Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.



Prior to the Great Financial Crisis I had a bet with "Heli-Ben", a staunch hyperinflationist who insisted we would hyperinflation before deflation. I won the bet but have not yet received my prize, a "crying towel" from "Heli-Ben".



By any rational measure, and certainly by my definition, the US went into a period of deflation lasting at least a year. Deflation ended in March of 2009.



In the wake of QE II hyperinflationists again started preaching about hyperinflationary crashes. Once again, and with increasing intensity, we heard things like ...





The US is Zimbabwe

No food available at any price

Oil is going to $200, then $400

Excess reserves will pour into the economy causing massive inflation

No one will be willing to hold US dollars

Treasury rates are going to the moon

The US dollar is going to zero



Definition of Terms

Inflation

Deflation

Hyperinflation

Price Myopia

Role of Credit in Inflation

Fed Ignorance

Humpty Dumpty on Inflation

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.'



It appears that the deflationista camp is incapable of comprehending a model, and the events that it forecasts, that lays out a two step process. For some reason they cannot grasp the fact governments will respond to disinflation with inflation, that the impact of those interventions is not instantaneous, and that markets historically are not very good at foreseeing the change in inflationary conditions in either direction.



Not quite. Rather it appears that some who suggested there would never be deflation are gracefully attempting to back into it, and indeed going out of their way with a two-step to pretend it is something else.



Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it.



Humpty Dumpty on Inflation

Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it.

every

Humpty Dumpty

Symptoms of Deflation

Falling Credit Marked-to-Market Falling Treasury Yields Falling Home Prices Rising Corporate Bond Yields Rising Dollar Falling Commodity Prices Falling Consumer Prices Rising Unemployment Negative GDP Falling Stock Market Spiking Base Money Supply Banks Hoarding Cash Rising Savings Rate Purchasing Power of Gold Rises Rising Number of Bank Failures

Scorecard





1- Falling Credit Marked-to-Market

direction

$BKX Banking Index

Bank of America (BAC) find itself increasingly under suspicion from investors, as it continues to choke on its acquisitions made during GFC, Phase 1. Readers may recall our comments on the take-over of Countrywide by BAC – at the time we noted that in our view, the takeover was done because Countrywide was one of the biggest counterparties of BAC. By taking it over, the losses that would have come due on occasion of Countrywide's bankruptcy could be swept under the rug. Moreover, BAC had invested a lot of money in Countrywide and strove to make it appear as though these investment had been wise. That the then management of BAC paid such a high price in the takeover was clearly a dereliction of its fiduciary duties. It could have gotten the carcass a few weeks later for next to nothing. Instead it decided to pay a high price for what has likely turned into a sheer bottom-less well of losses. This was then topped off with the acquisition of Merrill Lynch, likely at the behest of the administration – again in order to avert what would likely have become a major bankruptcy otherwise. If this reminds you of the story of Creditanstalt in the early 1930's, we say it should. BAC appears to be on the brink again. Its new management keeps saying that no new capital will have to be raised and that the bank's 'fundamentals are strong', but since it continues to sell 'non-core assets' at a fast clip, it evidently does need more capital. The market's verdict is rather worrisome.

Nothing Fundamental Ever Changed

2 - Falling Treasury Yields

Yield Curve as of 2011-08-10

click on chart for sharper image

Shades of Japan

3 - Falling Home Prices

4- Rising Corporate Bond Yields

5 - Rising Dollar

6 - Falling Commodity Prices

Producer Price Index Finished Goods

Producer Price Index Intermediate Goods

Producer Price Index Raw Goods

$CRB - Commodities Index

7 - Falling Consumer Prices

8 - Rising Unemployment

Employment

Unemployment Rate

Household Data

The number of people employed fell by 38,000!

9 - Negative GDP

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.

10 - Falling Stock Market

$SPX Daily

11 - Spiking Base Money Supply

Base Money Supply

12 - Banks Hoarding Cash

Excess Reserves

Excess Reserve Money-Multiplier Theory is Fatally Flawed

13 - Rising Savings Rate

14 - Purchasing Power of Gold Rises

Gold is money Gold is in the senior currency rises in value in deflation. Gold, as money, would would benefit (rise) in response to Fed actions to defeat deflation by printing fiat money.

15 - Rising Number of Bank Failures

Doctor, Doctor Gimme The News

Who Called This?

To my knowledge, no school of economic thought predicted all of the major trends back in, say, January 2008. The conventional Keynesians employed at the White House and in major forecasting firms were completely wrong about the Obama stimulus package. The "crowding out" Chicago School types were completely wrong about the deficit's impact on interest rates. People like Peter Schiff (and yours truly) were completely wrong about consumer price inflation in 2009 and 2010. The "quasimonetarists" (who blamed Bernanke for his allegedly tight money policies) and Paul Krugman were completely wrong about gold and silver prices, and arguably about the fragility of the "recovery" in the stock market.



Over the last two years, I have gotten perhaps dozens of requests to "deal with" the deflationist approach of Mike "Mish" Shedlock.



Mish's Framework: Credit, Deflation, and Gold



A good summary of Mish's views comes from a September 2010 blog post — it was this one that spurred me to write the current article, egged on by a reader who enjoys both Mish and my own work. Mish writes, Day in and day out I hear it from readers who insist that we are not in deflation and will not be in deflation because prices are rising and continue to rise. … Such comments come from those who are not thinking clearly about what's important. Here's why: In a fiat credit-based financial system, when credit is plunging businesses are not hiring. There are currently 14.9 million unemployed who want a job but do not have a job because businesses are not hiring. … This is all related to the ongoing credit contraction.

When credit is plunging so do yields on treasuries and in turn yields on savings accounts. …

When business earnings are under pressure or when business owners face uncertainty over consumer spending trends, businesses cut back on benefits, especially health care. Those with health care benefits are asked to chip in more of the costs. This too is a function of deflation.

When profits are weak and business uncertainty high, stock prices do not act well (at least in the long run). Those with 401Ks or personal investments are affected.

With credit falling and wages stagnant or falling, anyone in debt is likely to have a harder time paying back that debt. Foreclosures rise so do bankruptcies and divorces. Entire families have gone homeless. … Expanding credit (inflation) created an enormous housing bubble, a commercial real estate boom, a rising stock market, and an enormous number of jobs. Contracting credit (deflation), burst the housing bubble, burst the commercial real estate bubble, burst the stock market bubble, resulting in millions of foreclosures and bankruptcies, millions of broken homes, millions on food stamps, 26.2 million unemployed or partially employed, and countless additional millions who are underemployed. People notice food and energy prices because they tend to be somewhat sticky. Everyone has to eat, heat their homes, and take some form of transportation at times, but is that what's important? No! In the grand scheme of things, nominal increases in food and energy prices are but a few grains of salt in the world's largest salt-shaker compared to the massive effects of rising or falling credit conditions. So we see that Mish takes great exception to those Austrians (especially Peter Schiff) who have been warning of inflation. Rather than focusing on statistics such as the monetary base (which has exploded since the crisis in the fall of 2008), Mish defines "inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market." ....

So Robert Murphy who got it right?

Who got inflation picture right?

Debt deflationists like Steve Keen Austrians who incorporated debt-deflation into their theories. Arguably Paul Krugman, in accordance with his definition



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Practically Speaking