Last week I was in an inflation vs. deflation debate on Financial Sense with Daniel Amerman. The debate was moderated by Jim Puplava. It is a credit to Jim that he is willing to entertain both sides of an argument even though he himself is an inflationist.



Amerman took the inflation side, and of course I took the deflation side.



One of the main rules of any debate is to agree on definitions. In this case, there was no agreement.



I believe inflation is an increase in money supply and credit while Amerman considers inflation to be a purchasing power phenomenon. This lead to different opinions as to whether or not we are in deflation.



Furthermore, as with any audio discussion, there was an inability to point to charts or written material to make a case.



Let's now explore some of the issues that came up in the debate starting with Amerman's post Puncturing Deflation Myths



Japan & “Where’s The Beef”?



As discussed in Part One, someone who had attended one of my inflation solutions workshops asked me to debate deflation theory with him. I said “fine” but with one condition: before I would debate theory, he needed to first provide a real word example of this problem actually having happened. Could he answer this simple, real world question:



Name an example of a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?

Six Fallacies

Fallacy One. The belief that a “dollar” is a “dollar” and that the deflationary history of gold standard currencies applies to symbolic currencies (an “apples to oranges” fallacy).

Fallacy Two. The belief that the US Great Depression proves the case for unstoppable monetary deflation during depressions, when it in fact proves that a sufficiently determined government can immediately break monetary deflation at will, even in the midst of depression.

Fallacy Three. The belief that inflation and deflation take wealth from all of us equally, when what they actually do is redistribute the wealth among us.

Fallacy Four. The widespread belief that Japan experienced powerful price deflation that the government was powerless to fight. It didn’t.

Fallacy Five. The fundamental mistake of thinking that “deflation” is “deflation”, which leads to confusing price deflation with asset deflation, and means missing the real lessons and dangers of what happened in Japan, which is the persistent asset deflation that has defeated all government interventions (another “apples to oranges” fallacy).

Fallacy Six. The dangerous belief that deflation protects you from inflation.

Collapsing credit availability and the resulting collapsing money supply leading to an unstoppable and rapidly rising value for a symbolic currency (price deflation) is a popular theory – but it has never happened in the real world.

What Does and Should the CPI Reflect?

What's the Real CPI?

Case Shiller CPI vs. CPI-U

CS-CPI Year over year has now fallen for 8 consecutive months and 11 of the past 15. High Year over year comparison data points for the next several months will likely result in CPI deflation coming in at -7% to -8% in the coming months.

Closer Look At "Uncontrollable"

Is Bernanke a Wizard?

Money Supply Argument

Rate of Change In Monetary Base

Nikkei Stock Index

Humpty Dumpty On Inflation

Practical Definitions Of Inflation And Deflation



Most know my definitions by now but here they are again for convenience.



Inflation is a net increase in money supply and credit.

Deflation is a net decrease in money supply and credit.

In both cases credit must be marked to market to make any practical sense out of what is happening. Those who focus solely on money supply cannot easily explain stock markets that have fallen in half (this does not happen in disinflation), TIPs yields, a global race to ZIRP, or many other events that are happening.



Humpty Dumpty Defines Inflation



Unfortunately there are many definitions of inflation and deflation strewn about. Some play the role of Humpty Dumpty changing meanings at whim, switching from commodity prices, to consumer prices, to expansion of base money or M3 or whatever measure of money seems to be expanding at the fastest rate.



Some do the inflationista two-step to avoid admitting that we are indeed in deflation, choosing instead to call it "disinflation"





In short: "We are going to have a period of deflation that we will instead call disinflation."



'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.'



'The question is,' said Alice, 'whether you can make words mean so many different things.'



'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'





Base Money % Change From A Year Ago

Be Mindful of the Fed

A Practical Look At "Flation"

Symptoms vs. Definition

symptoms

Mish Treasury Calls

Kass Says Sell Bonds Short.



Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.



Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.



There is no bubble in treasuries if you look closely at the fundamental issues. Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.

Those focused on the CPI failed to see any chance of the Fed Fund's Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.



In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

Comparison To April 1930

S&P Weekly Chart December 2005 - Present

Dow Weekly 1928 - Spring 1930

Looking Ahead

Japanese GDE from the 1989 peak to Present

US GDP 1999 peak to Present

Discussion of Unfunded Liabilities

Can Government Inflate the Debt Away?

Do the Symptoms Match the Definition of the Disease?