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Evidence That Big Inflation Is Coming

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!
>

Evidence That Big Inflation Is Coming

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?

Hedge Fund Redemptions May Crash Q1 Markets

There have been massive hedge fund redemptions--the debate centers around how much more is coming.

Question: what about redemptions from private equity firms? Won't this have a negative effect on equity markets?