INFLATIONISTS vs. DEFLATIONISTS -- a compendium in progress

[ninakat]

"Will the world economy sink into a Japan-like slump...or will the feds cause a Zimbabwe-like catastrophe? Every day, our head aches from trying to figure it out..."
-- Bill Bonner, The Daily Reckoning, January 9, 2009

INFLATIONISTS vs. DEFLATIONISTS
a compendium in progress

Dear LATOC reader:

I'm not an economic analyst, but I'm very concerned about the future of our economy and how best to protect myself and my family. So, like most people, I turn to the experts. But when it comes to predicting the direction of the economy, many reputable experts don't agree -- so much so that their opinions often diverge spectacularly.

In the interest of trying to get a handle on what the prevailing opinions are, I've gone to the internet to sample and compile the opinions of a myriad of economists and analysts -- mostly outside the mainstream media (MSM), since the MSM tends to be biased by corporate interests. And of course there's bias from those I've selected here too, but I suspect it's far less.

The hope is that by seeing all of these perspectives in one compilation, we'll be better informed so that we can decide for ourselves which side of the argument makes the most sense. I'm trying my best to keep my own bias out of this listing -- just to fairly present the opinions from a variety of sources. In doing this research, I've concluded that there seem to be three major groups: (1) Inflationists who don't believe we are having or will have deflation; (2) Deflationists who believe we're now experiencing deflation, but will have inflation later; and (3) Deflationists who don't believe we will have significant inflation (or don't forecast that far ahead). So I've structured the list according to those three general camps. Of course, there are variations -- some subtle, some more obvious -- so keep in mind that I'm somewhat of a novice at this and am open to suggestions about how to better structure this list.

One of the main purposes of this research is to help make a decision about whether or not to invest in precious metals. The pattern I'm seeing is that there's a general consensus, even among many of the deflationists, that gold is a smart choice.

It's likely that I've left out some noteworthy commentators in my listing, but this is a work in progress, so please contribute any additional sources and opinions in the discussion thread, and I'll update this listing accordingly. Please limit your suggestions to people who publish articles, books, blogs, and/or videos to a readership/listenership -- people who have an established reputation and are active on a regular basis. In other words, I would prefer this listing not include anonymous bloggers.

One last point. I've tried to find links to the most up-to-date opinions from these people. If someone has more current information that changes or clarifies the positions of anyone on this list, please post it and I'll make the update.

-- ninakat

OVERVIEW

Here's an article by John Rubino that illustrates the divisiveness on the inflation vs. deflation debate as of September 2006. While not current, the opinions have likely not changed that much, and it's insightful as an overview.

THE Question
by John Rubino, DollarCollapse.com
September 28, 2006

"Choose the form of your destruction." -- Gozer the Traveler, Ghostbusters

By now, pretty much the whole sound-money community agrees that humanity in general and the U.S. in particular are headed for seriously hard times. But exactly how we get from today’s illusion of prosperity to tomorrow’s financial Armageddon is a tougher call. Will the global economy collapse under a mountain of debt as in the 1930s, or will central banks run the printing presses until hyperinflation vaporizes most fiat currencies? As Sprott Asset Management’s John Embry recently put it, inflation vs deflation "is THE question, really."

The answer matters for a lot of reasons. Hyperinflation and deflation favor very different investments, obviously, gold the former and cash the latter. But it also goes to the heart of our understanding of post-gold standard economics: Are today’s central banks in complete control of their fiat currencies’ value, or do the markets ultimately determine exchange rates and price levels? Is there a point of no return, when rising debt levels make one outcome or the other inevitable? How do you invest to make sure you’re covered either way?

I’ve been keeping a file of the best stuff written on the subject, some of which is pasted below: (article continues with the words of John Embry, Ben Bernanke, Jay Taylor, Steve Saville, Mike Shedlock, and Doug Noland).

[ninakat]

INFLATIONISTS - part 1

Chris Martenson [formerly deflationist (inflation later), now inflationist]
October 2008
"I hold gold because of the possibility that the Fed might inadvertently veer off into the hyperinflationary ditch. Historically, this has a very high chance of occurring. Either way, inflation or deflation, I can make the case for gold. But right now? The data says that you need to begin preparing for a nasty deflationary crunch."
June 2009
"Prepare now for upcoming destructive inflation."

