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Mish Shedlock, other than engaging in an online battle of economic punditry with Peter Schiff, wrote an article at the very end of 2008 attempting to sum up the arguments for and against inflation in the US.

His core argument was that the rapid expansion of the Fed's balance sheet was not going to be inflationary in the face of the much larger contraction in credit that is still ongoing. He listed a series of indicators that were meant to be a scorecard of the deflation versus inflation debate, which at the time, they all agreed that the direction was deflation (by his scoring not mine, but I am not arguing with his point).

  1. Falling Treasury Yields: At the start of 2009, the 1 month bill yielded a measly 0.04, rising until in mid-February they were at 0.26. However, a leg down and up in the market later, and they are back down to 0.10 as of the time of this writing. Overall yields for Treasurys are still low by historical standards, but not necessarily falling. Edge: Deflation
  2. Falling Home Prices: Federal programs, foreclosure moratoriums, and other stop-gap measures have been tried, but prices still continue down. Large "shadow inventory" and huge number of underwater homeowners suggest no near-term recovery. Edge: Deflation
  3. Rising Corporate Bond Yields: A really great run for the first half of 2009 has pushed the yield on corporate bonds down significantly. Though there is still expected to be 14-16% default rate (says MS), it was much worse around New Years. Edge: Inflation.
  4. Rising Dollar: The dollar has been all over the place, rising strongly to start the year, big fall in late-Feb, fought back up by early April, then another big drop until the beginning of June. Right now, lower than it was for most of the last 12 months, but higher than the 12 months before that. Edge: Inflation.
  5. Falling Commodity Prices: S&P GSCI is up 25% in just a quarter, but year to date commodities are only up 6.5% and down 60% YoY. Edge: Deflation.
  6. Falling Consumer Prices: CPI is zero or negative for most categories, and the Case-Schiller CPI is negative for many months now. Edge: Deflation.
  7. Rising Unemployment: Even an optimistic White House admitted 10% is a certainty and rising to 12% is not out of the question. Edge: Deflation
  8. Negative GDP: GDP will contract sharply in 2009, and consensus is for a feeble 2010 with minimal growth. Edge: Deflation
  9. Falling Stock Market: Still way down YoY, but essentially even YTD. Plunge in early March to 12-year lows, but huge rally since. Hard to call it falling, but much wealth has been destroyed. Edge: Push
  10. Falling Credit (Market to Market): Credit card default rates, home foreclosures, and commercial real estate troubles will all cause significant losses that are not yet realized. Though banks have been made to hold reserves against these, there would be more losses were the loans marked to market if sold to investors now. Edge: Deflation
  11. Spiking Money Supply Percentage Wise: Not sure that this is actually an indicator of deflation, but it is assuredly the Fed's prescription for the liquidity issues of many banks. Since this did happen during the Great Depression, Mish marks it down as deflationary, but inflation proponents believe that this is the very cause of inflation. Banks clearly aren't lending it, but nothing would stop them from doing so. Since we can't have it both ways, I'm going to call this as push as well. Edge: Push.
  12. Banks Hoard Cash: As per the requirements of regulators (and just prudent business in a recession), banks are selling assets, holding large reserves against potential losses, deleveraging loan portfolios, and making fewer loans. Edge: Deflation
  13. Rising Savings Rate: Went from below 1% (2005-2008) to over 4% in Q109. Attitudes have changed, making it less likely to return to the low rates of the mid-2000s. Edge: Deflation
  14. Purchasing Power of Gold Rises (relative to other commodities): Since the collapse of oil prices in Mid-2008, gold has risen in value versus other commodities. Gold has held strong, and the ratio has yet to move anything close to the lows of ~7g/bbl. Edge: Deflation
  15. Rising Number of Bank Failures: FDIC has shut down 40 banks so far in 2009, and there is likely no end in sight for small to mid sized banks that can't get TARP money or access to the liquidity facilities. Few expect this trend to end soon. Edge: Deflation

Total Score: 11-2-2 for Deflation, but not the 16-0 of December 2008.

Clearly, many of the actions of the Fed and Treasury would be very inflationary under normal conditions of full employment, economic growth, and well-functioning global trade.

But that is assuredly not the case now, and until many of the indicators he listed turn to the positive, I expect that we will feel the effects of deflation or at least very low inflation.

For all of the efforts to expand the monetary base and jump start lending, the individual decsions of households and companies will continue the contraction in credit, leading to a net decrease or at least minimal growth in the overall effective amout of money (currency plus credit).

Source: Mish Shedlock's Inflation Scorecard: June 2009 Update