money. I don't believe it is; credit merely acts like money when it chases assets. Credit is destroyed when debt is payed off, but money is not. The markets' reactions on Thursday / Friday of last week to the UK bank crisis tells the story: banks are underwater, BoE embraces 'secret' QE, Sterling tanks and gold in terms of Sterling skyrockets. The stories were not about credit, they were about money.

This is an unmistakable step forward in the death of the fiat paradigm, and central banking along with it.

The problems the CBs will have on the other end of this mess, if there is an "other end", are legion.

1. What are the reliable signals that the economy has recovered and tightening can safely begin?
2. How quickly should tightening be done, and what is the time lag beteween tightening and seeing results?
3. When, if ever, will political will actually emerge to begin tightening? At what point in which election cycle (Presidential, Congressional) will the opportunity for tightening present itself?

Jan 25 08:24 AM

[Tradememe:]

I, too, believe that inflation is coming as a result of the increase in money supply. But the question is when. If people keep on saving and paying down their debts instead of consuming as before, then we may have the inflation a little further in the future.

Jan 25 08:28 AM

[SW Richmond:]

'And those same Humpty Dumpties were amazed by the collapse in commodities and were crushed shorting treasuries because they did not see this coming.'

'My comment: What deflationist has argued that commodity price declines are proof of deflation? Can I have a name?'

Mish Shedlock, in his very same post above.

Jan 25 08:30 AM

[patio:]

"If people keep on saving and paying down their debts instead of consuming as before, then we may have the inflation a little further in the future."

There is no "if", none. When you add staggering $12T in real wealth losses, unemployment and under-employment,to companies contracting like rarely before, you have ( on a global scale as well ) complete demand destruction. Even the dodos left that might want to continue to consume stupidly, cannot borrow more. Credit companies have reduced limits staggeringly, and jacked up rates. Banks are only lending to high quality individuals that qualify ( 20% down, and demonstrated ability to pay back ).
How people can ignore this seachange in fundamentals, but also consumer attitude, psychology, is unfathomable. It is impossible to have inflation if lenders don't lend, and borrowers both WANT and QUALIFY for credit. We have decades of over-credit to unwind, and its going to be ugly for a good long while.
We have neither.

On Jan 25 08:28 AM Tradememe wrote:

> I, too, believe that inflation is coming as a result of the increase
> in money supply. But the question is when. If people keep on saving
> and paying down their debts instead of consuming as before, then
> we may have the inflation a little further in the future.

Jan 25 08:43 AM

[Bruce Vande...:]

Maybe we get too wound up in semantics. Housing, commodity and other price declines will cause people NOT to spend, increasing unemployment, protectionist sentiment, increasing savings, deleveraging,. This decreases the velocity (turnover) of money. Add to this the destruction of the shadow banking system with a resultant credit availability losses.

You can print all the money in the world but if it just sits in a vault somewhere nothing changes. For now anyway, the world is in a wealth/income destruction mode and governments so far has not been able to stop it. TARP2 will be followed by TARP3 and then TARP4. I like the term "negative wealth spiral" better than deflation. When the helicopters start flying things may change.

Jan 25 08:45 AM

[D. McHattie:]

Let's say Mish is right. Let's say the expansion of the monetary base is not inflationary because banks are not lending (because they are insolvent due to borrowers defaulting on loans).

What happens when this 'aggregator bank' or 'bad bank' is created to buy up enough toxic assets from the banks to make them solvent again?

It seems to me that when you return the banks to solvency they will resume lending and they will have a mountain of money to lend. The money now in bank vaults will enter circulation and produce a tsunami of inflation within 12 months of the creation of the aggregator bank.

Jan 25 08:55 AM

[calvino:]

You assume that the 10k proceeds from the sale of stock was not reinvested back in stocks. It was, and into CDO's as well, and into real estate and international equities. We have just seen a big chunk of wealth erased. Every central bank is now throwing money into this maw. It is true that their capacity is limitless, so let us watch how bonds do now. Last week, not so well.

Jan 25 09:08 AM

[Dr. Duru:]

Thanks, Adam for this piece and the data. I am fascinated by the (theoretical) battle between deflationists and inflationists, and I remain in the inflationist camp based on classic monetary theory. The trick, as always, is with timing...but I would rather prepare for inflation in the future than get overly caught up in the panic in the present.

Jan 25 09:11 AM

[Jonathan Ch...:]

While I agree with the Hamilton conclusions of upcoming major inflation, there are several things I disagree with:
1. Deflation, in common usage refers to decreasing price levels. There is no mechanism implied in the term. It could be due to decreasing demand or decreasing cash available, or perhaps some legislative action. The result is OVERALL dropping in price levels. We may or may not have classically defined "Deflation" at present, but we are awfully close.
2. Money defined as cash in circulation is too narrow a measure. While it is clear that the Federal Reserve has created an awfully large amount of cash, part of that cash has been counteracted b a large decline in "Velocity" or how quickly that money changes hands. Due to declining economic activity, money is not changing hands as quickly, that is reducing the effective amount of money in circulation, partially or even completely counteracting the increase created by the Federal Reserve.

What this implies, of course, is that as economic activity picks up, there will be a double whammy effect on prices, Quite beyond the intent of the Federal Reserve, the amount of money in circulation will increase as economic activity increases, simply due to the effect of velocity.

It is likely that the Federal Reserve, in an attempt to eliminate the excess funds, will begin issuing huge amounts of treasuries, and will be required to pay very high interest rates to bring the money in.

This action will crush the value of corporates and other bonds, and raising interest rates on mortgages to levels not seen since the eighties. That will by itself drop house prices again.

Jan 25 09:16 AM

[mansingka:]

Dear Adam,
What I believe is that there is another big factor that has not been taken into consideration. It is the velocity of money. In a system having high confidence, money velocity is very high and so even a zero growth in money supply can increase inflation. The same is true vice versa. This is the same reason that we are seeing deflationary environment right now as consumer confidence is very low and money velocity has fallen dramatically.
One has to only keep on waiting for the confidence to recover before we see an inflationary environment. With the bad news still coming, it is still time before confidence comes in the system and so inflation may be slight ahead.

Regds


is caused

Jan 25 09:31 AM

[EUARTE:]

I am just a retired guy and a humble reader of economic and financial articles. I have a degree in economics but it is about 50 years old. Old or not one things remains as god like dogma. Eco 101.....supply and demand. You can play all the games you want but you can not stop the law of supply and demand.

I am a true believer in inflation now (under reported) and much inflation ahead. My problem with the writer, and I may be wrong, is his incentive to push inflation in order to sell silver and gold. In this case, I believe, he is right even if for the wrong motives.

Jan 25 09:49 AM

[Libertad:]

This is a rather simple matter....

Monetary velocity, deflation, inflation, money supply, money printing....are all attempts to categorize and quantify future expectations....

The reality is that there is not a true measure readily available that gives the information that is required as to how money will be spent....

A simple example would be Person1....

Person1 has $100,000....

Later on the same $100,000 is reduced in value because the money stock was diluted in value....10x the money was printed....and thus the previous $100,000 becomes 1/10 the value what it was before....

However....if 10% of whatever is available is spent....the economy will be valued as it relates to the 10% spent....

If 20% is spent....then the economy becomes worth more....because 2x the cash is moving to other labels within the economy....

So what matters is 1) what is available 2) what is spent

Futhermore....money either stays or leaves the local economy.....Money leaves to other economies if imports are bought....and stays in the economy if domestic production is bought....

Thus a country can have a depression if no money is spent....regardless
of savings levels....money printing, etc...

Also....if there is very little savings....then the choice of spending is very clear....

Jan 25 10:00 AM

[Lawrence J....:]

The problem with this analysis is that it does not account for the wealth effect and its doppelganger the paradox of thrift. When wealth has been destroyed, people do not spend their incomes as freely as when they feel flush. Rather, newly printed money comes to rest in the investment markets to buy stocks and bonds for savers who lost what they think of as "money" in the crash, in effect putting us right back where we were before except that the money will have moved from the old savers (our trading partners, mostly) to new ones (people with jobs). (This is a good thing. What else were we going to do about the accumulated trade deficit? We had to default on it somehow, and this is what we came up with. I was expecting we'd inflate our way out of it, but instead we destroyed the assets in which it was invested. Brilliant.)

Inflation may be coming, but only AFTER the wealth has been replenished in nominal terms, people are no longer underwater on their mortgages by reason of equity loss, and the stimulus keeps coming because turning it off too early replays 1937. But I think that day's a ways off.

Gold is till a good near-term play, though, because thanks to GLD, the public can effectively "corner" the physical market. GLD is gold-backed currency, and Gresham tells us that people will hoard it, putting tremendous upward pressure on the price of the physical metal.

Jan 25 10:11 AM

[kruser53:]

I think this article does a good job of laying out a controversial opinion. It does have some logical lapses (as many commenters have pointed out) but it dehinitely gets a discussion going.

I am surprised at two things:

1. So many comments have negative ratings when they have presented very logical arguments. I feel thumbs down are merited only by opinions unsupported by logic or fact, mis-statement of fact, or faulty logic. I have often given a thumbs up for well argued opinion with which I disagreed.

2. This article was given an "Editors Choice" when an ill-advised paragraph near the end turned it into an info-mercial.

Jan 25 10:24 AM

[OldLimey:]

Outstanding article. Many thanks.

Two points arising from the comments:

First, SWRichmond asked the following:

QUOTE

"The problems the CBs will have on the other end of this mess, if there is an "other end", are legion.

1. What are the reliable signals that the economy has recovered and tightening can safely begin?
2. How quickly should tightening be done, and what is the time lag beteween tightening and seeing results?
3. When, if ever, will political will actually emerge to begin tightening? At what point in which election cycle (Presidential, Congressional) will the opportunity for tightening present itself?

ENDQUOTE

Whether somebody is in the inflationist or deflationist camp, these three questions are absolutely seminal to any assessment of where we're headed. I'm firmly in the inflationist camp, so my answers would be sceptical. Perhaps someone who believes we're entering a deflationary spiral would like to provide his or her answers to SWRichmond's questions.

Second, a number of comments have raised the point that whilst the monetary base is exploding, a slowdown in the velocity of circulation mutes the inflationary impact. It is therefore worth highlighting that the existence of the 'thing' we call velocity of circulation is not a matter of objective fact. Velocity of circulation is merely a concept that economists developed a long time ago to explain variations in the value of money that could not be accounted for by variations in its supply. It is in fact a crucial element in the very old 'mechanistic quantity theory' which Fisher did so much to popularise with his MV=PT formula. Whilst that formula is easy enough for the commentariat in the mainstream media to grasp and therefore has wide currency (pun intended), there are plenty of economists who consider the mechanistic quantity theory (and, by extension, Fisher's formula) discredited. (Anybody interested in the arguments can find them in the work of von Mises.)

Jan 25 10:43 AM

[prudentinve...:]

Yes, inflation is coming, courtesy of the central banks all over the world. It is the only way out of the asset bubbles they've created.

However, they will have to phase it in carefully, both in the US and Europe, because inflation in prices is likely to both precede and exceed inflation in wages.

Jan 25 10:45 AM

[notsosmart:]

things are different this time around.the past may not be a clue to the future.the wealth(???) that was erased should not have been there in the first place.it was based on lies & liars whose phony rated AAA paper cantbe valued & is still all over the globe.until this unravels nobody knows anything.

Jan 25 11:05 AM

[kaszub:]

The only way to inflate prices in present envoriment is: Fed must go to WalMart and start to buy all goods of it shalves and consume it, till there is no more, or:
must give me and you that money so we can do that ourselves. At present moment people have to finde: a WAY in next couple of years, on how to pay all the loans, NOT A WAY TO MALL!


On Jan 25 08:16 AM Barnettech wrote:

> I follow Jim Rogers and he is saying similar things, that an inflationary
> nightmare is coming. I don't agree that losses in the stock market
> aren't losses in money supply. Stocks ARE companies. Contractions
> of companies revenue and stock price mean less goods and services.
> Although some of the losses are just due to the panic (we hope),
> the temporary losses are still losses for company owners until the
> revenue for stock holders starts coming back in (rising stock prices).
> Anyone who has sold while down (and not waiting for the panic to
> be over) has locked in a low return on investment, like a person
> with a good or service who only collects 50% of cash from its sale
> without waiting for the other 50%.
>
> I do think inflation is coming though and I love that I Finally find
> a good conversation about M0 and MZM What are your sources please
> for this article, I'm looking for further reading.... are they government
> publications I can access on the internet? Your response is greatly
> anticipated thank you!

Jan 25 11:36 AM

[tb1975:]

Who cares if it is technically a deflation or not? Words are said or written to convey meaning. When most people use the word deflation, they mean falling prices. Prices fell = deflation. They don't care (nor do I) if it meets some clinical or technical definition of deflation, they just mean falling prices. Period.
Nouriel Roubini, the most prescient economist around, uses the term deflation. He knows the money supply is increasing. He simply means falling prices (via credit contraction and disappearing wealth) when he says deflation.
Likewise, when 99 of 100 people speak of inflation, they mean increasing prices. They could care less about whether the money supply is increasing- what they care about is whether their groceries, fuel, and other living costs are increasing or not.
This discussion of the technical meanings of these two words is useless. Words are meant to convey meaning. When most (nearly all) people use these words, they simply are referring to increasing or decreasing prices. End of story.