Bill Bonner, The Daily Reckoning [formerly non-committal, now inflationist]
January 2009
"Will the world economy sink into a Japan-like slump...or will the feds cause a Zimbabwe-like catastrophe? Every day, our head aches from trying to figure it out..."
June 2009
Déjà Vu All Over Again Once More

GEAB (GlobalEurope Anticipation Bulletin) - LEAP/E2020
June 2009
"Wave of terminal crisis for the US Dollar, US T-Bond and GBP, and the return of inflation. [end of summer 2009]"

Ben Bernanke [listed for reference only]
2006?
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Peter Schiff, Euro Pacific Capital
December 2008
"By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation."

Ron Paul
January 2009, YouTube 4:13
"2009 will see inflation and a rapid deterioration of the dollar. We’re spending too much money, borrowing too much money, and printing too much money."

John Rubino, DollarCollapse.com
September 2008
"Here we go. America's options have finally dwindled to just two: Accept a 1930s-style deflationary crash or embark on a Weimar Republic-style hyperinflation. There was never much doubt about which course our leaders would choose, but today they made it official. Treasury will assume essentially dictatorial powers to buy up pretty much the entire U.S. financial system, and the Fed will print the required trillions."

Jim Sinclair, JSMineset
January 2009
"The dollar cannot and will not remain strong, nor can a planetary Weimar [hyper-inflationary] experience now be avoided."

John Williams, Shadow Government Statistics
January 2009
"As inflationary pressures mount anew and the financial markets increasingly shun U.S. Treasuries, an inflationary depression can evolve quickly into a hyperinflationary great depression. Although hyperinflation became inevitable in the last decade, the onset of the process just recently was triggered by Fed and the Treasury actions in addressing the systemic solvency crisis. The process would be accelerated by unfettered and unfunded government spending that appears to loom in early 2009."

Henry C.K. Liu
January 2009
"Thus far in this financial crisis, the Bernanke Fed has sown the seeds not for a quick recovery but for a decade or more of stagflation for the US and the global economy." Note: Stagflation is high unemployment along with high inflation. (link)
July 2008
"The bursting of the latest dollar-denominated debt bubble created a global credit crisis in August 2007 that is beginning to cause globalized trade to contract. Exporting economies around the world are now forced to reconsider their dysfunctional strategy of seeking growth through exports for fiat dollars that are pushing the world economy towards hyperinflation, leading all other fiat currencies in a depreciation race to the bottom."

Robert Higgs, The Independent Institute
December 2008
"...does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain. ... In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to what the investment "experts," the politicians, and the mainstream economists believe, inflation is not a benign element in the economy's operation. It is, as it has always been, the most dangerous and destructive form of taxation."

Eric Janszen, iTulip
November 2008
"Over 100 books, papers, and original analysis went into developing and refining Ka-Poom Theory over the years, and model that explains how, following the collapse of the credit bubble, the US economy will experience a short (six month to one year) period of deflation that we call disinflation, such as we are experiencing today, followed by a major inflation induced by monetary and fiscal policy and the actions of US trade partners in response to that inflation."

Jim Willie, Golden Jackass
January 2009
"False Deflation Diagnosis and Gold Bullish Crossover Signal"
January 2009, Hat Trick Letter (subscription)
"No sign of deflation exists in monetary measures, when the financial sector data is incorporated."

Marc Faber (Dr. Doom), Marc Faber Limited
December 2008, YouTube 3:27
"... we'll essentially have a tail wind for inflation in the long run and for precious metals"
December 2008, YouTube 5:29
"... in the case of the U.S. today, it is likely that this money printing exercise by the Fed will lead to a weaker dollar, and of course the question comes up: weaker dollar against what? all the other currencies are not much better, so I think weaker dollar against hard assets, you know, such as precious metals, oil, and industrial commodities that have been absolutely hammered..."

