Gotta love those inflationists! We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991. That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.
And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air. Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold. We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’ worth of unpayable debt from the world’s books.
Failure Begets Even More Debt
But don’t believe even for a minute that this will occur in time to save eighty million U.S. homeowners who are, or eventually will, be underwater on their mortgages. That’s the kind of inflation the Guvvamint has been trying to promote since the housing market began to implode in 2007. The effort has clearly failed – not that the inflationists would have noticed – and the trillions of dollars we’ve blown in the process now sits on the ledger as yet more debt that can and will come back to haunt us.
As for the chances of a hyperinflation in the real estate market, you need only consider who would come out on the losing end to understand why it’s not going to happen. Lenders, savers and the supposed Masters of the Universe would perish overnight. And that’s why we continually chide the inflationists, admonishing them to wake us when we can sell our home for a quadrillion dollars. Imagine going to your mortgage lender with a suitcase stuffed with confetti money. Fat chance. More likely is that mortgages will ultimately be rewritten to resemble leases. That way the lenders will not have to evict half of America from their homes, even if this means the banks and their shareholders will be forced to settle for 20 or 30 cents on the dollar.
You Must Read This!
All of which brings us to Ron Hera’s pellucid essay at GoldSeek, “Into the Abyss: The Cycle of Debt Deflation”. If you’ve got time to read just one essay on the economy in 2010, make it this one. He sets the tone with a quote from Ludwig von Mises: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” We especially recommend Hera’s think-piece to those who believe that just because their monthly expenses have been rising, we are actually in an inflationary spiral. We’ve referred to this in the past as “grocery store inflation,” but Hera puts it in proper perspective, ticking off a long list of black-hole deflators including high unemployment, shrinking real incomes, rising personal bankruptcies, soaring mortgage defaults and delinquencies, and a growing wave of credit card defaults. There are also enough hard statistics to bury the astounding lie, repeated often by the news media and politicians, that the economy is recovering. Most recently, for example, we were told that consumer credit had turned the corner and begun to expand. In fact, as Hera notes, consumers have stepped up borrowing to pay off old borrowing. Scary.
This essay is an eye-opener and a must-read. We can’t recall reading anything on the topic of inflation/deflation that has gotten so many things right.