We backed off the inflation/deflation debate a few months ago when we started feeling sorry for the inflationists, who seemed hopelessly out of touch with the real world. As far as we were concerned there was nothing to debate, since, other than what we’ve referred to as grocery-store inflation, no evidence existed that prices were about to rise, let alone explode. That is still true. What on earth could they have been thinking? It should have been clear enough that the monetarists needed to revamp their outmoded theories after rampant easing in the wake of the S&L debacle 20 years ago failed to generate any meaningful inflation at the consumer level. What we got instead was a new strain of “good” inflation that seemed to benefit everyone. Indeed, few complaints were heard from homeowners whose properties were increasing in value by 15% or more per year, nor were financiers whining about the soaring collateral values that made it possible for them to leverage $60 trillion worth of global GDP into a derivatives edifice with a notional value exceeding $600 trillion.
And now we’ve got the “bad” kind of deflation, with a moribund housing market that has so far failed to respond to trillions of dollars worth of intended stimulus, either direct or indirect. Freddie Mac, for one, has nearly tripled its book, filling the shoes of all the profligate subprime lenders who nearly took the financial system down a couple of years ago. Thus, rather than gearing the mortgage market toward precipitous failure, the government has been dribbling out subsidies of $10 billion to $15 billion to the GSEs each quarter that we hardly even notice any more.
Hyperinflation, But Too Late…
We’ve made this point a hundred times, but we will make it again: Hyperinflation is coming, for sure, but it will not likely come in time to bail out the scores of millions of homeowners in the U.S. whose mortgages are underwater. So any time you hear an inflationist blather on about how the Fed ultimately “won’t let deflation happen,” make him explain what the implications are for mortgage debtors. For if borrowers are to skip and go naked, so to speak, that implies that the likes of Goldman Sachs, J.P. Morgan, B of A, Wells Fargo and their respective bondholders and shareholders will take a bath. Somehow this doesn’t sound quite right to us. In any case, with reports yesterday that consumer inflation hit a 44-year low, and considering Europe’s ongoing deleveraging of their books into a deflationary bog, we can appreciate why the inflationists have had so little to say lately.