Jim Puplava, Financial Sense Newshour
January 10, 2009 (listen from 16:00 - 18:00)
"... at some point, something is going to crash, running trillion if not multiple trillion dollar deficits, John [Loeffler], there's only one way that you're going to pay for that, and that is you're going to have to hyperinflate your way out of that..."

James Turk, GoldMoney
January 2009
"The outlook for the US dollar continues to worsen as the Federal Reserve balloons its balance sheet. What's more, the Fed's zero interest rate policy removes any incentive to hold dollars in an environment where counterparty risk remains an intractable problem and where rapid money growth portends a surge in inflation in the weeks and months ahead."

Martin Hutchinson, PrudentBear
January 2009
"The combination of reappearing inflationary trends and a soaring budget deficit will cause 'buyers’ strikes' at Treasury bond auctions, sending interest rates through the roof. ... The rise in long-term interest rates will choke off economic recovery while the resurgence of inflation caused by excessive monetary growth will force the Fed to reverse its policy and increase short-term rates to some margin above inflation."

Steve Saville, The Speculative Investor
November 2008
"By trying to counteract today's falling prices by increasing the supply of money, central banks are setting the stage for a major inflation problem in the future. Think of it like this: by the time the de-leveraging process has run its course a lot less money will be needed, but if central banks and governments get their way there will actually be a lot more money. We acknowledge that wealth destruction could lead to less money being borrowed into existence in the future, and, consequently, to deflation. After all, tens of trillions of dollars have been knocked off the market values of equities, houses and high-yield bonds, thus reducing the collective ability of the owners of these investments to borrow money. However, as long as the total supply of money continues to grow we can confidently conclude that the deflationary forces that stem from wealth destruction and credit contraction are being more than offset by the inflationary actions of the central bank and the government."

Mogambo Guru
December 2008
"Well, inflation "reasserting itself" is a given, as far as I am concerned! Hell, the money and credit necessary to finance all those higher prices is already being created, and if you don't believe me, then explain how there is already an estimated $8 trillion in new government spending and lending announced, in an economy whose GDP is a measly $13 trillion to start with! This means a budget deficit of over 50 percent of GDP! 50 percent! Yikes! Unheard of!"

[ninakat]

INFLATIONISTS - part 2

Puru Saxena
January 2009
"The main reason why I do not foresee deflation (decrease in the supply of money) is due to the fact that the contraction in credit arising from deleveraging is being more than compensated by the money-pumping actions of the various governments. In the past year alone, the Federal Reserve has expanded its balance-sheet by a whopping US$1.2 trillion! Moreover, thanks to Mr. Bernanke’s cash injections (quantitative easing), reserve balances have sky-rocketed from roughly US$5 billion to almost US$600 billion in roughly 3 months... Now, you may be wondering why there is so much talk about deflation these days when inflation (expansion in the money-supply) is the real issue at hand. There are two reasons for this: First and foremost, you must remember that banks are in the business of lending and the central banks’ prime objective is to manage inflationary expectations. So, Mr. Bernanke and his comrades are paid to keep a lid on the public’s inflationary fears. Accordingly, a ‘deflation scare’ is engineered ever so often, so that they can continue with their long-term stealth inflation agenda without raising too many eyebrows.  Secondly, the establishment needs to advertise a ‘deflation scare’ so that the central banks can slash interest rates. If inflation rather than deflation was perceived as the legitimate threat, then the Federal Reserve would not get away with near zero interest-rates."

Howard Ruff, The Ruff Times
December 2008 (see 2nd paragraph)
"It is axiomatic that deflation is the spawning ground for inflation, as the government doesn't know how to fix deflation, depression or recession other than to throw money at it. The creation of all the money floating through the economy will eventually meet all the conditions for inflation."

Paul Craig Roberts
January 2009
"The third source of financing is for the Federal Reserve to monetize the debt. In other words, the Treasury prints bonds and the Fed purchases them by printing money. The supply of money thus expands dramatically in relation to goods and services, and high inflation, possibly hyperinflation, would engulf America."

