Self-Proclaimed 'Inflationista'

Michael Panzner has just written a piece highlighting Mike Shedlock's blog post, which itself centered around a letter Mish received from a 'former member of the hyperinflation is coming crowd'.

I have received emails recently from readers about Mish's views on deflation. I guess he could be described as a 'deflationist', as could Michael Panzner - whose work we value and regularly publish at biiwii.com - and of course Robert Prechter, a man who I have noted many times was a strong influence on me; especially after I read Conquer the Crash in 2002. These are all very smart and thoughtful men.

So with all that said, I do not take Michael Panzner's 'Inflationistas Coming Around' lightly. I have permission from Mr. Panzner to publish anything of his that I find of value and in this piece I find lots of value because it gets to the heart of the matter; it gets to the definitions of inflation and deflation. If you believe inflation is rising prices then of course you believe deflation is declining prices.

Here is a three year old email I sent to Rick Ackerman - reprinted on his site - in response to a provocative article Rick wrote on deflation. It gets to the heart of why I am one of the 'Inflationistas'. Especially these lines:

In my view, the inflation game is played against the deflationary impulse or need to correct. It is the Fed and other forces pushing on a string, and one day they will find the string simply goes limp and all the inflated chickens will then come home to roost...

"deflation (at least in capital flowing to the US manufacturing sector) has been a good thing, driving progress and productivity; but it [deflation] has been perverted in recent years/decades to the point where it is cast as bad, while inflationary policy is cast as good...

Deflation is a wellspring of progress and resulting lower prices that has been poisoned by the easy money crowd.

The national (and global) front porch is loaded with chickens. Clucking, confused, bloated birds with nowhere else to go. The Fed is 'pushing on a string' and talk of deflation is growing by the week. In a genuine deflation 'scare', this needs to happen. But when you define inflation as increasing money supply - similar to that which Mr. Greenspan promoted earlier this decade, then that 'pushing on a string' can only be inflation, regardless of what prices on most goods and services do. The Fed is inflating and global policy makers stand ready to fight the dreaded forces of deflation (in prices) as well, although many developing regions are still dealing with the effects of the last inflation - booming prices.

Recall that Greenspan's inflation regime took some time to take hold (credit and housing bubbles) and it is far from a sure thing that today's policy makers will be successful in keeping the bubble economy alive. But that does not change the fact that we are in for a whopper of an inflation cycle. It's all in how you define inflation. If the Fed is successful, gold will pick up on it before positively correlated (to the economy) commodities and then under-perform as it did in the middle of this decade. If the policy does not succeed, the collapse predicted by the 'deflationistas' will indeed visit us, in which case there will be a continued mad scramble for liquidity, which means cash and gold. And one of those two will actually have intrinsic value in such a scenario. But the point is that there will be massive inflation (by policy) even as the collapse in credit and general liquidity continues.

I am not a gold bug. I would much rather be a sound 'US economy bug'. In fact, there are productive segments of the US economy that are faring relatively well and benefiting from inflationary policy even as the US financial sector, arguably the former beneficiary of the greatest bubble (in confidence) of all time, continues its collapse. This is a confusing time. This is not a drill. It is time to get this right.

Comments

[iThinkBig]

One positive, the immense negative rhetoric means it's almost time to buy tangible things besides just gold like real-estate and hold them for five years. Unless Russia and the Middle East literally own the United States of America somehow then guess what? Even at collapse these properties will one day rise again. I am buying place up in the White Mountains in Sept/October. Lake front, beautiful and cheap! Thing is, it will also serve as a back-up place if the fiscal house of cards collapses. Anarchy would follow quickly with looting and other nastiness while citizens await wheat pasta rations and yellow cheese. Katrina and New Orleans is a good example of being in a major city and waiting for the Feds to show up. This would be more like weeks of waiting for food and clean drinking water, never mind medical supplies. If it all works out fine and this is deep recession, GREAT! I will have a nice vacation property that will triple in value in a decade.

[Did U ThinkThe PonziSchemeWould Last?]

There is no need for a religious war over inflation / deflation because what is happening is obvious: stagflation. In other words, inflation of assets which have not previously bubbled to meet the falling asset prices of the bubbled housing market. In other words, housing valuations walked away from the valuation of commodities in terms of commodity per square foot. Now we need to find a new equilibrium. Housing will not come all the way back down to where it needs to come unless we get the great depression 2.0, and Ben B will do whatever it takes in terms of inflation to avoid that. Thus, nonbubbled assets need to play catch up. Thus the cost of living will continue to increase until we reach that equilibrium.

At the same time, workers have been benefitting from the cheap and easy money of the past 2 decades. Salaries have gone up significantly, especially in high tech and finance, both of which are still bubbles. Salaries will now revert to the mean.

The net is that workers will get paid less and will have to spend more for the basics. They will be able to save less and retirement will become less of an option for anyone. At the end of the day, the elitist uniparty (for the GOP and DEMs are no different from each other) will have a hungry and willing yet dumbed down labor force to exploit just like communist China. Every employee will need some form or help or subsidy from "the system" and will thus be disinclined to complain or revolt.

What could change all this would be black swan events like world war or the loss of the US dollar as the world's reserve currency. Such events could awake the apathetic US citizen and provide them the impetus to throw the bums out retake the country. However, if people watch their wealth slip away over time it will be the proverbial frog in hot water. They will indeed wake up one day to find that the inflating and deflating of the currency has left them poor and homeless on the continent conquered by their forefathers. They will also find that the Uniparty has merged the once great USA with Canada and Mexico in order to lower the overall standard of living and create the powerless worker class so sought after by elitists slave owners throughout recorded history.