Tuesday, September 18, 2012

Inflation or Deflation?

"I'll take Economic Catastrophes for $500, Alex". 

"The answer is, ' QE3 and the current depression ends in this' ".

H/T to Bayou Renaissance Man for the tip to John Mauldin's "Outside the Box" newsletter (PDF).  In it, Mr. Mauldin argues that we are going to face a deflationary collapse.  In it, he quotes Harry Dent (video ad) saying we are going to die of deflation and the Fed won't be able to control it. 
Most of you reading this expect inflation in the years ahead, right? Well, I don't.  In fact, I am firmly in the deflation camp. 

Just think about it.  What has happened after every major debt bubble in history?  What happened after the 1873-74 bubble?  Or after the 1929-32 bubble?  Did prices inflate or deflate? 

We got deflation in prices ... every time.

This time around, with the latest bubble peaking in 2007/08, the outcome will be exactly the same. There is deflation ahead. Expect it.  Prepare for it.
It shouldn't be a surprise that the collapse of a bubble is deflationary.  The image of collapsing a bubble itself brings deflation to mind.  Dent goes on to claim that the deflation is the result of things we've talked about here: the cycles of spending at different times in life, and the retiring baby boomers.  He says the private sector is getting out of debt as fast as it can, and there's more private debt than public.  And he thinks deflation will happen no matter what the central banks can do.  He specifically argues that these generational patterns are what killed the housing market and are what are keeping it from recovering. 
Basically, his deflationary argument is Bernanke's and the central bankers'.  They feel the only way to prevent the deflationary collapse is to inflate our way out of it.  Create so much money that they can restore the housing prices through price inflation.  They don't count/don't care that they'll raise the prices of food, energy and everything else.  They don't count/don't care about the horrible toll it will take on savers.   

So the question is simply whether an unlimited amount of monetary creation can prevent the deflation.  It really is an unlimited supply of currency they can create.  They don't have to buy ink and paper, they just need to add decimal places in a microprocessor that can support very, very big numbers.   I can imagine pretty big numbers.  Those numbers won't change the value of things, but the prices can be manipulated pretty much at will. 

While his arguments are interesting, and I have to agree with much of what he says, I think the only thing we completely agree on is that the central banks can't save the economy or prevent the coming global economic collapse. 


  1. It will be both. Simultaneously.

    Virtually all assets will deflate - real estate, stocks, bonds, vehicles - etc. - while commodities essential for sustenance will skyrocket.

    The fed et al will stop at nothing to re-inflate the burst balloons - but it will not work. As has been shown.

    But that is just my opinion - YMMV.


  2. "I'll take Economic Catastrophes for $500, Alex".

    "The answer is, ' QE3 and the current depression ends in this' ".

    "What is the wavefunction is multiplied by its complex conjugate?"

  3. Yes, deflation will occur... in terms of Gold, and specie currency. Deflation absolutely will not occur in terms of USD/FRNs, Euros, Yen, or Fiat currency. To expect otherwise is completely contradictory with economic history, and contrary to the incentives structure of the power players. Central Banks and Governments are in a hyper inflationary trap. Once a nation reaches a certain point, they cannot change course, it's like a black hole, once you cross the event horizon, you are no longer traveling /acting to move toward the hole, it pulls you in. The Fed is no longer in control, they are compelled to print. They cannot allow currency deflation to occur, because that would require honesty, and would destroy the banks, and would very likely put their own selves in danger from the same. Inflationary policy keeps the banks alive short-term and enriching the bankers before hyperinflationary collapse, or currency restructuring is forced upon them. Deflation can be stopped in it's tracks immediately by printing infinite amounts of money, just as FDR did in the 30s (de-pegging gold). He stopped it in it's tracks. Deflation has IMMEDIATE and CLEAR consequences and causation to all people, inflation has diminishingly good short term consequences and potentially disastrous consequences LATER (most importantly).

    The incentive system is what matters. "Qui Bono" In deflation, the savers win, in inflation the monied interests win. That's most important.

    To believe in USD/FRN deflationary collapse, is to believe in something that has never happened in recorded history, and in fact, the opposite. As long as there are humans able to create more currency or debase what exists, those currencies will debase/inflate. Additionally, it's a hell of a lot easier to debase a currency when it only exists digitally (no coin or paper). That is why of all the hyperinflationary episodes, most have occurred since the 20th century. Hyperinflation is a modern problem.

    You're and engineer... Look at the historical empirical data, it's pretty clear. There have been 29 recorded hyperinflations in history, 28 in the 20th century, one, the french revolution earlier.

    I highly recommend you go read:

    Monetary Regimes and Inflation - Peter Bernholz
    This time is Different - Reinhart, Rogoff
    Dying of money - Jens O'Parsson
    everything at "fooledbyrandomness.com" and all Taleb's books
    Human Action - Ludwig Mises