Gerald Celente, Trends Research Institute
December 2008, YouTube 4:05
"... and also realize that their dollar might be worth dimes in the coming years because they're creating a situation for hyperinflation so we're looking at gold to go to probably $2000 an ounce."

Lew Rockwell
December 2008, YouTube 4:44
"What apparently we'll end up with is, at least in the industrial world, a global hyperinflationary depression."

John Embry, Sprott Asset Management
September 2008
"There is a good argument for a deflationary spiral like the Great Depression. On the other hand, this time paper money isn’t anchored. Everything’s fiat and the government can create it with the stroke of a pen or the touch of a computer key. If you really want to pin me down, I'd say we’re going to have a hyper inflationary depression. The value of money will be destroyed and economic activity will grind to a halt. It'll be the worst of all possible worlds--a South American meltdown."
November 2008
"For now (though we believe it a temporary state of affairs) the markets seem to believe that cash is king. They are still content to own paper in times of trouble, particularly US dollars and US Treasuries. But such confidence is misplaced, for many reasons. In the current environment, deflation à la the Great Depression is highly unlikely. Ben Bernanke, the head of the Federal Reserve, is already on record as saying deflation cannot happen, using the helicopter drop analogy to prove his point. Under a fiat currency system this is true enough, and made abundantly clear with the central banks assuming the role of buyer and guarantor of last resort."

Dan Denning, The Daily Reckoning Australia
November 2008
"If we're right here at The Daily Reckoning in Melbourne, Australia, however, and the bond bubble began bursting in late October, then the Treasury's line of credit with global savers is nearing its end. Global creditors will be reluctant to finance American deficits any further. Because isn't that how the world got into this mess in the first place? So in order to borrow, the Treasury is going to have pay much higher rates of interest to reflect the credit risk the US government has become. Trouble is, the US can't afford to borrow at higher interest rates right now. So that leaves the option Roubini thinks is least likely -- printing money. The fancy term for it would be "monetizing the debt". In practical terms, it would mean the Fed buying public debt issued by the US Treasury with freshly printed money. And THAT, we reckon, is super inflationary."
January 2009
"Perversely, the monetary authorities will destroy public confidence completely through massive inflation. It will also unleash a great deal of social and political disorder. But the authorities appear to prefer this chaotic result (which they can then police and manage with new rules) to another Great Depression characterized by too little money and price deflation. The excesses of the credit bubble will not be liquidated. Instead, they will be perpetuated and subsidized."

Jim Rogers, Rogers Holdings
October 2008
"The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Rogers warned. 'We're setting the stage for when we come out of this of a massive inflation holocaust,' he said."
October 2008
"I'm of the view that the world's going to recover some day, and with all the money that's being created, history shows it has always led to inflation."

Alf Field
November 2008
"The problems are manifold, but the most pressing one is to restore confidence in the banking systems of the world. Failure to do so will measurably increase the odds of a deflationary depression. The power of the modern electronic money creating machine suggests that the odds still favour an inflationary outcome."
November 2008
"In 'Crisis Cogitations' (essay by Alf Field), it is acknowledged that the current credit/debt deflation could get out of hand and result in a serious deflationary depression. There is debate as to how gold will react in a deflationary environment, but the fact is that in a serious depression bankruptcies will be rife and price levels will decline. This may result in cash and Government bonds performing better than gold, but this is not certain. Gold cannot go bankrupt and is thus an asset that people can hold with confidence in a deflationary depression. It is possible that demand for a "safe haven" investment may be large enough to cause the metal to perform better than cash or Government Bonds. The odds, however, strongly favour an inflationary outcome. Given a strong will and the ability to create any amount of new money via the electronic money machine, it seems a foregone conclusion that runaway inflation will be the end result. If Mugabe could do it in Zimbabwe, there seems little doubt that Ben Bernanke and his associates in other countries will have no trouble in doing it too. ... I feel very strongly that it is time to quietly hold onto one's gold insurance and not attempt to trade it."

Ambrose Evans-Pritchard, Telegraph.co.uk
January 2009
"So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far. ... My tentative guess is that Bernanke's blitz will "work" -- perhaps later this year. Markets will start to look beyond deflation."