Jan 25 11:54 AM

[Elaine Supkis:]

EMS News here!

Look, inflation happens only when the working class has extra paper money to spend on whatever they spend it on. There are several different levels of 'inflation': buying things on credit, buying things one needs to survive and savings levels.

Easy credit at the BEGINNING of a bubble leads to manic bidding up the prices of various things such as fancy cars, properties, etc. The wealthy use this easy money to bid at art auctions, buy mansions, pay for ritzy prostitutes. The lower classes buy season tickets to sporting games, go to Vegas to gamble or go on vacations or get divorced [heh].

When debt builds up to the point that no one can afford to pay even Zero Interest Rates [ZIRP] we get a depression. The government, very early on tried to elevate spending artificially by giving all Americans $600. This led directly to a sudden and very destructive series of commodity bubbles that rose very rapidly from February, when the first money was mailed, to August, when the last checks were spent.

Virtually every penny of the 'free' bonus was soaked up by the sudden inflationary surge. Now, the deflation spiral is back and much nastier. The US is trying to do what Japan did when it had a huge credit bubble: keeping the zombie banks alive while trying to use government debt to float the entire economy.

Japan is now very deep in debt due to this. Debt owed nearly totally, 87%, to the Japanese. We are mired deep in debt to the Japanese and Chinese, not to ourselves. So all our government spending is turned into future tax obligations to our most dangerous trade rivals.

The simple question of 'deflation or inflation' has to be viewed from a global trade perspective to see where our real dangers lie. The US can't 'create money out of thin air' without getting totally entangled with our largest trade partners and creditors. All the fiddling we are seeing are being watched by these two dragons who will leap on us the minute we choose the 'inflate the currency' option and the dollar nosedives against the yen and yuan.

It is already diving against the yen and it 88 yen to the dollar! The Japanese prefer to have it at 120 to the dollar. Which is where it was at in July, 2007, back when the Japanese carry trade went suddenly into reverse.

Gold is neary $900 per ounce. But has barely budged in the last two months if you compare this to how many yen buys the same amount of gold! We are seeing the differential in the dollar, falling, rather than gold rising.

OPEC, being a consortium, a loose one, at that, always lags behind when it comes to cutting off the spigots when there is an economic downturn. But they will catch up with it, pretty soon. And then the one thing that can trigger global inflation will take off. For oil is the fundamental basis of all commodity and manufacturing pricing inflation. It doesn't affect property or equity values, right away. But it certainly has a very powerful effect on everything else.

High oil prices is the nightmare of world trade. It eats profits in industry and prevents customers from being able to take on more debt as they struggle to pay for food and energy.

Jan 25 11:57 AM

[Insiderman:]

Monetary stimulus works on the real economy in the short run, but fails in the long run as everyone realizes their earned income purchases less and less.

On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Additionally, I disagree with the author's contention that the fall in Texas home prices after the oil shock wouldn't qualify as "deflation." Totally false. In the short-term, the initial influx of home buyers must compete only for the 3k homes available (vertical supply curve). An outward shift of the demand curve brought by the influx of oil folks means that prices rise (inflation: too many dollars chasing too few goods). Over time, a new equilibrium short-run supply of homes exists and prices stabilize or perhaps even fall slightly if the area becomes overbuilt. When the oil people move on, the supply of homes remains the same and the demand curve shifts invward. This results in falling prices for the same goods.

Sorry, but those are the very definitions of inflation and deflation.

Jan 25 12:11 PM

[mavericks:]

Caveat emptor here. One big fallacy with this author's argument, and it is one being made by Bill Gross at PIMCO, is that as long as the amount of money being printed and doled out by the public sector (i.e. the Fed) is commensurate with the loss of capital in the private sector, inflation will NOT be a problem.

This is more intuitive when you look at what's happening in the real world than writing an extended essay to promote gold and newsletters. Most of the billions being printed is doing nothing but filling a black hole. It is hardly making its way into the hands of the private sector for investment yet.

Perhaps at some point, there will be traction in all this newly printed assets going into the economy, but until then...the Govt. is essentially buying depressed assets from the battered private sector that can barely afford to keep their heads above water. That is hardly a recipe for inflation.

Jan 25 12:11 PM

[kelm:]

This was an excellent article and I agree with the conclusions. Readers need to keep in mind though that we imported deflation during the 1990's due to a strong dollar and we loved every minute of it. Should the dollar weaken due to our degrading fiscal position and profligate printing habits we will import inflation. The Fed does not have to go to WalMart and buy goods to raise inflation. The goods at WalMart simply have to cost more to import either directly or in the form of the piece parts comprise them.

Jan 25 12:16 PM

[kenrun:]

After reading all the response so far, I think Libertad comes the closest to the reality of the issue. The question is not what you call it, but what are the effect of it now and going forward. What if it is technically inflation but with all the other variables resulting in lower prices now and for several years to come? If so, then who cares what you call it? I would have liked it if the author of the instigating article had, after supporting his argument, gone to predicting what it all means..anything less is just arm chair BS. Is it a depression with inflation with lower prices and if so for many years to come (which I think is true), if so, big deal what it is called? Or does he mean prices will soar like we are familiar with in other inflationary times where people race to buy before prices rise even more (which I think will not happen for at least 3- 5 years). That is the real question, making all other terms in this article moot.


On Jan 25 10:00 AM Libertad wrote:

> This is a rather simple matter....
>
> Monetary velocity, deflation, inflation, money supply, money printing....are
> all attempts to categorize and quantify future expectations....

>
>
> The reality is that there is not a true measure readily available
> that gives the information that is required as to how money will
> be spent....
>
> A simple example would be Person1....
>
> Person1 has $100,000....
>
> Later on the same $100,000 is reduced in value because the money
> stock was diluted in value....10x the money was printed....and thus
> the previous $100,000 becomes 1/10 the value what it was before....

>
>
> However....if 10% of whatever is available is spent....the economy
> will be valued as it relates to the 10% spent....
>
> If 20% is spent....then the economy becomes worth more....because
> 2x the cash is moving to other labels within the economy....
>
> So what matters is 1) what is available 2) what is spent
>
> Futhermore....money either stays or leaves the local economy.....Money
> leaves to other economies if imports are bought....and stays in the
> economy if domestic production is bought....
>
> Thus a country can have a depression if no money is spent....regardless

>
> of savings levels....money printing, etc...
>
> Also....if there is very little savings....then the choice of spending
> is very clear....

Jan 25 12:17 PM

[Maxe Paul:]

You seem to be trying to change the way deflation is reported to support your argument, but the evidence dose not support your case. Inflation is more likely late in a bull market cycle, it certainly will not be a major problem any time soon. An increased money supply is useless if people are not spending and just hoarding cash.

The plan is do devalue the US dollar to improve exports and prevent rampant imports, encourage saving and reduce credit. You also base your theory on the current circumstances of Fed policy. Looking at the future 0% rates do look inflationary at face value, but the fed will (we hope correctly) act to prevent any inflation when and where it appears.

Jan 25 12:20 PM

[polar40:]

I own real estate and stocks. It only takes a few people to panick and sell at lower prices making me a poor person on paper holding the same equity. All that money supply does not matter, my wealth has evaporated. Huge amount of wealth has disappered in a short few days even when no transection of asset has occurred. Is this not deflation? So many of us retired are poor all of a sudden waiting for prices to rise again.

Jan 25 12:25 PM

[athena:]

FINALLY SOMEONE GOT IT RIGHT!!!! THANKS MAXE!


On Jan 25 12:20 PM maxe wrote:

> You seem to be trying to change the way deflation is reported to
> support your argument, but the evidence dose not support your case.
> Inflation is more likely late in a bull market cycle, it certainly
> will not be a major problem any time soon. An increased money supply
> is useless if people are not spending and just hoarding cash.

>
>
> The plan is do devalue the US dollar to improve exports and prevent
> rampant imports, encourage saving and reduce credit. You also base
> your theory on the current circumstances of Fed policy. Looking at
> the future 0% rates do look inflationary at face value, but the fed
> will (we hope correctly) act to prevent any inflation when and where
> it appears.

Jan 25 12:39 PM

[ArtfulDodger:]

Bruce Vanderveen:

I think your comment is on the money. Thank you for it.

Another consideration is the massive demand for dollars around the emerging market world.

Another is population; more people create more demand for dollars.

So it seems that the resulting run up in prices from inflating the currency should be a while off.

Jan 25 12:52 PM

[texas cowboy:]

So when do you think interest rates will spike?

On Jan 25 09:49 AM EUARTE wrote:

> I am just a retired guy and a humble reader of economic and financial
> articles. I have a degree in economics but it is about 50 years old.
> Old or not one things remains as god like dogma. Eco 101.....supply
> and demand. You can play all the games you want but you can not stop
> the law of supply and demand.
>
> I am a true believer in inflation now (under reported) and much inflation
> ahead. My problem with the writer, and I may be wrong, is his incentive
> to push inflation in order to sell silver and gold. In this case,
> I believe, he is right even if for the wrong motives.

Jan 25 01:08 PM

[SW Richmond:]

This commenter believes there will be no inflation and then acknowledges the planned devaluation of the dollar. Could he/she explain that further please? I'd like to know how that works.

On Jan 25 12:20 PM maxe wrote:

> You seem to be trying to change the way deflation is reported to
> support your argument, but the evidence dose not support your case.
> Inflation is more likely late in a bull market cycle, it certainly
> will not be a major problem any time soon. An increased money supply
> is useless if people are not spending and just hoarding cash.

>
>
> The plan is do devalue the US dollar to improve exports and prevent
> rampant imports, encourage saving and reduce credit. You also base
> your theory on the current circumstances of Fed policy. Looking at
> the future 0% rates do look inflationary at face value, but the fed
> will (we hope correctly) act to prevent any inflation when and where
> it appears.

Jan 25 01:45 PM

[bigmoney:]

when someone says "big inflation is coming", I wish they would predict what sectors / asset classes are going to inflate, and relative to what? Is anyone predicting that average California housing is going to bubble up from $600k to $1.2M within a year or two? And would the price increases represent cash purchases or additional debt growth? Perhaps the dollar will devalue with respect to commodities, but if housing and incomes are sagging faster than than commodities, we are still talking overall deflation. Can't get blood from a stone, unless its borrowed (more debt growth).

Jan 25 01:47 PM

[bigmoney:]

also, adding to my previous comment, in the previous commodities bubble, its clear in hindsight that it was primarily debt / leverage driven, , except maybe gold, which is holding its value. Gold may take off to $2000/ounce or whatever, but the bullion market is thin, and there is no popular gold "culture", so I cannot imagine that gold will even be a blip on the inflation radar.

I would like a prediction as to where all that "Fed Printing Money" money supply is going end up in an inflationary scenerio. Housing, wages, food, college tuition, medical care? And why wouldn't it be a zero sum game? If oil, food, and medical care go up big time, who will be able to buy $500k houses with granite counter-tops and late model, 6000 pound SUVs?

Jan 25 02:01 PM

[Elaine Supkis:]

Oil is going to go up. By the way, who is the person who rates these comments? Not very good choices, I might suggest.

But this isn't my own site! To go back to 'deflation/inflation' we can have both at the same time! Isn't that amazing?

For an obvious example: housing was inflating rapidly from 2003 to 2007. Then, it rapidly deflated. Oil was deflating from 1994-1999. Then it began to inflate. Consumer goods dropped in price and deflated from 1994-2004. But then it began to inflate. For example, plywood from Canada was $3.50 a 4x8 sheet quarter inch and shot up to over $9 a sheet and now has fallen to $7 a sheet.

All of these things, incidentally, are part of our TRADE DEFICIT. This mostly grows and grows and grows. We take on more and more debt to service this trade deficit. Now, we can't take on more debt, the trade is falling but is STILL in a deficit.

As I keep saying, the true thing at work here isn't 'how much money is being printed' but 'what is going on in trade?' I may be the only person saying this, but this see saw of prices is very much balanced on the fulcrum of trade.

Jan 25 02:04 PM

[Conan the B...:]

Atrodo kad visi cia dirba su viena ranka, nemato ka kita ranka daro ir nenori zinoti.

Jan 25 02:14 PM

[Bruce Pile:]

The arguments that all the monetary flood is harmless as long as it doesn't spill makes sense. But to make a no inflation argument from this, you must say that nothing ever changes in the world of finance! You have to say it will all stay jammed up in banks and savings forever. But it won't. Debts will be paid off. Deals will be made. Lenders will become more ready to lend. Delayed purchases will be made. When the wave starts to move the other way, it could be massive.You can debate about all the policy you want, but the one thing you can count on is change. And with the pent up flood already out there, change = inflation.

Jan 25 02:22 PM

[Mark Anthony:]

I totally agree with the article, but I want to caution now is no longer the time investors can feel comfortable buying precious metal ETFs like GLD and SLV. It's time to buy actual physical precious metals. You really need to be alarmed and be skeptical about paper instruments like SLV.

The comment section of this blog article is a must read:
stockology.blogspot.co...

In short, spend some time scrutinize the SLV silver bar list see if rings an alarm bell to you!!!

Jan 25 03:44 PM

[the social ...:]

That's about the best discussion I've seen on seekingalpha.

