Allen Phatimer

Evidence That Big Inflation Is Coming

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&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

Evidence That Big Inflation Is Coming

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.