Chicken Little Inflationists

Includes: COIN, GLD, SLV
by: Sean Weston

Ever since the recession of 2008 the predictions have been pouring in. Not just of elevated inflation, but hyperinflation.

Many of the individuals making these predictions are frequent guests on American financial news channels. Examples include:

  • Marc Faber predicting massive wealth destruction and hyperinflation
  • Peter Schiff predicting Zimbabwe style hyperinflation
  • Ron Paul predicting hyperinflation and the dollar losing its reserve status

There are many more examples. The major flaw in their arguments, of course, is that it never happened. It never even came remotely close to happening. What exactly is the definition of hyperinflation varies; many peg it at the inflation rate reaching 50% in a month.

According to the CPI, here is what annual inflation has been from 2008 to present:

Core inflation shows this:

In no single month did inflation rise higher than 5.6%, which was July of 2008. In addition there were plenty of months during 2009 where what we had to contend with was deflation.

The two popular replies to these stats being pointed out are:

  • Much like with Harold Camping's latest prediction on the forthcoming apocalypse ending up wrong, the date of impending doom will simply be moved forward
  • They claim the "real" inflation numbers are much higher than let on officially by the government's statistics

To be fair with the first point, the event not coming to fruition yet isn't necessarily indicative of the basis for it being wrong. After all, many people have warned of market bubbles and were "wrong"…until they turned out to be right. But as with any extraordinary claims, they require extraordinary evidence. The burden of proof is on them.

Much of what is offered has to do with some combination of Obama/Bernanke "turning on the printing presses." When looking at base money, it has in fact soared.

The reason this hasn't led to inflation is simple. The velocity of money has collapsed. But does inflation have to happen eventually? Have we simply managed to stave off the inevitable for a time? No. A fairly synonymous recent example is Japan slightly before and after the turn of the century. Consumer prices still fell despite the large monetary expansion.

The second point can be refuted by the fact that there are non-governmental sources for inflation data. A fine one is the Billion Prices Project at MIT. Their results? Not too different from what the CPI tells us. After 5 years they remain within a percentage point of each other.

While the difference does illustrate the inexactness of measuring inflation precisely, they do paint a similar enough picture that someone attempting to state inflation is exponentially higher really has their work cut out for them.

That isn't to say there isn't a legitimate sense that everyday purchases are consuming more of people's money than our inflation numbers are letting on. Dreadfully stagnant wages coupled with un/underemployment are the culprit, however. Not incognito inflation.

Chicken Little Motivation

While there are those dogmatic, libertarian ideologues, there are two more insidious areas of motivation behind this. Both are based on exploitation. A fear-based political agenda, and/or fear-based marketing.

Politically, it remains a story of validation in a bipartisan environment. Cries of "inflation!" are a simplistic, easily digestible, and feared thing to relentlessly throw out there. Especially since it is either indefinitely coming any day or lurking in the shadows, it operates as a nice bogeyman. As "loose money" is the current policy they wish to condemn, adopting a sudden "hard money" stance (despite silence when deficits were being run up in prior administrations) is a nice antithesis to stand behind.

For marketing purposes, consider the example of the Wiedemer brothers. Their predictions include 50% unemployment, a 90% stock market crash and 100% annual inflation. Bold claims! They claim these predictions, which were published in a book they wrote, are responsible for some $100 million in assets flowing into investment vehicles they are associated with. Clearly doom and gloom is a very, very lucrative business.

It also makes for good TV. There is a stark divide between what is given airtime and what the vast majority of economists stand behind.

Very often those peddling inflationary fears have attached to their claims calls for SPDR Gold Trust (NYSEARCA:GLD), Ishares Silver Trust (NYSEARCA:SLV) or their physical variations being great places to pile your money into. Kryptonite to evil inflation lurking in the shadows. Those same people making claims of outrageous future inflation levels can also be found making outrageous claims on where the price of precious metals are headed. To stir publicity they'll even tout a future return to the gold standard, which has about zero actual support from serious economists. Anil Kashyap has a succinct summary on the issue, stating:

A gold standard regime would be a disaster for any large advanced economy. Love of the G.S. implies macroeconomic illiteracy.

While some of the zeal has been sucked out of precious metals as infinite price appreciation failed to materialize, that hasn't deterred those vulnerable and gullible from getting behind another chicanery. This time in the form of [[BITCOIN]].

The dollar isn't exactly collapsing:

(click to enlarge)

So why such excitement in something which is almost infinitely inferior in facilitating transactions? I think when you get down to it, it's more a political statement than anything based on sound economic reasoning. One of mistrust in the established financial systems. Created in the environment cultivated by the Chicken Little Inflationists.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.