Let's distill - the comments in particular. Inflation is a general increase in the level of prices of things that we consume. Asset price inflation refers to the change in price of productive resources (or non-productive, like collectibles) that last for some time. Residential real estate then is an asset, but it's shelter services are priced as consumption inflation. When Friedman hypothesized that inflation is a monetary phenomenon he was encapsulating a theory, that inflation is the result of an increase in the money supply. He was not redefining inflation. In his argument he of course engaged in modeling, in which we assume that a lot of other influences (causes) do not vary, and so the independent effect (by itself) of an increase in the money supply will produce inflation. That is, if nothing else changes, including no change in the production of goods and services that money buys.

Unfortunately, other things do change, and the changes in the other causal variables are all inter-related. The key variable omitted by the first author is the velocity of money. If the new money just sits locked up and is unavailable to create an increased demand for goods and services, it isn't going to engender inflation (think globally here). I'm with Mish, for the most part. The bad debt has to unravel. There won't be credit expansion until a lot of that debt is simply written off. There won't be economic growth until credit expands again, or people have saved a lot of money, and then dip into those savings. There won't be inflation until you get economic growth. Don't hold your breath waiting for it.

How does that square with stagflation - inflation with no economic growth? It's mostly a question of time lags I expect. Inflation did ease when the recessions of 1974-75, and 1982-83 bottomed. And, during those recessions, there was no destruction of asset values or credit contraction as now.

This is the 1930's, and Japan in the 1990's. Can the government and central banks save the day? Nobody knows, including them, because this experiment hasn't be tried before. Consider that the 1930's was the control group, and now we are the experimental group. So far the experiment isn't going well is it? Who knew that recapitalizing the banks was not going to improve credit availability for the consumer Who would have thought that people would not want to borrow? Actually quite a few.

When inflation returns there will be plenty of forewarning - we will have signs of economic growth, such as new unemployment claims falling. Remember though, that in the past deflation, or lack of inflation, hung around for a long time.

I do own some GLD - it's a trade.

Jan 25 03:44 PM

[Fred Voetsch:]

Read carefully:

"Imagine an investor buys stock for $10k. To receive his shares, his broker transfers $10k of money from his account to the seller’s. The seller now has $10k, the buyer now has shares. The money simply changed hands. Then a stock panic hits and the shares plunge 50%. The investor’s fear gets the best of him so he frantically liquidates these shares for $5k. A new buyer’s broker transfers $5k from the buyer’s account to the investor’s. Did the investor’s original $10k of cash get destroyed in this stock plunge?"

No, but the economy DEFLATED by $5k, or by 25%.

It's too bad that people don't learn to use simplicity of thought. But this is what happens when someone starts out with a motive (to shill gold).

--Fred Voetsch

Jan 25 04:09 PM

[Mark Anthony:]

Bruce said:
You can print all the money in the world but if it just sits in a vault somewhere nothing changes. For now anyway, the world is in a wealth/income destruction mode and governments so far has not been able to stop it. TARP2 will be followed by TARP3 and then TARP4. I like the term "negative wealth spiral" better than deflation. When the helicopters start flying things may change.

My response:
What's the point for the government to waste ink and paper to print massively amount money, just to hoard them in the vaults of the Fed or the banks? It makes absolutely no sense. The government prints money because it can not borrow the money, nor can it raise tax. So it prints money to SPEND. When government spent trillions of dollars of money, it is a real DEMAND on physical goods and services, and that is inflational. Also you can bet banks will not keep the money in their vaults for long. That's not their business. A bank's regular business is for loaning money and earn interest. The money will be released from vaults and flood the market. Hiarding paper money is only a temporary aberration which does not make financial sense. The hyper-inflation will come, and will come pretty quickly:

seekingalpha.com/artic...

Read the above discussion. I intend to expand on the idea that government spending is just as as much a legitimate demand on good as consumer spendings, in the next article.

Jan 25 04:18 PM

[George Kesa...:]

The problem is not monetary deflation but asset deflation. These are two different issues.

I cant understand why analysts don't make this distinction.

As far as inflation, well, people have to have money in their hands and have to believe that this money will lose value over time.

For the time being, this is not the case.

As demonstrated by Japan, you can have rapid expansion of the money supply and deflation (asset and price deflation) at the same time ... for many many many years.

Jan 25 04:30 PM

[driftwood2:]

The M0 money supply doesn't matter if the banks are unwilling to lend. M0 can grow while M3 doesn't. Historically, even though central banks have tried to inflate money supply during deflationary recessions, they have failed. Look at the following graph:
upload.wikimedia.org/w...
Doubling m1 had hardly any effect on m3.

Jan 25 04:39 PM

[henarl:]

Classical descriptions of deflation and inflation are great for academic debates amongst economists but are meaningless in the real world. To go back to that original town of 10,000 that balloned to 20,000 when oil was discovered nearby, that resulted in a boom economy. Then when the oil ran out, that resulted in a bust economy. To the people of that town, boom and bust were what they experienced, not "inflation" and "deflation" Those terms have little meaning in the real world. We are now in a bust economy, hoping to return to the boom economy we all loved. Lots of luck to us, we're going to need it!

Jan 25 04:46 PM

[Keepin it r...:]

This level of inflation = Currency collapse....

Jan 25 05:22 PM

[Old Turk:]

Mish, I've followed your stuff for years, and you are terrif. But, hey, can we not broaden the concept of M1 to include the items that are detracting from it?? These TARP and similar rescue funds, do we think that they are adding to M1 (or 2 or 3)? Let's get real: These taxpayer dollars are going into the big banks' black boxes where they get nuked by the toxic waste on their books. These dollars simply disappear (poof!!) in order to make the bank books look better, albeit still terminally ill. This newly created money dies just like the soldiers attacking from trenches in WW1.


On Jan 25 08:23 AM TMM wrote:

> From: globaleconomicanalysis...
>
>
>
> Adam Hamilton at Zeal is predicting Big Inflation Coming.
>
> The growing legions of deflationists see an unstoppable depression-like
> deflationary spiral approaching like a freight train. They cite some
> convincing data. The stock markets have been cut in half in just
> a year. In the past 6 months, some key commodities prices fell farther
> and faster than they did in the entire Great Depression. House prices
> are down by double digits across the nation, with no bottom in sight.
> And credit is a lot harder to come by today than in any other time
> in modern memory.
>
> My Comment: Well yes, that is convincing data. Indeed a perfect 15
> out of 15 conditions experienced in the great depression are happening
> today as discussed in Humpty Dumpty On Inflation.
>
> Of course Humpty Dumpty can and does pretend that deflation is specifically
> about money supply, totally ignoring credit. And those same Humpty
> Dumpties were amazed by the collapse in commodities and were crushed
> shorting treasuries because they did not see this coming.
>
> In light of these universal falling prices, how could we not be entering
> a sustained deflationary period? The case may seem airtight, but
> I’d like to offer a contrarian view in this essay. Believe it or
> not, despite 2008’s price collapse there is plenty of overlooked
> evidence suggesting big inflation is coming. You won’t hear much
> about this on CNBC, but it could have a big impact on your investments
> in the years ahead.
>
> My Comment: I am not sure what Hamilton means by "sustained". We
> have been in deflation for about a year, and maybe it lasts another,
> or five. Then again, perhaps we drift in and out of a slow growth
> recessionary period much like Japan for a decade. We have to take
> this one step at a time.
>
> Inflation and deflation are purely monetary phenomena. Inflation
> is not just a rise in prices, lots of things can drive prices higher.
> Inflation is the very specific case of a rise in general price levels
> driven by an increasing money supply.
>
> My Comment: That last sentence puts the cart in front of the horse.
> Inflation is not rising prices; rising prices are a result of inflation
> (an increase in money supply and credit).
>
> Acknowledging that debt-financed house prices are a special case
> that may indeed be deflationary (contraction of credit), I am focusing
> on stocks and commodities in this essay. From October 2007 to November
> 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths
> of these losses snowballed in just 9 weeks during the stock panic.
> From July 2008 to December 2008, the flagship Continuous Commodity
> Index plummeted 46.7%. Almost half of this mushroomed during the
> stock panic.
>
> Deflationists argue these price drops are proof of deflation, and
> most people today believe this. But they are only deflationary if
> they were driven by a contraction in the money supply. Stocks and
> commodities are generally cash markets. Credit such as stock margin
> can be used, but it is trivial relative to the market sizes. And
> real commodities purchased for industrial uses are paid for in cash
> or near-cash (short-term trade loans), not multi-decade loans like
> houses. So the money supply during 2008’s slides is the key.
>
> My comment: What deflationist has argued that commodity price declines
> are proof of deflation? Can I have a name? Most mainstream media
> is concentrating on prices.
>
> More to the point, no single indicator alone can constitute proof.
> However, 15 out of 15 symptoms one might expect to see in deflation
> should be ample proof for anyone.
>
> If available money to spend indeed contracted, then the deflationists
> are right about seeing deflation in 2008. But if the money supply
> fell by less than stocks and commodities plunged, was flat, or even
> grew, then deflationists are wrong. When prices fall simply because
> demand declines (too much fear to buy anything immediately), this
> is merely supply and demand. If money didn’t drive it, then it isn’t
> deflation.
>
> There is the humpty dumpty argument again. And again I reply that
> it is foolish to ignore credit (debt). Debt is actually more important
> than money simply because it dwarfs base money. And much of that
> debt cannot be paid back and that is why banks are failing.
>
> Come to think of it, I need to add bank failures to my list. That
> makes a perfect 16 out of 16 things.
>
> The key point in this rebuttal is that money supply does not have
> to shrink to cause deflation unless you insist on a humpty dumptyish
> definition that has no real world practical application.
>
> Here is a practical application: There is no money to pay back loans.
> What cannot be paid back will be defaulted on and the default avalanche
> has been triggered. Once an avalanche starts, it is impossible to
> stop.
>
> That avalanche of defaults amounts to deflation if it exceeds the
> expansion of money supply.
>
> Banks are attempting to hide the avalanche by not marking their books
> to market. Citigroup alone is sitting on over $800 billion in SIVs
> of dubious value. However pretending credit will be paid back does
> not make it so, just as ignoring an avalanche does not stop it.<br/>
>
> Hamilton goes on and on with straw man arguments about what deflationists
> believe. In practice I do not know a single deflationist who believes
> the strawman Hamilton is rebutting.
>
> Hamilton also talks about various money supply charts as if they
> are proof of inflation. Here is my rebuttal.
>
> Base Money % Change From A Year Ago
>
>
>
> Hamilton's definition shows there was massive inflation during the
> great depression, starting in 1931!
>
> Of course that is ridiculous. But it is what one must conclude if
> one defines inflation as an expansion of money supply alone.
>
> That chart shows why it is foolish to look at one indicator as proof
> of inflation. A more practical approach and a more practical definition,
> gives more practical results.
>
> Soaring base money supply is not proof "Big Inflation Is Coming"
> soon, just as it was not proof that "Big Inflation" was coming in
> 1931. There cannot possibly be any other logical conclusion when
> confronted with the data.
>
> Mike "Mish" Shedlock
> globaleconomicanalysis...
> Click Here To Scroll Thru My Recent Post List

Jan 25 05:33 PM

[mathgeek:]

Discussing money supply without considering credit is like discussing air without considering the presence of oxygen.

Of course the money supply (absent credit) is increasing at a massive rate... this is the Fed's desperate action to counteract the equally massive contraction in money supply that is credit driven... Let's all hope it works.

On the flip side, it is absolutely true that if credit were to reappear tomorrow at 2006 levels, everything the Fed is doing would be wildly inflationary... and in fact, if the economy normalizes, it will be difficult to unwind some of these manuvers quickly enough to prevent meaningful inflation but slowly enough to keep a recovery from stalling out. It is probably a wise observation that the Fed will probably err somewhat on the side of allowing a higher than average level of inflation for some period.

Jan 25 06:00 PM

[nmelendez:]

The problem i have with the inflation scenario is the valuation given to equities and their derivatives. Over 30 trillion dollars were destroyed last year. Was there actually 30 trillion or the electronic expectation of those 30 trillion? That's my problem. I do believe in the inflation scenario in the sense of the worlds printing presses. The problem will be how many people will buy that bread at 8 dollars a loaf? You will see an entrenchment of peoples spending which will further drop prices. Why would i pay 900 dollars a month for a house if i have to spend 1000 dollars on food monthly?

Jan 25 06:03 PM

[jarry green...:]

Come on guys. Nobody has touched on the real problem. What is money?
When men first began to come out of the woods and form tribes, then villages and eventually larger communities everybody pitched in to help furnish what the commuity needed, Houses, clothes, food, baby care, help for the elderly. As the communities grew people began to develop more advanced skills. The better carpenters built things. The better farmers grew things. Goods and services.You build me a house, I'll bring you food. But as the community got bigger and people became more mobile they needed a representation of these goods and services. It started with pretty stones, handicrafted bits of wood and eventually something permanent. Gold. When I was a kid in the 30's you could see it in action. An ounce of gold would buy 10 barrels of oil or a good qualty mans suit. That's still the case. The ratio applied to everything and still does, Except men became involved in wanting a paper representation of gold. Lots of reasons why, but still true.

