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"Misguided Inflationistas?"

|Includes: FXE, IEF, iShares 20+ Year Treasury Bond ETF (TLT), UUP

Mish had a blog post yesterday in which he referred to "misguided inflationistas".  This is another of the financial geeks that I like, d Boy though he is.  He joins Rick Ackerman, Bob Prechter (uber-D) and others in being okay in my book, even though they lock and load the deflation argument in what is probably an often painful way for many who follow the analysis to the letter of the law.

"I repeated the above headline in bold for the benefit of misguided inflationistas everywhere who confuse rising commodity prices with inflation when there is literally no passthrough to consumer prices."

Inflation has nothing to do with prices - whether of commodities or consumer goods - so I fail to see why this matters.  And I would dispute that many of the more vital consumer goods are 'deflated' anyway.  Food, for example.

And here is Mish, setting this straight:


"If that was not bad enough (and it is), the fact of the matter is inflation is not about prices at all but rather about the expansion of credit.

Small businesses [in] general do not want it or need credit to expand. Indeed, the very last thing on their minds is expansion. The first thing on their minds is lack of customers and inability to pass on costs.

This folks is clearly deflation in action and it is what the Fed is fighting with a misguided Quantitative Easing strategy.

Fighting deflation and winning the battle are two different things!"


Except  that inflation is not solely about the expansion of credit; it is about the creation of money with no backing in productivity or value.  This is the old 'velocity of money' argument that d Boys make and I think that as long as artificially created money is not moving, there will be huge risks of utter meltdowns - or deflationary 'events', but the money (funny munny) is there, it has been created and it will eventually seek out valuable or productive ends.  In short, it will seek to transform itself from paper (and digital entries) willed into existence, to something tangible.  

This, in my opinion is how the creation of false money is helping to finance the global build-out, first in the transitional precious metals and secondarily in valuable resources so vital to growing economies which just happen to have the reserves to spend on said resources.

Along these lines, as you may know, I own a productive business that makes actual things that are used in vital (medical) applications.  We do have pricing power - for the first time ever (in my career) and while the leveraged, valueless things of the previous economy are subject to declining prices, things of value currently are not.  I believe there is a good chance that this is because of changes going on globally as capital flows to the resourceful and productive.  Sitting in T Bonds as an investment - per boilerplate d Boy dogma, could be a real sucker's game.

The post goes on to talk about another of the growing contingent of 'bad cops' at the Fed (joining Bullard and Yellen), Thomas Hoenig and again lectures that deflation and inflation are not declining and rising prices and that these descriptors are defined rather, by whether or not credit is expanding.  Mish is one of the debate's heavyweights and spends much more time on traditional economics than little old me, with a marginally popular blog and a bunch of charts and indicators. 

Being an id Boy, I can take common sense from both camps but really, the compelling arguments launched from each side ultimately sound like mental masturbation because I think that while the two forces battle for the winning ticket in the macro economic guru sweepstakes, the art is found in the vast space in between these ideologies.  Like in the space between the two blue lines for example.



Ben Bernanke loves the ongoing battle between the diametrically opposed financial eggheads.  He and his policy live in that middle ground, and as long as this continuum remains intact - with its implied (real, imagined or compelled) confidence in the long bond - we will have the ongoing debate between the d & i Boys and Girls while the whole time, speculators with a bullshit detector will simply play the spread.


Disclosure: No positions mentioned