Bob Chapman, The International Forecaster
December 2008
"Zero interest rates can only make matters worse. In combination with massive money and inflation it will bring about the collapse of the dollar. Shortly due to these monetized infusions, inflation will rise strongly from current levels. America and the 20 leading nations have never seen such massive monetary aggregate creation being deliberately coordinated."

Rich Toscano and John Simon, Pacific Capital Associates
January 2009
"We believe that this state of affairs is simply incompatible with the existence of the type of protracted "deflationary spiral" about which it has become all the rage to worry. Deflation is a choice in the current monetary regime, and it is a choice that our government simply cannot make. ... We believe that the current monetary system, political climate, and prevailing analytical framework are incompatible with a prolonged period of either monetary or price deflation."

Dmitry Orlov, ClubOrlov
December 2006
"We should certainly expect shortages of fuel, food, medicine, and countless consumer items, outages of electricity, gas, and water, breakdowns in transportation systems and other infrastructure, hyperinflation, widespread shutdowns and mass layoffs, along with a lot of despair, confusion, violence, and lawlessness."
September 2008
"About the only thing the government currently seems it fit to do is extend further credit to those in trouble, by setting interest rates at far below inflation, by accepting worthless bits of paper as collateral and by pumping money into insolvent financial institutions. This has the effect of diluting the dollar, further undermining its value, and will, in due course, lead to hyperinflation, which is bad enough in any economy, but is especially serious for one dominated by imports."

George Ure, Peoplenomics
January 12, 2009
"Since the US (and the West) seems by my reckoning to be working its way through an echo of conditions of the Great Depression, it's interesting that the hyperinflation groundwork has been laid with all the bailouts and now a wider war comes into view."

Kevin Depew, Minyanville
November 2008
"The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore, there is great incentive for the small minority -- the 2-3% of wealthy who control the vast majority of assets in this country -- to continue to press government and the Fed to maintain the present course of inflation over deflation."

Adam Hamilton, ZEAL
January 2009
"The bottom line is inflation and deflation are and always have been purely monetary in nature. Supply and demand can drive prices all over the place, but it is only a changing money supply that can truly spawn inflation or deflation. And the money-supply data is crystal clear. The Fed is growing the fiat-dollar supply by frightening rates, all the way from double-digit broad-money growth down to a scary doubling of the monetary base! This means big inflation is coming, it's already baked into the pipeline. Too distracted by deflationists who have no dictionaries and hence don't even know what the word "deflation" really means, Wall Street hasn't realized the real threat is inflation yet. But when it does, capital should rapidly flood into investments that thrive in inflationary times. Of these, gold remains the king. Its bullish potential in the years ahead is vast."

Kevin Phillips
April 2009
Inflation Ahead -- Phillips likens the current situation to that of the mid-70s. More at the link.

[ninakat]

DEFLATIONISTS (INFLATION LATER)

Larry Edelson, Money & Markets
January 2009
"Now mind you, all that fiat money being printed will not work its way into the system overnight. And it pales in comparison to the wealth destruction that’s already occurred. So short term, deflation still has the upper hand. But, and this is very important, when the wheels of commerce and business begin to turn again ... when banks begin to lend again ... and when investors start to pull their money out from underneath their mattresses -- you are going to see a tidal wave of worthless money get thrown into the markets. And when that happens, it will re-inflate almost all tangible assets. And the chief beneficiary? Gold!"

Stoneleigh, The Automatic Earth
January 11, 2009
"When we eventually do see inflation, it will not come from the initial havoc in the bond market, but from the aftermath of its destruction. Once deleveraging is over and countries must function in financial isolation, there will be nothing to prevent them from printing actual cash, as opposed to desperately trying to expand credit in a double-or-nothing gamble as they are currently doing. Down that road lies a currency hyperinflation on a Zimbabwean scale, but we are nowhere near that point now. You must survive deflation in order to have to worry about hyperinflation."

John Mauldin
January 2009
"For a very long time, I have been adamant that deflation is in our future. In the next few pages I outline how inflation might come back, but I doubt it will be this year [2009]. For now, deflation is the economic factor that the Fed and central banks will be battling. And believe me, it will be a very large and controversial battle."