Try to find a copy of the book "Extraordinary Popular Delusions and the Madness of Crowds", copyrighted in 1841. After all is said and done, an ounce of gold is still an ounce of gold and its ratio of value to goods and services is still unchanged, At the same time a dollar is still only a piece of paper and of no value in and of its self. Its only worth the goods and services some thinks he can obtain with it. Politicians and other shysters have tried since the begining of civilization to change that without doing so. Niether will you

Jan 25 08:07 PM

[nova:]

It called a con game. The major players:
- Crooked politicians
- Government
- Average citizens (who believe to politicians and government propaganda)
- Foreign lenders

Round one:
US government and its citizens lived and borrowed well above their means with no desire to pay back

Round two:
US government and its citizens debts became so high, there is no way to pay back either the interest and principle

Round three:
- Government and politicians are trying to inflate (printing lots of fiat-money) a way out of paying on debts without alienating major foreign lenders
- Government and politicians deploy a smokescreen (called a "deflation") not to scare a shit out of citizens and, most importantly, lenders
- US Government has a trump card: US$ is a reserve currency

Round four:
- Foreign lenders understand the game very well developing way to reduce lending and get some of their money back
- Flood of fiat US$$ hit US economy driving hyperinflation
- Since the US must import a lot of goods including most basic commodities, commodities' prices follow hyperinflation trend
- US$ is about to lose its reserve-currency status

Round five:
- US economy starts to disenegrate big time
- God Help America

Jan 25 08:36 PM

[The Good Ne...:]

Great article Adam,

Many have already heard me rant on about the lack of deflation in any of the numbers (save energy and transportation driven by energy/oil decline). Your comments on the money supply are right on the mark and are backup up by the data charts published on the st louis fed data site.

But I don't agree that inflation is coming any time soon. Core prices are likely to remain flat for some time to come... should they rise I'm sure there will be swift corrective action. But there is no evidence in any numbers that it will be needed. The first action of course is to stop adding it in to the system... and then perhaps bleeding it out...

Mish types a long yarn about avalanches, etc... but it's just a story not based on data or historical perspective... just a bunch of what ifs.

Thanks again Adam for a great thoughtful post.

GNE

Jan 25 09:19 PM

[jstratt:]

Outstanding article! I enjoyed your detailed logic.

Aside from a unique perspective with significant value for readers I must take issue with your definition of money.

M0 is almost worthless as an indicator of inflation

Velocity is a critical component of the mix

When will inflation arise? Perhaps not while in the midst of a banking crisis.

If every country in the world increases money supply simultaneously is it inflationary to the same extent as if just one country increases its money supply dramatically?

Making money is the point of all of this!

I think most people feel a hugely overindebted world will inflate away excess debt to one degree or another.

Risk Management is the key as visibility of asset growth is very low.

Some ideas

World class company stocks (non financial) are outstanding including IBM/UTX/EMR/T/HON/NSRG...

Gold/Oil/Commodities have a place in the portfolio

Investment RE such as a normal 3/2 house in a good location bought at auction can be an option. Other RE including Comm has more downside IMO.

Cash is better than debt but worse than the investments above beyond basic liquidity. You make a good point of illustrating the perils of cash via inflation.

The next year is a crap shoot. However 5 years out the investments above will excel.

Jan 25 09:21 PM

[Simon Smelt:]

The article claims to shed light, but in fact spreads confusion. This is because the writer, Hamilton, is (at best) confused in his terminology and thus his argument is based on misplaced assumptions.

- As Jonathan Christopher points out, "inflation" and "deflation" refer to price movements on some scale (whether CPI or other). In the example given by Hamilton, if one had a local measure of inflation for his small Texas town then one would probably see local inflation rising.

- CPI excludes house prices. The rise in house prices had only an indirect impact on CPI (which is a severe flaw in the Greenspan policy of attending only to CPI). Now, the fall in house prices also has only an indirect effect.

- No mechanism of causation is implied in inflation or deflation. It's just a measure. Using official CPI as the metric is problematic but don't throw the baby out with the bath water.

- Growth in MZM lately is indeed very striking, as I and numerous others have already commented. However., MZM is not M0 as the writer claims, but a narrow measure which includes bank deposits with the Fed. There are well know reasons why they shot up in late 08. Whether prices rise sharply depends on three variables - none of them MZM:
(1) Expansion in money supply by the Fed (say M2, a broader definition than M0.)
(2) Contraction in very broad money (no figures available!) due to de-leveraging by banks.
(3) Reduction in the velocity of circulation of money due both to deleveraging by banks and increased saving (and hence reduced consumption) by households.

Assuming GDP to be pretty constant,. if the increase in (1) more than counter-balances the decrease in (2) and (3) then inflation will result. Personally, I think hyper-inflation is a severe risk, but not based on Hamilton's confused arguments. Understanding the issues involved isn't helped by confusing the terminology.

Jan 25 09:30 PM

[reddgreen:]

Re "Credit is destroyed when debt is payed off, but money is
not."

I don't believe that this is completely correct. We live (at least in the USA) in a fractional reserve banking system. When loans are paid off, money is destroyed. It's by design.


On Jan 25 08:24 AM SW Richmond wrote:

> '...we refuse to drink the deflationist Kool-Aid as long as central
> banks are rapidly growing money supplies.'
>
> I refuse to drink it also, and I believe you are watching the correct
> indicators. Pundits disagree about whether or not deleveraging and
> the resultant destruction of credit is in fact destruction of money.
> I don't believe it is; credit merely acts like money when it chases
> assets. Credit is destroyed when debt is payed off, but money is
> not. The markets' reactions on Thursday / Friday of last week to
> the UK bank crisis tells the story: banks are underwater, BoE embraces
> 'secret' QE, Sterling tanks and gold in terms of Sterling skyrockets.
> The stories were not about credit, they were about money.
>
> This is an unmistakable step forward in the death of the fiat paradigm,
> and central banking along with it.
>
> The problems the CBs will have on the other end of this mess, if
> there is an "other end", are legion.
>
> 1. What are the reliable signals that the economy has recovered and
> tightening can safely begin?
> 2. How quickly should tightening be done, and what is the time lag
> beteween tightening and seeing results?
> 3. When, if ever, will political will actually emerge to begin tightening?
> At what point in which election cycle (Presidential, Congressional)
> will the opportunity for tightening present itself?
>

Jan 25 10:04 PM

[dakyne:]

You don't get it--employment figures are a lagging indicator. Right now, corporations are worried about access to capital, and lowered earnings due to demand destruction--hence, they are restructuring to right-size their companies to prepare for a tough environment (i.e. lower earnings projections). So they try to hang on, but at some point (even strong companies like Microsoft, with plenty of cash) they reluctantly have to reduce their workforce as part of their "restructuring." It's a last resort to reduce costs, and that's why it's a lagging indicator. The government finally acknowledged we came into a recession Dec. 2007--a year after the fact. Many would argue it occurred sooner than that. But due to its lag, expect unemployment to continue rising.

The opposite is also true. Company earnings have to bottom out, and then show a confirming uptrend before employers will look to start hiring again. Again, employment figures are lagging indicators because the share prices would have already increased long before companies hire again.

The timeline for an upcycle would be:
1) share prices move up first, as the stock market is a forward-thinking discounting mechanism, usually 6 -9 months before business metrics improve.
2) business picks up, adding to earnings
3) hiring starts sometime after earnings projections improve.

In other words, this doesn't happen overnite. Adam is correctly in stating the public and companies are fearful of a deflationary spiral, even tho inflation is the danger going forward.

Two counterpoints: are inflationists really contrarian? I'm starting to read a lot of articles that people are starting to go long commodities and precious metals. I started buying in November, near the absolute lows for gold. But I'm starting to see interviews on CNBC about gold, so that has me worried. Hell, even Suze Orman started recommending gold--that is a troubling thought as her followers are pretty much sheep and late to the party.

2nd counterpoint is when does this excess money supply flow into the economy--the V velocit?. We have M money supply in place, but it's being trapped. Once it gets unleashed, the dam will break and you will see inflation pick up. Due to the profligate printing of dollars, pending inflation is a mathematical reality. The question is when, not if.


On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Jan 25 10:23 PM

[dakyne:]

Jim, did you even read Adam's article? He's saying what we are experiencing is NOT deflation. Yet, you declare we fell into deflation in the Oct/Nov timeframe. A look at the money supply growth in the last few months refutes that mistaken notion.

Deflation only occurs with a contraction of money supply. It does not occur with plummeting asset values. The Fed and Treasury are implementing inflation monetary policies. However, it is being hoarded by banks in an effort to shore up their shaky balance sheets--it's a liquidity trap. The irony is that Ben and Hank were telling them to lend the money, but the government's only regulatory bodies are saying they cannot lend money until their capital reserves rise to acceptable levels.

Prices may be falling, but the overarching issue is that dollars are being created at an unprecedented rate--that is the definition of inflation--money supply growth. The resultant higher prices down the road (once the capital is released into the economy in the form of loans) are due to the flood of dollars chasing the limited quantities of good and services. These higher prices are the result of inflation, not the source of inflation. Money supply growth is the source of inflation, and money supply contraction is the source of deflation. The latter is not happening.


On Jan 25 07:51 AM Jim Hawthorne wrote:

> Thanks for a most controversial submission, Adam! Contrarian it most
> certainly is!
>
> I agree that there is a widespread tendency to confuse simple falling
> prices with deflation, and you are correct to label deflation as
> a sustained contraction in the money supply coupled with a sustained
> contraction of credit. In addition, these contractions take place
> with an inflation rate below 0%.
>
> By several accounts then, we entered a deflationary trend sometime
> back in October/early November, when real inflation dipped below
> the line and we saw a dramatic increase in the purchasing power of
> money. Credit had dried up to the extent that it appeared that nobody
> was lending much of anything!
>
> Currently, and most troubling, the the 10-year TIPS yield is running
> at about 1.85% compared to about 2.60% for a T-bond, and this seems
> to imply a trending 10 year annual inflation rate breaking at about
> -1.0% to -1.1% annually.
>
> So if it looks like a duck, walks like a duck and quacks like a duck,
> let's go ahead and call it a duck. It looks like we are in a deflationary
> dip at the moment.
>
> The question is, are we about to enter into a deflationary spiral
> which leads inexorably to depression?
>
> You supply some very credible reasons why Central Banks (this is,
> after all a global event) are doing and will continue to do everything
> in their power to more us back across into the inflationary lane
> so they can deal with the devil they know, inflation being the better
> choice.
>
> Whether or not this move will once again move us way over into inflation's
> fast lane is the big question. There is also, as always, the thorny
> question of timelines. The Bank of Canada's latest report predicts
> rising commodity prices in expanding global markets and a rapid recovery
> from the current recession.
>
> Many economists, and a few of us skeptics find this assessment overly
> rosy and optimistic, at least in the short term.
>
> If you're right, Adam, and you might well be, we will witness a monumental
> shift away from paper assets and a tsunami of money piling into hard
> assets. Gold has certainly become more attractive recently. Perhaps
> movements in the spot price of copper and corn/soy contracts will
> give us the first clues as to whether or not you're correct!
>

Jan 25 10:31 PM

[X86BSD:]

Die keynesians die! Holy god, how much longer and how many more depressions and bubbles will it take before we stab these people through the heart with a wooden steak and KILL their ilk for good? SERIOUSLY can we *please* bring about some sound austrian economics, kill central banking, end fractional reserve banking, and for the love of all thats holy end fiat money!!! I mean this, I implore you, with sugar on top, I don't care if the currency to replace the dead dollar is backed by gold, silver or uranium, but can we pleeeeeeease have a value based currency again. All of this was predicted by the austrian school of economics. Am I the only austrian follower here?

Jan 25 11:55 PM

[Bruman:]

I agree with the basic premise, but I do think that the collapse of asset prices has brought on short term deflation. When asset prices collapse, like housing and the stock market, you have basically eliminated a portion of the money supply, because assets that had been convertible to money are now convertible to much much less. That means that many other prices must fall in order for markets to clear (e.g. costs of iPods now have to drop before the quantity produced can be sold, because people aren't feeling as rich). The contraction of credit also means that prices need to drop to clear markets.

Eventually goods production may slow so that prices can creep up for markets to clear, but this may mean that employment is down, reducing people's income, and forcing other prices down. Thus, these are money supply issues.

There is also the question of the velocity of money. Inflation/deflation can happen if the number of transactions rises or falls rapidly. This is a part of the money equation MV = YP or (money supply)*(velocity) = (output)*(price levels). Usually money supply changes faster than velocity, but that may not be the case presently.

At the same time, I do agree that central banks are flooding the system with money, and that is likely to produce inflation down the road. But I think that deflation has happened and may persist for another 3 months or so.

Jan 26 02:02 AM

[CLH:]

The answer is in history. A full blown credit crisis ALWAYS leads to deflation. (See the 1930s US and Japan 1990s and 2000s.) Will inflation return? Yes after 45 years or longer. This is how long it took for inflation to return for the US after the 1930s and 1940s.

Jan 26 07:59 AM

[wyvern:]

Thank you for posting this outstanding article!

It was thoroughly enjoyed by myself and others.

Clear and concise... doesn't get much better!

Jan 26 10:07 AM

[xb74:]

How does all the printed money get back in the hands of the consumer? With unemployment rates the way they are banks won't be loaning it out. Buisnesses will not hire if they can't get loans. Maybe if the Fed put it in barrels and left it on street corners we could get this process moving along. ; )

Jan 26 10:29 AM

[dw57:]

not sure how do you get inflation when wages are going up? won't the fact that consumers (AKA wage earners) aren't making much in the way of money keep inflation in check? and if they hadn't had access to easy credit, which is highly unlikely to return, we wouldn't have seen inflation in years. so since wages have been going down (in spite of all of the tricks to keep that from every one) won't deflation get a full head of steam and stay for quite a while? but the wage earner isn't that stupid any more.

Jan 26 10:59 AM

[BrunoT:]

I'd be wary of listening to Bill Gross at PIMCO. He is an "interested party" in all this and has his own agenda. I've learned to check the agenda of anyone writing about the economy before accepting what they say.

Amazingly almost everyone (from the treasury sec. to Peter Schiff) has some sort of profit motive tied to what they are saying. I am a Schiff fan, agree with how he sees things, but his call to go into foreign stocks was probably motivated as much by commissions as it was economics. He knew you don't need him to buy gold and treasuries, so he couldn't recommend that 100%...no commissions for his firm if you did that. He HOPED the foreign stocks wouldn't get taken down with us, but they were. At least temporarily. There was certainly no harm in sitting the crash out on the sidelines, but he wanted those commissions rolling in before the crash played out. Long term his holdings will recover, but everyone has an agenda.

As for Mish, that guy is like Hitler. He has a theory and will stick to it till the bitter end, refusing to surrender in his bunker. The idea that we can print up money and hand it out instead of making people and institutions earn it and have it EVER turn out well is about as insane as some of Hitler's ideas. Yet another case of an educated person making valid small points yet missing the big one. Chickens lay eggs. Eggs turn into chickens. Therefore eating an egg is the same as eating a chicken.

Jan 26 11:14 AM

[applesauce:]

Credit availability and current demand destruction.


On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Jan 26 11:15 AM

[SW Richmond:]

A full blown credit crisis might lead to deflation, but only if left to its own. This one is being fought by the most determined inflationist in history, and I fear he knows no restraint.


On Jan 26 07:59 AM CLH wrote:

> The answer is in history. A full blown credit crisis ALWAYS leads
> to deflation. (See the 1930s US and Japan 1990s and 2000s.) Will
> inflation return? Yes after 45 years or longer. This is how long
> it took for inflation to return for the US after the 1930s and 1940s.

Jan 26 11:35 AM

[Jason Rines...:]

Nice to see you weigh in Mish. I have to assign credit to the increasing unemployment numbers several months ago. Good combo of technical and common sense skills. The votes are split on your comments.

This article is indeed contrarian and I love it. My forecast is that the reinflation attempt will lift the boats of where government puts the money: Energy, Higher Ed, I.T., Healthcare. It also will lift the commodities assigned to these sectors and trickle down effects. I am looking at company specific equity investing this year. How's a companies' cash flow and who is running the ship?

What will the economy look like afterward? Mish doesn't know for sure, neither do I, but vanity makes me want to take a guess I have stated quite a bit here on comments these last few months and that is a W shape. Deflation occuring with the worst part nearly over. Then reinflation attempt and lifting of boats. Then inflation and recessionary conditions followed by slow recovery. There's my take from the cheap seats.


> Mike "Mish" Shedlock
> globaleconomicanalysis...
> Click Here To Scroll Thru My Recent Post List

Jan 26 12:32 PM

[Jade Queen:]

The plea to look at value has prompted me to add things to this discussion that have to do with sectors and locations.

If the banks won't lend to ordinary wage earners at rates and with down payments they can afford, there will be a rise in owner-carries and lease options. These contribute to velocity, so long as the payments are made.

Even if the payments aren't made and evictions have to happen, there may be enough potential buyers for the process to start over. Property prices in places with higher employment rates will hold up a bit more than if bank loans were the only way to go.

What it means locally would be hard to track by looking at national bank statistics.

In addition, there are some local credit unions who do not sell residential paper away from where they can eyeball the collateral. Will people move their money from banks to credit unions and use credit unions more for mortgages? When people talk about the banking sector, are they including credit unions in the discussion?

Properties that were owner-occupied are likely to turn into renter-occupied to some extent. Seldom is the entire value of a property destroyed by renters, especially in these times of often careful examination of renters before they move in.

People worried about this sort of thing are unlikely to be buying gold bars.

Then there is the food issue. I do not detect a drop in food prices where I live. What I do detect is a lot of rumbling about taking out the lawn to put in fruit, vegetables, and greens. This is not just about prices. Trucks have been stuck on freeways behind floods around here, so it is also about reliability of supply and about convenience.

Moving on to energy. The gas company announces a big price hike. The wood-stove guy gets very busy, as do some insulation companies. If I burn wood from my own property, that energy-use is not included in velocity any more, though the stove purchase, installation, and maintenance might be.

Clothing I hardly want to talk about because buying and trading at thrift stores can happen in tough times.

Low-cost gyms don't seem to be suffering. If you're laid off, and you already had a $20 per month membership, you might as well go work off steam until your last $20.

I agree with those who have said this is sort of a new situation. This is a country of such wealth and surplus that there is a lot of elasticity in how we can respond. It is also going to vary a lot from region to region.

Is the Southwest draining its below-ground water to a point where people are going to have to conserve or move? How many are going to move?

I would argue that putting value on currency should be based on a basket with energy, shelter, food, and to really screw it up, a health-service indicator. Maybe we should have independent geek-groups come up with indicators for particular regions, because heating costs are a bigger deal in the north, and cooling a bigger deal in the south.

I have a greater need to know what is going on in my own region than I do to know what is going on in the country at large.

However, if one region does better with health care, other regions may be able to copy what works.

There are so many variable in prices and the inflation/deflation discussion. I would find it helpful to break it out by region and by sector.

Jan 26 01:46 PM

[Whippet:]

Great article, Adam. You must not be a direct descendant of the Hamilton on the $10 bill with this analysis... I appreciate a well written, Austrian-influenced analysis of the truth of the matter in the midst of the Keynesian neo-Socialist drivel we all risk drowning in. Keep in mind that the only other real determinant of inflation, the velocity of money, is down but not out at the moment, so the actual inflationary effects of this monetary policy may not be seen immediately. Once liquidity increases, and that number goes back up to historic levels, that's another story of course. The other thing to mention is that most of these newly minted dollars are on reserve at the Fed as a result of TARP (to decrease banks' leverage ratios). Once the financial institutions escape their current liquidity trap, do you think they will stay there?

Jan 26 02:39 PM

[Chris B:]

1) "M0, the narrowest measure, is usually called the monetary base. It is simply currency (coins and paper dollars) in circulation and in bank vaults plus reserves commercial banks have on deposit with the Fed."

M0 includes bank deposits at the federal reserve banks. Do you think any of the trillions of dollars that have exited the derivitives, stock, bond, and commodities markets were deposited in these accounts? If some of the growth in M0 and MZM was caused by banks converting their riskiest assets to cash, is that really the same as money printing? It looks to me like the government accounts used to keep banks' required reserves have become the hottest new place for banks to hoard cash safely! Keep in mind, since the repeal of the Glass Steagal Act of 1933, the investment banks and the commercial banks with Federal reserve accounts are one and the same. Most of the TARP funds are still sitting there.

2) "Ride the coming inflationary wave. Some of this deluge of new money will flow into beaten-down stocks and commodities. I like both since they were driven to such irrational prices in 2008."

That's certainly contrarian! You're predicting a currency devaluation like Argentina, Mexico, or Russia in the 90's and you think stocks are a good place to hide? Would domestic stocks priced in domestic currency have been the right investment to make for people in those countries when their currencies and economies collapsed? No. A passport and lots of USD would have been best.

If you are positive that we are about to experience a currency collapse, the rational thing to do would be to take on as much debt as you can and convert to another currency (or just buy forex options that would pay off big). When your home currency collapsed your debts would be cheap compared to your foreign currency and you'd be left with much more purchasing power than you started with.

Regarding commodities, the collapse of an economy the size of the US would do strange things to supply and demand, so oil could underperform inflation. As far as precious metals are concerned, portability and security could be problematic (imagine 50lbs of metal in your carry-on luggage at the airport as you try to escape the country!). However a few coins for bribes wouldn't be irrational.

Jan 26 03:48 PM

[JohnAl:]

Excellent article and commentary!

I'm starting to feel comfortable in the "(general price) inflation will return later rather than sooner" camp. I don't see how "big" inflation can return until "big" borrowing does. Desire to borrow is the main missing ingredient in the credit bubble reflation formula. Desire to lend is missing right now too, but I'm guessing that banks will get cleaned up and will be ready to lend again before people and businesses are ready to borrow big again.

Many individuals with big debt got crushed last fall and others had the crap scared out of them. And most everybody is looking over their shoulder and hoping the boss doesn't show up with a pink slip. People are doing the right thing now, the rational thing - saving - and aren't likely to want to get in over their heads borrowing again any time soon, if ever.

And what business is interested in borrowing for expansion right now, with unemployment rising and the general economy looking like it's on life support?

Yes Bernanke and the gubmint are doing everything they can to reflate the credit bubble, and we can all see the enormous base money increase, but it can't do much harm just sitting there in the banks.

It's like Bernanke is furiously trying to light a bonfire but the wood is soaking wet. It's gotta dry out. It's gonna take a while to light.

Jan 26 04:18 PM

[RVN-VET:]

360 billion would give each american 1 million to be given on a ration card for specific items (only) and only so much a year (to meat out over time) to save their homes, and to buy only american products. This would be the only grass roots program that would insure BIG MONEY would not just blow more BIG MONEY...or make more big money. The payback here from grass roots is that all americans would be insured against loseing their homes.

Any auto MFG should explain to BIG OIL they should take a vested interest in their companies because without them there would not be a BIG OIL. I don't know where the BIG OIL become so independant they think they can artifitially inflate prices by restricting output to insure income levels but this is totally an independant idea from somewhere that has too much control over OIL. So if they want to continue they should care about their future and INVEST.

Jan 26 05:27 PM

[Jim Hawthorne:]

dakyne: thanks for the comment!

I think there is some confusion here, and I didn't do much to ensure that I was clear in my comment above...
I fully understand that there has been a substantial blip in M1 and M2 of late. There has also been a coincidental blip in equity prices from November into January. Does this blip in equity prices singularly signal an the end of the current bear?
No, of course not. While many (classical Friedman economists) chain M1 & M2 data directly to inflation, they also like to hedge by dabbling in prices of goods and services to boot. Thus, they can have their cake and eat it too. Now that we see a spike in M1 and M2, they cry that 'see, there can be no inflation', and that the 'deflation myth' has been vanquished.
I beg to differ, and suggest that the money supply has been shrinking rather alarmingly, is in a downtrend, and has been masked by the startling drops in loans to banks, CP loans, consumer spending, commodity prices, and employment (in terms of both hours and compensation) to name only a few.
I think it might be more helpful if, rather than talking about money supply and inflation/deflation, we started to play around with ALL the factors that contribute to wealth.
Over the past year, we have seen wealth, globally and locally absolutely destroyed. When all factors are considered, it really is much too early to call it either way: you might be right and we can once more re-inflate out way out of trouble... for now.
From where I sit, and considering all the elements of deflation, I think there is as good a chance of a deflationary spiral, and all the kings horses and men and yes, printing presses may not be able to quell it.


On Jan 25 10:31 PM dakyne wrote:

> Jim, did you even read Adam's article? He's saying what we are experiencing
> is NOT deflation. Yet, you declare we fell into deflation in the
> Oct/Nov timeframe. A look at the money supply growth in the last
> few months refutes that mistaken notion.
>
> Deflation only occurs with a contraction of money supply. It does
> not occur with plummeting asset values. The Fed and Treasury are
> implementing inflation monetary policies. However, it is being hoarded
> by banks in an effort to shore up their shaky balance sheets--it's
> a liquidity trap. The irony is that Ben and Hank were telling them
> to lend the money, but the government's only regulatory bodies are
> saying they cannot lend money until their capital reserves rise to
> acceptable levels.
>
> Prices may be falling, but the overarching issue is that dollars
> are being created at an unprecedented rate--that is the definition
> of inflation--money supply growth. The resultant higher prices down
> the road (once the capital is released into the economy in the form
> of loans) are due to the flood of dollars chasing the limited quantities
> of good and services. These higher prices are the result of inflation,
> not the source of inflation. Money supply growth is the source of
> inflation, and money supply contraction is the source of deflation.
> The latter is not happening.

Jan 26 06:40 PM

[Jim Hawthorne:]

Sorry! should read...
'Now that we see a spike in M1 and M2, they cry that 'see, there can be no deflation', and that the 'deflation myth' has been vanquished.

Jan 26 06:45 PM

[Jake Berzon:]

Thanks for helping us go back to the basics. It is important to call things by their proper names. You are absolutely right, we have not yet seen any data showing deflation. In fact, the Fed was so scared of the mere possibility of deflation that they quickly increased money supply.

Our Government needs inflation and so the powers that be will do everything in their power to inflate. Nevertheless, it looks like deflation will happen before inflation returns. I think your article is very good at driving home the point that when inflation does return, it will return with a vengeance.

It is only a matter of time and the only question is, "How much time?" Too bad that none of us are able to answer the question of when inflation will return with any precision. Most who venture to guess, are betting it will not happen this year. Adam, could you tell us your thinking on the timing?