Rick Ackerman, Rick's Picks
December 2008
"Inflation Coming, But Not in Time. We expect that to change, but not in time to rescue debtors with a flood of cheapened money. We have told you for years to tune out the inflationists because they do not know their butt from a hole in the ground. That is still true. ... Deflation will run its course no matter what the puny central banks attempt to throw at it next. It will take years to play out, and the price declines we have seen so far in the housing market are not even halfway to their bottom."

Mike Whitney
December 2008
"That's why Bernanke is planning to force-feed credit into the system via untested methods that, many believe, will engender Weimer-like hyperinflation when the recession winds down. If the economy kicks in faster than Bernanke figures, he'll have to mop up $8.3 trillion of liquidity or watch while the dollar gets torn to shreds. For now, the problem is deflation; steadily falling asset prices which are shrinking profits, increasing layoffs and forcing fire sales of distressed assets. As unemployment soars, aggregate demand falls even more, causing a vicious downward cycle. Once deflation becomes entrenched--as Japan discovered during its "lost decade" in the 1990s---it becomes more difficult to eradicate. Between 1994 to 1999, Japan initiated 7 stimulus packages which amounted to hundreds of billions of dollars. All of them failed to restart the flagging economy. According to the Wall Street Journal: 'Only in this decade, with a monetary reflation and prime minister Junichiro Koizumi's decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.'"

James Howard Kunstler
January 2009
"For at least a year several story-lines have been slugging it out inconclusively for supremacy of the Web-waves. The main event has been the Deflationists versus the Inflationists. ... Some of us see both outcomes in sequence: the deflationary "work out" of bad debt currently underway -- of loans that will will never be paid back, of acronymic paper securities revealed as frauds, of "non-performing" contracts entering the swamps of foreclosure, of banks pretending to still exist, of hallucinated "wealth" rushing into the cosmic worm-hole of oblivion -- can only go for so long before everyone who can go broke will go broke. Then, just as we find ourselves a nation of empty pockets, the tsunami of shoveled-in "money" designed to "reboot the consumer" (created not from productive activity but just printed recklessly), will start churning through the "economy," chasing products and commodities that became scarce during the deflationary phase -- and the result is hyper-inflation, the eraser of debt, destroyer of fortunes, and suicide pill of feckless governments. I guess the basic difference is that the hardcore Deflationists seem to think that their process can go on forever. The society just gets poorer and poorer until we're back at something like a scene out of Pieter Bruegel the Elder. The Inflationists see a fork in the road leading to more overt destruction, especially political turmoil as a lot of negative emotion joins the work-out orgy and overwhelms government."

Michael Hudson
October 2008
"Interviewer: Can we expect hyperinflation? Michael Hudson: Not yet. That occurs when a currency crashes against other currencies, usually by trying to pay debts that its trade balance can’t cover. I don’t think you’ll find hyperinflation of dollar prices until other economies create an alternative to the dollar. This will start by developing a vehicle for trade among themselves. The first stage is to arrange barter deals, as was done with the Soviet Union in the 1960s. The moral is that over-indebtedness always leads to barter in the “final” stage. The Roman Empire remains civilization’s primary and most serious example. But as we move toward this position, the United States simply will not have much to exchange with foreign economies. Once Europe, Asia and the post-Soviet economies can’t find many dollarized financial vehicles in which to invest, you can be sure that will try to develop an alternative to the dollar. Until they actually do that, there will not be inflation here. There will simply be a polarization of income between wealthy creditors – the top 10 percent of the population – and an increasingly indebted bottom 90 percent. This is basically a deflationary process – debt deflation as far as the distribution of income is concerned. The only inflationary impact will come as the dollar declines to reflect how much the debt overhead has hollowed out the U.S. economy."