Jan 26 07:16 PM

[MGA_1:]

Another way to increase/decrease the money supply is through fractionalized banking. Loans going bad decreases, issuing loans increases.

I think it's very possible we will end up with:
- Asset deflation
- Commodity inflation

I believe we share a number of characteristics with Argentina in 2000 - deflationary economic slump followed by large government deficits which resulted in money printing to make up for the gap. Right now people have faith in t bills, but if that evaporates the buyer is going to be the fed which will result in large monetary increase. A 1 trillion dollar budget deficit next year?? Good lord, who's gonna fund that?

Jan 26 08:55 PM

[Balderdash:]

Don't confuse money with demand. We could multiply all prices in the world by a factor of 100, and that wouldn't spur demand; it would simply change the basis of price. If we did this, would it change the ratio of value of various goods? No! 1 chicken would still be worth 1/250 of a piano, despite the 100-fold increase in price of both.

What matters here is profit margin -- the producer will increase production to the extent that the input prices -- raw materials, labor, etc, lag the output prices. If we simply multiplied all prices by 100, there would be no harm done because all prices would rise in equal proportion.

The reason that inflation is so dastardly is that the prices don't always rise in equal proportions.. those who get the money first get to buy stuff at low prices and screw the rest of us who saved our dollars. Indeed, inflation encourages malinvesment because the producer that increases production in response to inflation due to a temporary iniquity will soon see his newfound profit margins collapse and lead to liquidation.

Hope this helps

On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Jan 26 08:57 PM

[Balderdash:]

Don't confuse money with demand. We could multiply all prices in the world by a factor of 100, and that wouldn't spur demand; it would simply change the basis of price. If we did this, would it change the ratio of value of various goods? No! 1 chicken would still be worth 1/250 of a piano, despite the 100-fold increase in price of both.

What matters here is profit margin -- the producer will increase production to the extent that the input prices -- raw materials, labor, etc, lag the output prices. If we simply multiplied all prices by 100, there would be no harm done because all prices would rise in equal proportion.

The reason that inflation is so dastardly is that the prices don't always rise in equal proportions.. those who get the money first get to buy stuff at low prices and screw the rest of us who saved our dollars. Indeed, inflation encourages malinvesment because the producer that increases production in response to inflation due to a temporary iniquity will soon see his newfound profit margins collapse and lead to liquidation.

Hope this helps

On Jan 25 07:49 AM [e-mail] wrote:

> Your comment -- "When a central bank doubles the monetary base in
> a matter of months, a lot more money is going to be flooding into
> the real economy. It will compete for finite goods, services, and
> investments, driving up prices" -- doesn't this instance send a message
> to manufacturers and service providers to rehire and crank up production
> to satisfy demand, thereby correcting the problem?? What am I missing?

Jan 26 08:57 PM

[Balderdash:]

check your math


On Jan 26 05:27 PM RVN-VET wrote:

> 360 billion would give each american 1 million to be given on a ration
> card for specific items (only) and only so much a year (to meat out
> over time) to save their homes, and to buy only american products.
> This would be the only grass roots program that would insure BIG
> MONEY would not just blow more BIG MONEY...or make more big money.
> The payback here from grass roots is that all americans would be
> insured against loseing their homes.
>
> Any auto MFG should explain to BIG OIL they should take a vested
> interest in their companies because without them there would not
> be a BIG OIL. I don't know where the BIG OIL become so independant
> they think they can artifitially inflate prices by restricting output
> to insure income levels but this is totally an independant idea from
> somewhere that has too much control over OIL. So if they want to
> continue they should care about their future and INVEST.

Jan 26 09:08 PM

[Joana25:]

<A HREF="www.tycromedia.com">online shopping consumer electronics</A>

Jan 26 10:49 PM

[Lin:]

NOVA + Elaine are spot on !

Noriel Roubini has predicted " stagfaltion " = no economic growth , coupled with inflation . Oil IS rising now . Groceries are in inflationary mode ! Will get much worse . Inlation is a must for the Gubmint to inflate to get out of paying for the huge debtload commencing with the boomers retirements .
80 million folks ! Gold acts well as an inflationary hedge , But also does well to protect one against a " currency collapse " UK is experiencing presently , US is next , along with Ireland , Greece , Italy + foremost Mexico !.

Jan 27 12:19 AM

[Dirk McCoy:]

First, prices wouldn't multiply by the same factor- principle on debt, for one example. Another would be certain currencies. Another would be goods with higher investment requirements, like automated flat panel TV factories, as opposed to those with lower investment requirements, like boomer middle managers.

Second, as people saw their asset values recover relative to debt, wealth effect would kick in, and spending resume. As banks had fewer loans defaulting, their performance would recover as well.

Third, increase in supply and demand lead to greater specialization and division of labor- this is where real productivity and improved living standards emerge. This only leads to collapse and liquidation when interventionists show up with their every 7-8 year or so Fed interest rate hikes to slow down an "overheating" economy and create another Latin/Asian/global financial crisis. If they just stop meddling, then instead of wholesale economic destruction, just a few less productive producers- usually the late entrants, not the early- will have to turn over management/ownership to more productive players.

On Jan 26 08:57 PM Balderdash wrote:

> Don't confuse money with demand. We could multiply all prices in
> the world by a factor of 100, and that wouldn't spur demand; it would
> simply change the basis of price. If we did this, would it change
> the ratio of value of various goods? No! 1 chicken would still be
> worth 1/250 of a piano, despite the 100-fold increase in price of
> both.
>
> What matters here is profit margin -- the producer will increase
> production to the extent that the input prices -- raw materials,
> labor, etc, lag the output prices. If we simply multiplied all prices
> by 100, there would be no harm done because all prices would rise
> in equal proportion.
>
> The reason that inflation is so dastardly is that the prices don't
> always rise in equal proportions.. those who get the money first
> get to buy stuff at low prices and screw the rest of us who saved
> our dollars. Indeed, inflation encourages malinvesment because the
> producer that increases production in response to inflation due to
> a temporary iniquity will soon see his newfound profit margins collapse
> and lead to liquidation.
>
> Hope this helps
>
> On Jan 25 07:49 AM [e-mail] wrote:

Jan 27 01:21 AM

[MDStudent101:]

I see that the deflation/inflation debate rages on here as well.

For those who are looking for more arguments against the inflation argument, I would encourage you to read the almost daily "Five Things You Need to Know" Column on Minyanville.com written by Kevin Depew.

I have been reading his column since this whole financial crisis began back in July of 2007, and he has been consistently (and correctly, in my humble opinion) been arguing the case for deflation argument for quite some time.

He lays out some very convincing reasons for deflation that have come true over time. I would encourage everyone on both sides of the debate to read his past columns as I believe he has one of the best track records to date on this subject.

Jan 27 01:38 AM

[sidd:]

Most articles i have read thus far speak about "imminent" deflation based on the trend in inflation during the last few quarters. No one has said that we are already in a (CPI)deflation. The trend in CPI cited in your article(DEC. CPI=0.1%) clearly indicates that we may indeed be approaching a deflationary cycle.

Further, your article deals with the credit crunch and deflation but there is no mention of the velocity of money. Sometimes, with "slowing" money you can have deflation even though the money supply may be increasing. With the situation as it is now, banks and consumers are desperately holding on to their cash. Some increase in the money supply may help to mitigate the devastating effects of such a freeze. This may later force the Fed to withdraw some of the excess liquidity from the system once the situation improves, resulting in a slow recovery.

Jan 27 02:44 AM

[Balderdash:]

On Jan 27 01:21 AM Dirk McCoy wrote:

> First, prices wouldn't multiply by the same factor- principle on
> debt, for one example. Another would be certain currencies. Another
> would be goods with higher investment requirements, like automated
> flat panel TV factories, as opposed to those with lower investment
> requirements, like boomer middle managers.

You're right ... prices won't multiply by the same factor with an injection of money into the banking system. Rather, it will mutilate savers and reduce the value of debt. Point here is though, society can't get something for free here; you're always robbing peter to pay paul unless you manage to multiply all prices, debts, etc, by the same factor, which is not only impossible but totally pointless.

>
> Second, as people saw their asset values recover relative to debt,
> wealth effect would kick in, and spending resume. As banks had fewer
> loans defaulting, their performance would recover as well.
>

This is tantamount to kicking the can down the street. If the banks are the source of the new captial, it will originate as loans and encourage people to go deeper into debt. Until people reach their new debt ceilings, banks will get repaid, essentially through the loans they just provided. But without a parallel increase in real wealth and productivity the result will be the same and performance would deteriorate 'post-stimulus'.

> Third, increase in supply and demand lead to greater specialization
> and division of labor- this is where real productivity and improved
> living standards emerge. This only leads to collapse and liquidation
> when interventionists show up with their every 7-8 year or so Fed
> interest rate hikes to slow down an "overheating" economy and create
> another Latin/Asian/global financial crisis. If they just stop meddling,
> then instead of wholesale economic destruction, just a few less productive
> producers- usually the late entrants, not the early- will have to
> turn over management/ownership to more productive players.

Would you have us permanantely suppress interest rates? The fed does this by monetizing treasury and other debt instruments . At some point a currency crisis would ensue and not any amount of dollars would buy you a lollipop as people realized it's all a sham. What leads to higher living standards is increased production of goods, services and technology which can't possibly be properly encouraged through capital injections and attempts to prop up home prices.
>
> On Jan 26 08:57 PM Balderdash wrote:

Jan 27 07:25 AM

[Balderdash:]

On Jan 27 01:21 AM Dirk McCoy wrote:

> First, prices wouldn't multiply by the same factor- principle on
> debt, for one example. Another would be certain currencies. Another
> would be goods with higher investment requirements, like automated
> flat panel TV factories, as opposed to those with lower investment
> requirements, like boomer middle managers.

You're right ... prices won't multiply by the same factor with an injection of money into the banking system. Rather, it will mutilate savers and reduce the value of debt. Point here is though, society can't get something for free here; you're always robbing peter to pay paul unless you manage to multiply all prices, debts, etc, by the same factor, which is not only impossible but totally pointless.

>
> Second, as people saw their asset values recover relative to debt,
> wealth effect would kick in, and spending resume. As banks had fewer
> loans defaulting, their performance would recover as well.
>

This is tantamount to kicking the can down the street. If the banks are the source of the new captial, it will originate as loans and encourage people to go deeper into debt. Until people reach their new debt ceilings, banks will get repaid, essentially through the loans they just provided. But without a parallel increase in real wealth and productivity the result will be the same and performance would deteriorate 'post-stimulus'.

> Third, increase in supply and demand lead to greater specialization
> and division of labor- this is where real productivity and improved
> living standards emerge. This only leads to collapse and liquidation
> when interventionists show up with their every 7-8 year or so Fed
> interest rate hikes to slow down an "overheating" economy and create
> another Latin/Asian/global financial crisis. If they just stop meddling,
> then instead of wholesale economic destruction, just a few less productive
> producers- usually the late entrants, not the early- will have to
> turn over management/ownership to more productive players.

Would you have us permanantely suppress interest rates? The fed does this by monetizing treasury and other debt instruments . At some point a currency crisis would ensue and not any amount of dollars would buy you a lollipop as people realized it's all a sham. What leads to higher living standards is increased production of goods, services and technology which can't possibly be properly encouraged through capital injections and attempts to prop up home prices.
>
> On Jan 26 08:57 PM Balderdash wrote:

Jan 27 07:25 AM

[upgrayed:]

Here is a simplistic question:

If there is so much new money sloshing around, where is it? I don't know of too many individuals or companies that doubled in net worth over the past year. Something has to be drastically overlooked here.

Jan 27 09:34 AM

[Kdogz1344:]

M0 has increased - but M2 has decreased. The money multiplier has shrunk. You seem to overlook this. Once banks start actually lending again - then the Fed can reduce M0 accordingly...

Jan 27 05:02 PM

[Kdogz1344:]

M0 has increased, but M2 has contracted. You seem to overlook that. The money multiplier has shrunk. Once banks start lending again, then the Fed can reduce M0 accordingly...

Jan 27 05:05 PM

[hopschoko:]

I follow what the inflationists are saying, but I have a hard time agreeing with them.

Didn't we just experience an inflationary period from approximately 1999 to 2006/7/8? What happened to house prices during that time? How about gold? Oil? Equities anyone?

I don't care how much peanuts, Cap'n Crunch, or a bunch of basil increased in price over that time if the most expensive items I will ever purchase (home, gold, oil, equities) skyrocketed.

How is the money supply the main indicator of inflation as long as the FRACTIONAL RESERVE system exists. How is this not considered by any inflationists. at. freaking. all.

Who needed the Fed to inject money into the system when the commercial banks were able to do it themselves? Now the Fed is plugging the black hole of debt that the fractional reserve system created. IMHO, the inflationary period has passed; now the creators of the latest inflationary period (commercial banks) need the money from the Fed to keep them on life support. Think about it, the money that the Fed is printing now should've been given to the banks from 1999 to 2006/7/8. That's when the inflation occurred, but anyone who was just paying attention to the money supply and not to the home/oil/gold/equity prices missed the party.

Gold is not decreasing in value because of the demise of other currencies. Paniced Brits, Icelanders, and Latvians are keeping it afloat (but so have my purchases...shhhh).

Jan 27 05:28 PM

[Bill Thompson:]

Of course, inflation is coming, this guy has been calling it all along crashmarketstocks.com , Thats why Im in GDX and GLD

Jan 27 09:18 PM

[Steve Pasq:]

A monetary plague is a better way to describe the current conditions than deflation. As the plague spreads outright scoundrels, like Madoff, are plucked from the legitimate population--more will follow. Next good people hit with tough circumstances enter poor house. Then hard-working, good people run into tougher circumstances and enter the poor house. Pretty soon there is only a small tribe of individuals who have assets and high credit scores and the rest of the population starts wondering how they ended up dodging the plague.

The members of this healthy tribe better not show their health (wealth) because we now have elected officials to reallocate their medicine (assets) to the unhealthy masses.

Jan 27 09:24 PM

[scotty1560:]

Are wages increasing anytime soon? doubtful.
Is oil going back to $100 anytime soon? doubtful.

How about residential real estate?
Much tighter credit..years of over supply..declining incomes...soaring foreclosures. Real Estate has a long way to go on the downside.
Liquidation of forecloses is 25-50 cents on the dollar...that's contraction.
Rental rates are also contracting which is a negative to investing.
That means all the services and industries tied to real estate are dead.

Commercial Real Estate....retail...hot... prices...
dead in the water...

autos? yachts? travel? How about trade with China?

Does anyone really see a long term equity rise based on earnings the next few years? Sure, food and taxes and health care will inflate. Without big time leverage my outlook is weak for assets and consumption. Any stock market rallys are nothing more than speculative trader swings.

Jan 28 10:56 AM

[Marcap:]

North America will most likely not see any inflation for the next 2-4 years. On the contrary, consumer prices in general will most likely fall a lot more than their current levels long before they ever start to increase. A DOW at 5000 or less unfortunately is quite possible.

Oh sure, as another writer stated, we may see price increases in essential products such as health care, food, etc, but on the whole, I believe there will be very few price increases. Real estate for one, will certainly not go up while millions of homes are coming on the market under foreclosure; and new projects will not come on line while the banks are in their current lending freeze. And as for our auto industry, if the automakers cannot sell their cars at current price levels, how could they be expected to sell them for more? Wake up everyone, not to be a bearer of doom and gloom, but I'm afraid that times will be getting a lot worst before they start to get better...and that I suspect will be a long time off.

Jan 28 12:47 PM

[Mistrofan:]

As much as I agree there are no fundamental reasons to be an inflationary environment, I have to say that FOREX markets are already telling us that we will face HUGE inflation due to increased costs of hard assets. This type of inflation has NOTHING to do with GDP growth. And I have to agree in the end with Mr. Hamilton.

Jan 28 01:16 PM

[econjunkie:]

I don't agree with your definition of inflation. A persistent increase in prices is inflation. A persistent decrease in prices is deflation. In the long-run, the quantity theory of money holds. Likewise, certain interest rates increase ex-post to maintain their real effect by accounting for inflation (see hyperinflation and bank rates in Latin America throughout the last two decades). However, if oil prices go to 100, and my groceries therefore cost 5% more due to transportation costs, things cost more, this is inflation. If oil goes back down to 40 and my gasoline costs less, this is deflation. The only explanatory variable we need to care about in the measure of 'flations is time.

With respect to the money supply, I agree. Banks WILL escape their defensive postures, and the quantity theory of money will hold. These effects are rarely, if ever, immediate.

Jan 28 01:27 PM

[iyamwutiam:]

As with any great crime- the maxim follow the money -is one that is most useful.

Mr. Hamilton is correct in pointing out that temporary supply/demand phenomena do not make either an inflation/deflation but rather the underlying fundamental definition of money supply- is the more apropos and rational view.

As can be seen from the chart - the monetary base has increased and shall increase even more dramatically in the following year/s. Whether it is parked with the Fed/Treasury/private bank makes little difference and the distinction coupled to velocity of money is moot.

Ultimately -like any producer (the Fed being a producer of credit/money) - it must continually turn to economies of scale and surplus to remain profitable. This is essentially inflation. Inflation is the by word and pledge of all central banks (check the data worldwide and be clarified upon this point) because as a producer -it must continue to supply the market and as many dominant producers (pharmaceuticals/elect... is not above creating supplier-induced demand.

The principle of fractional reserve which started with unscrupulous goldsmiths and other Shylocks has been legitimized for a few centuries now. The implementation of a formal fractional reserve system which through its subsidiaries (banks, etc) have essentially used decreasing reserves and increased leverage to create enormous return on investment primarily through interest charges. The mower the interest rate-the greater the proportion of leverage required to generate interest income. In addition - the recent phenomena of globalization is nothing more than extreme leverage by 'developed' nations to co-opt 'under-developed' nations resources (oil/labor/etc).

Why train , fit and establish armies and bases when extreme leverage and low interest rates wll allow a pan-national corporations to effectively annex a nations resources (China/India/etc), If it can not be done in this manner -the more expensive and onerous method of war must be applied (Iraq)- at 2 trillion and counting.

What caused this so-called debacle. It was not the paltry 60 billion or so of subprime mortgages -nor its leveraged equivalent of 2.4 trillion dollars. Which has been effectively guaranteed by Fannie/Freddie Mac backing. This debacle has been accelerated because the reserve ratio's clearly showed that the so-called 'most powerful/rich' institutions in the word are insolvent,

If the same scale of leverage is used for the reserves of China/Japan and Russia (3.2 trillion dollars) -then effectively -these three countries own lock stock and barrel everything in Europe, the USA , Canada and Australia. In short- despite all the blather about economic - in the real world these models are but a farce. Throw in the arab countries and quite honestly -Europe will once again -'magically' as it did previously slip into the dark ages. A euphemism for being under the hegemony of other nations.

Why can not these surplus countires use the same principles of leverage as the US/Europe do and in short bail out every nation on Earth using the same principles that we have seen since the 1600s? Why is not possible for Russia/China/GCC to do what US/Europe do and buy these failing institutions that IMF has deemed on previous occasions (where the venue was not on their 'turf' ) the best course of action to be sold off to more profitable and prosperous private firms regardless of origin.

So in short- there is no shortage of money. There is an actual shortage of sovereign wealth. Due to this lack of sovereign wealth -the west continues to engage in further leverage and further debt because it chooses not to give up it's failing institutions and condemns its sovereign population to the burden of debt for several decades until one day -default inevitable comes.

With in twenty years -there will be a move away from surplus countries to finance their own colonizations. Already China has signalled this by allocating a staggering 500 billion dollars in CASH to its own country-using leverage -that would be close to 20 trillion dollar!!

Jan 28 03:47 PM

[SunrdrJuris:]

There’s something very common-sense-wrong with Adam Hamilton’s theory of inflation being solely a result of money expansion. If prices rise throughout the economy because of a shortage of goods, that is just as much inflation as when prices rise because there’s too much money floating around.

According to Adam, a steady availability of commodities & rise in money supply brings inflation. OK, and that clearly is a supply-demand event. But now, hold money supply steady and reduce available of commodities. That causes prices to rise just as certainly and that again is a supply-demand event. But this Adam refuses to call inflation. (The second situation is basically the example Adam gives re the Texas oil town boom in housing prices -- money supply holds steady and demand for limited commodities increases.) It all is inflation, whether you look at it from the money or the goods end. The result is exactly the same – your money is worth less because it is able to buy less.

What Adam is doing is just sort of academic massaging – artificially separating two supply-demand events that lead to exactly the same result, and arbitrarily choosing to define only one as inflation. Adam quotes couple dictionaries in his May 16, 2008 article (www.zealllc.com/2008/m...) as if to substantiate his definition But if you Google “inflation”, read Wikipedia, refer to Websters, it is clear that Adam’s definition is archaic and inflation is instead defined as: “Price level attributed to an increase in the volume of money and credit relative to available goods and services”. So, a change in either money supply or availability of goods/services can cause inflation. That is simple and makes much more sense in my head an my wallet.

Maybe I’ll can charitably give Adam that, if the supply-demand event happens only in one Texas town and nowhere else, he can call it no more than a supply-demand event, without qualifying it as inflation. But, if the corresponding kind of event happens throughout the USA, there is inflation in USA. If I go to Safeway and all my food suddenly costs more, I know it is inflation, regardless of what kind of narrowed academic exercises Adam Hamilton wants to indulge into. So, don’t rile Adam – the sun is not black. We all can clearly see it is white, bright, and we can feel it.

As far as “Big Inflation Coming”, -- yes. But the critical question is how soon. As long as employment is down, as long as credit is scarce, there is no money to spend and no demand for goods. Therefore -- no inflation.

To say that just because the Fed is broadcasting cash from helicopters, there is immediate inflation, is only half of it. What is happening to that cash? What caused the rise of housing prices, the bubble that give consumer piles of cash to spend, was that the banks could bundle mortgages into MBSs and resell them to Lehman Bros. and likes all over the world, who overleveraged themselves into endless debt, at 30:1 and more. Thus, that credit appeared to create a sea of cash to drive the economy. Now, that this house of cards has collapsed – think about it – isn’t all the TARP money is going into deleveraging banks and investment houses out of bankrupcy? It is certainly not going into the economy to create demand for goods. It is dead money. So – no inflation as of yet.

If Obama succeeds in raising employment (or the private sector does), that’s when inflation becomes a discussion. Gold (and to a lesser degree oil, copper, etc) is a different story.

That, I think, is the very simplest way to see where we are. What do you think?

Jan 28 06:14 PM

[iyamwutiam:]

Someone on this site (perhaps in the comments) suggested this as a good read.

I totally agree- worth the little amount of time to read. Highly suggested and to whoever out there that did --Thanx.

thepriceofeverything.t.../

Jan 28 07:01 PM

[jrs87sch:]

I think we have to have some major moves in economic growth before we have to worry about any significant changes in inflation.

If you have an opinion, tell me about it at www.InvestorPitStop.co...

Jan 28 07:13 PM

[Balderdash:]

ever hear of stagflation?


On Jan 28 07:13 PM jrs87sch wrote:

> I think we have to have some major moves in economic growth before
> we have to worry about any significant changes in inflation.
>
> If you have an opinion, tell me about it at www.InvestorPitStop.co...

Jan 28 09:21 PM

[Balderdash:]

ever hear of stagflation?


On Jan 28 07:13 PM jrs87sch wrote:

> I think we have to have some major moves in economic growth before
> we have to worry about any significant changes in inflation.
>
> If you have an opinion, tell me about it at www.InvestorPitStop.co...

Jan 28 09:21 PM

[The Last Bo...:]

Yes, I finally got it. There are tons of fresh money that the Fed is trying to put in our pockets but we won't spend it because we are different people now. We are prudent, smart, idealistic savers. We realize now how foolish we were to spend money we didn't have and how overly optimistic we were and we won't do this again. Never, ever again. Really? Come on. Now we are just scared but the moment the unemployment rate starts inching down, or the moment the stock market starts inching up, or the moment Bernanke and Geithner say the worst is behind us, we'll rush to to the store with wallets full of fresh new greenbacks while the banks will be littering our way with plastic because they have to put to work all this money they were given. And it ain't gonna be Walmart where we'll be rushing to. More like Neiman Marcus. We have not change and we never will. You combine this fact with the fact of mounting money supply and you get the perfect conditions for the perfect inflationary storm.

Jan 28 10:52 PM

[marketman54:]

I just have a little brain but I have to ask, when your government prints and/or is on the hook to print somewhere between $5 to &7 Trillion dollars to bail out or guarantee loans and all this will be NEW MONEY printed to be put in circulation - you surely have to believe that super inflation is rolling down the highway in the next 18 to 24 months! All the other mumbo jumbo doesn't mean a thing.

Buy all the gold and TBT you can get your hands on and just wait for the slot machine to pay off!!

Jan 28 10:53 PM

[Allen Phatimer:]

Great common sense commentary for anyone with a real economic bone in their body. I had to reply to your comment because you were the only one on the page of 100+ comments to refer to purchasing power at all. That is a sign of what semantics and a lack of grounding in truth and reality does to otherwise well educated people. And I'll say upfront that I agree that the inflation we all know but don't love is apt to surge in a way that can put us in a banana republic sort of conundrum; I just am not convinced it's around the corner, because I think the current economic circumstances is likely to suppress demand more and longer than most think, credit has changed dramatically, and there is likely to be a transmission problem with regard to getting that credit into enough hands that can overwhelm the enormous amount of excess capacity in product, service and labor markets that have been created almost overnight. So there's no telling how long deflation (not the asset kind, but the kind that increases purchasing power meaningfully) is apt to persist because this is anything but a free market economy anymore - ie. the Fed is likely (IMO) to be successful in keeping rates low and the dollar from collapsing in the near term. But some day in the not too distant future inflation will get going and it will inflict pain of the non-theoretical kind - your and my pocketbook and bank accounts and by extension our quality of life. Its just near impossible to predict when and to what extent but also how far and long deflation goes before it turns. My guess is that wont happen until the economy here and globally improves - which I doubt happen anytime soon. People looking for a 2nd half recovery are way off; we'll be lucky if happens by year end 2010 IMO.


On Jan 26 03:48 PM Chris B wrote:

> 1) "M0, the narrowest measure, is usually called the monetary base.
> It is simply currency (coins and paper dollars) in circulation and
> in bank vaults plus reserves commercial banks have on deposit with
> the Fed."
>
> M0 includes bank deposits at the federal reserve banks. Do you think
> any of the trillions of dollars that have exited the derivitives,
> stock, bond, and commodities markets were deposited in these accounts?
> If some of the growth in M0 and MZM was caused by banks converting
> their riskiest assets to cash, is that really the same as money printing?
> It looks to me like the government accounts used to keep banks' required
> reserves have become the hottest new place for banks to hoard cash
> safely! Keep in mind, since the repeal of the Glass Steagal Act
> of 1933, the investment banks and the commercial banks with Federal
> reserve accounts are one and the same. Most of the TARP funds are
> still sitting there.
>
> 2) "Ride the coming inflationary wave. Some of this deluge of new
> money will flow into beaten-down stocks and commodities. I like both
> since they were driven to such irrational prices in 2008."
>
> That's certainly contrarian! You're predicting a currency devaluation
> like Argentina, Mexico, or Russia in the 90's and you think stocks
> are a good place to hide? Would domestic stocks priced in domestic
> currency have been the right investment to make for people in those
> countries when their currencies and economies collapsed? No. A
> passport and lots of USD would have been best.
>
> If you are positive that we are about to experience a currency collapse,
> the rational thing to do would be to take on as much debt as you
> can and convert to another currency (or just buy forex options that
> would pay off big). When your home currency collapsed your debts
> would be cheap compared to your foreign currency and you'd be left
> with much more purchasing power than you started with.
>
> Regarding commodities, the collapse of an economy the size of the
> US would do strange things to supply and demand, so oil could underperform
> inflation. As far as precious metals are concerned, portability
> and security could be problematic (imagine 50lbs of metal in your
> carry-on luggage at the airport as you try to escape the country!).
> However a few coins for bribes wouldn't be irrational.

Jan 29 01:32 AM

[Allen Phatimer:]

Very nicely done - nothing like a few facts to put things in perspective. I agree with most of what you said.


On Jan 25 08:23 AM TMM wrote:

> From Mish, globaleconomicanalysis...
>
>
>
> Adam Hamilton at Zeal is predicting Big Inflation Coming.
>
> The growing legions of deflationists see an unstoppable depression-like
> deflationary spiral approaching like a freight train. They cite some
> convincing data. The stock markets have been cut in half in just
> a year. In the past 6 months, some key commodities prices fell farther
> and faster than they did in the entire Great Depression. House prices
> are down by double digits across the nation, with no bottom in sight.
> And credit is a lot harder to come by today than in any other time
> in modern memory.
>
> My Comment: Well yes, that is convincing data. Indeed a perfect 15
> out of 15 conditions experienced in the great depression are happening
> today as discussed in Humpty Dumpty On Inflation.
>
> Of course Humpty Dumpty can and does pretend that deflation is specifically
> about money supply, totally ignoring credit. And those same Humpty
> Dumpties were amazed by the collapse in commodities and were crushed
> shorting treasuries because they did not see this coming.
>
> In light of these universal falling prices, how could we not be entering
> a sustained deflationary period? The case may seem airtight, but
> I’d like to offer a contrarian view in this essay. Believe it or
> not, despite 2008’s price collapse there is plenty of overlooked
> evidence suggesting big inflation is coming. You won’t hear much
> about this on CNBC, but it could have a big impact on your investments
> in the years ahead.
>
> My Comment: I am not sure what Hamilton means by "sustained". We
> have been in deflation for about a year, and maybe it lasts another,
> or five. Then again, perhaps we drift in and out of a slow growth
> recessionary period much like Japan for a decade. We have to take
> this one step at a time.
>
> Inflation and deflation are purely monetary phenomena. Inflation
> is not just a rise in prices, lots of things can drive prices higher.
> Inflation is the very specific case of a rise in general price levels
> driven by an increasing money supply.
>
> My Comment: That last sentence puts the cart in front of the horse.
> Inflation is not rising prices; rising prices are a result of inflation
> (an increase in money supply and credit).
>
> Acknowledging that debt-financed house prices are a special case
> that may indeed be deflationary (contraction of credit), I am focusing
> on stocks and commodities in this essay. From October 2007 to November
> 2008, the flagship S&amp;P 500 stock index plunged 51.9%. About 4/7ths
> of these losses snowballed in just 9 weeks during the stock panic.
> From July 2008 to December 2008, the flagship Continuous Commodity
> Index plummeted 46.7%. Almost half of this mushroomed during the
> stock panic.
>
> Deflationists argue these price drops are proof of deflation, and
> most people today believe this. But they are only deflationary if
> they were driven by a contraction in the money supply. Stocks and
> commodities are generally cash markets. Credit such as stock margin
> can be used, but it is trivial relative to the market sizes. And
> real commodities purchased for industrial uses are paid for in cash
> or near-cash (short-term trade loans), not multi-decade loans like
> houses. So the money supply during 2008’s slides is the key.
>
> My comment: What deflationist has argued that commodity price declines
> are proof of deflation? Can I have a name? Most mainstream media
> is concentrating on prices.
>
> More to the point, no single indicator alone can constitute proof.
> However, 15 out of 15 symptoms one might expect to see in deflation
> should be ample proof for anyone.
>
> If available money to spend indeed contracted, then the deflationists
> are right about seeing deflation in 2008. But if the money supply
> fell by less than stocks and commodities plunged, was flat, or even
> grew, then deflationists are wrong. When prices fall simply because
> demand declines (too much fear to buy anything immediately), this
> is merely supply and demand. If money didn’t drive it, then it isn’t
> deflation.
>
> There is the humpty dumpty argument again. And again I reply that
> it is foolish to ignore credit (debt). Debt is actually more important
> than money simply because it dwarfs base money. And much of that
> debt cannot be paid back and that is why banks are failing.
>
> Come to think of it, I need to add bank failures to my list. That
> makes a perfect 16 out of 16 things.
>
> The key point in this rebuttal is that money supply does not have
> to shrink to cause deflation unless you insist on a humpty dumptyish
> definition that has no real world practical application.
>
> Here is a practical application: There is no money to pay back loans.
> What cannot be paid back will be defaulted on and the default avalanche
> has been triggered. Once an avalanche starts, it is impossible to
> stop.
>
> That avalanche of defaults amounts to deflation if it exceeds the
> expansion of money supply.
>
> Banks are attempting to hide the avalanche by not marking their books
> to market. Citigroup alone is sitting on over $800 billion in SIVs
> of dubious value. However pretending credit will be paid back does
> not make it so, just as ignoring an avalanche does not stop it.<br/>
>
> Hamilton goes on and on with straw man arguments about what deflationists
> believe. In practice I do not know a single deflationist who believes
> the strawman Hamilton is rebutting.
>
> Hamilton also talks about various money supply charts as if they
> are proof of inflation. Here is my rebuttal.
>
> Base Money % Change From A Year Ago
>
>
>
> Hamilton's definition shows there was massive inflation during the
> great depression, starting in 1931!
>
> Of course that is ridiculous. But it is what one must conclude if
> one defines inflation as an expansion of money supply alone.
>
> That chart shows why it is foolish to look at one indicator as proof
> of inflation. A more practical approach and a more practical definition,
> gives more practical results.
>
> Soaring base money supply is not proof "Big Inflation Is Coming"
> soon, just as it was not proof that "Big Inflation" was coming in
> 1931. There cannot possibly be any other logical conclusion when
> confronted with the data.
>
> Mike "Mish" Shedlock
> globaleconomicanalysis...
> Click Here To Scroll Thru My Recent Post List

Jan 29 01:42 AM

[tshk1221:]

I don't think we need these complicated charts and explanations to understand deflation and inflation. Deflation is the correct answer for the current situation due to the following chronogical reasoning.

1. Steep interest rate decrease (9/11 terror)
2. Historic collateral value inflation
3. Historic credit inflation (Money supply to market increased.)
4. Historic credit defaults
5. Historic credit deflation (Money supply to market decreases.)
6. Scarce dollars in the market (Dollars got stronger ever.)
8. Falling prices of goods (=> Mild deflation, We are here now.)
9. Further and further falling prices of goods (=> Hyperdeflation)
10. Prices of goods turning to negative (= Hyperinflation)

Mounting job losses and falling real estate price are the results of depleted money supply in the market.

Jan 29 07:54 PM

[guychan:]

One can use all the techno-terms out there and put any sophisticated spin to fit one's agenda, etc. Go ahead, but the bottom line is that the crisis has taken global proportions, as has the multi-layered and multi-national response(s) to it. Around the world in the next year or two, there will be mind-boggling amounts of new money being issued (in $, Yuans, pesos, yen, Euros etc) and this will flood the financials market and eventually make its way to borrowers and investors, be they individuals or organizations. When this money does reach people and organizations, they will spend or invest it. It's human nature (and in many cases it will be dictated by the issuers of the money). When that unheard-of tsunami of spending starts, I can not see any other scenario but of unlimited money chasing too few raw materials. Classic situation of supply and demand with the resultant inflation. Invest accordingly.

Jan 29 09:38 PM

[User 348115:]

Just a comain joe here. Where does the money go when you are fighting a war. Does it all majectley just reapear. And what about the trillion dollar credit card debts. Do these people have the cash just laying around in a mattress or can some where. How can you say money isnt lost and there is no real deflation? Money leaves our shores faster than we can print it. Maybe I am not money literat and my spelling lacks a little but I can't realy buy some of this sfuff I am reading. There might just be infaltion again when people start over spending there means againg. But like you say people are starting to save and pay down there debts. Maybe they are just starting to realize they can't always keep up with the jones. And they must start waking up to reality. And start live within there means. Like my father and grand father did. And they had real welth a dollar back by gold. Not a wheelbarrow full of papper. Just some thoughts!!

Jan 30 06:57 PM

[BS Flag Thr...:]

Liars can Figure but Figures don’t lie.

"EVIDENCE THAT BIG INFLATION IS COMING"

The real “inflation” here is in the gross exaggeration of the M0 DATA that this hack is presenting.

Want proof (that you can actually verify)?

His chart suggests that M0 is ~ 1.67T.

The Fed PUBLISHED M1 number for December 08 was 1.624T

Look at the tables here: www.federalreserve.gov.../

Now we know it is IMPOSSIBLE to have an M0 number higher than M1 (which is what this article suggests). Ah, your first sign that something is not right.

So next we look at table 3 (on the same page) "Components of M1"

Well, we see that paper currency is up 55b Dec 07 - Dec 08. An unamazing 7.2% increase over 12 months (avg. currency supply increases about 6% per year).

Then we see that Travelers Checks are down .8b (maybe people are traveling less). Funny, yes?

Ready for the BIG one?
Then we see that checking accounts (Demand Deposits) are up 173b. Basically this number is the reserve that the banks are actually holding. Typically this is between 305-370b (despite averaging slightly being 300 during 2008). The banks take your checking account money, send chunks of it back out into the economy (keeping these reserves just in case somebody actually writes a check). When you hear about a "run on the banks" - this is the number that gets hit. So what we have here is that banks are holding more reserves (keeping money OUT of the economy). Funny thing here is that this COULD be considered Deflationary.

BUT WHY???

No, people are not saving more.

The Fed has recently started paying (interest) banks to hold these reserves when held at central banks (saying, “hey, don't lend”). Yes, it runs counter to the goal of getting money into the economy but the gov't sometimes sends mixed messages.

Then we have Other Checkables (NOW accounts & Money Markets) are up 5b - not significant.

Oh, and by the way – if you take out the increase in reserves, you will see that, over the last 5 years, we’ve had a remarkably boring M1 number (up about 100b) – yes, all the way through December 08.

Now, I can’t speak for the motives of this author (he is trying to SELL you a report), but I can say that the numbers are WAY off which really makes his assumptions (based on the numbers) IRRELEVANT.

Maybe he gets his advice from the other lady here that said to buy $DRYS (the biggest turd stock of the decade).

Feb 01 05:18 PM

[Rock Johny:]

I subcribe to the notion that most of the TARP money is falling into a black hole, 'good money after bad' and that unless major discipline is levied on all levels of corporate and banking management> making many heads roll, no real change will take place and the true end of this mess will be nothing less than the destruction of America. No amount of economic theorizing can pick up the slack created by entrenched & institutionalized thievery with even government bodies (governed by corporate cronies), such as the SEC, in full collusion. That fact alone means no real change will take place.

The system is broken and the rotten fruitage of our Gordon Gekko- minded elite will have to be eaten by all levels of society. Stimulus checks and tax rebates only buy time for these elitists to run for cover before the roof falls in.ciety. Stimulus checks and tax rebates only buy time for these elitists to grab their bonuses and run for cover before the roof falls in.

Feb 05 06:21 AM

[User 351373:]

Inflation Watch. Here is some interesting bits. In Connecticut, the governor just held a press conference about taxes. She stated she is not raising them, HOWEVER and this is IMPORTANT BEYOND BELIEF, she is DOUBLING the cost of FEE's the state charges. Drivers License, Plates, Exams, Applications, etc. At the same time, I know of at least 5 people who are laid off and can not find work (they had GOOD jobs too). Lets see, in my own microcosm here, rising unemployment, doubling of prices that are non-negotiable. Sounds like what we have now, is the calm before the storm. We havent seen nothin yet!!!

Feb 05 07:42 AM