DEFLATIONISTS (NO INFLATION FORECAST)

Mike Shedlock, Mish's Global Economic Trend Analysis
September 2006
"It seems that everyone feels the Fed is all-powerful, and that the Fed can defeat the business cycle by forever printing money. That is the fallacy of the inflationist arguments. It cannot be done. The root cause of the great depression was an overexpansion of money and credit. "Helicopter Drop Bernanke" could no more cure that by printing more money than I could take on Michael Jordan in one on one basketball at his prime."
January 2009
"2008 is the year the impossible happened, the impossible being deflation. Deflation was called on this blog and a few other places but the idea was essentially mocked as impossible by the masses."

Karl Denninger, The Market Ticker
January 2009
"'Hyperinflation', or even 'Serious Inflation' (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages."
December 2008
"Deflation, not inflation, will become evident well beyond housing.  Other capital goods beyond housing will see real price declines for the first time since the 1930s.  Debt is inherently deflationary; the 'hyperinflationists' will once again be shown to be wrong (how many years running will it be now?)"

Nouriel Roubini
November 2008
"You'd think evidence of even bigger deficits in the United States is clearly inflationary. But not everyone agrees. The new prophet of doom, Professor Nouriel Roubini -- a tutor in economics & international business at NYU's Stern School of Business -- says at least four factors are setting up what he calls 'Stag Deflation.' As opposed to the stagflation of the 1970s, where you had no growth and rising prices, he foresees no growth and falling prices -- a depression by any other name."
October 2008
"So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question: likely not."

Robert Prechter, Elliot Wave International
December 2008
"Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue. My book remedies that situation."

Nassim Nicholas Taleb
December 2008
"I think it is worse than Roubini thinks. No, I - I had the same story, haven’t changed my story since - and what convinced me of this is that we switched from an environment of inflation, hyperinflation, where people are afraid of commodity prices rising, to a total deflation in no time. Look at inflation bonds... I know that we are going [to] have massive deflation. The overhang of debt, massive deflation. Debt needs to be reduced. And I think Paulson seems to be doing a good job, particularly that they were part of the cause of what happened, you know, it is quite commendable."

Gary Shilling, A. Gary Shilling & Co., Inc.
December 2008
"For years, we've been forecasting that chronic deflation of 1% to 2% per year would start with the next major global recession. Well, it's here! ... Inflation? Many, of course, worry not about deflation but inflation, due to all the money being pumped out by central banks and governments globally. They, no doubt, are biased since most have lived only in an era of inflation and don't agree with us that inflation is the result of excess government spending in wars, both hot and cold. In peacetime, deflation reigns."

SUMMARY

Inflationists: 35
Deflationists (inflation later): 7
Deflationists (no inflation forecast): 6

Translated into percentages:

Inflationists: 73%
Deflationists (inflation later): 15%
Deflationists (no inflation forecast): 12%

[memills]

Wow -- thanks for the effort in researching this!  

  Very interesting and worthwhile.

In order to invest, and prepare in general, I think this is the most important question: inflation
or deflation.   The wrong bet can wipe you out.   (The only exception is perhaps gold, which
does decently apparently in both scenarios.)

Here is what I would like to know:  what indicators best predict inflation or deflation ahead?

Right now, my bias it toward deflation.   Money is being vaporized far faster that stimuli now
are replacing it.  Net loss of money = deflation.   They would really, really have to crank up
the printing presses offset the loss of money and create inflation.   Could happen, but, later, IMHO.

[ninakat]

Thanks memills -- glad you're finding the list useful. I know what you're saying about net loss of money = deflation. What I noticed in making the listing is that the vast majority of analysts are falling into the inflationary camp, although that doesn't necessarily make it so. But I found Puru Saxena's comments regarding his expectation of inflation (see above) quite compelling.

On the question of gold holding up in either environments, I saw both pros and cons to that argument. John Rubino (dollarcollapse.com) reiterated the point that cash is where you want to be if its deflation, while a couple of others (Chris Martenson comes to mind) indicated that gold was good in either environment.
 

[unrepentantcowboy]

Thanks for the leg work. Found this in Puru Saxena's blog:

http://www.kitco.com/ind/Saxena/jan082009.html

Furthermore, it is interesting to note that the Federal Reserve (money-printer extraordinaire) has now started to inflate the supply of money. Over the past few weeks, the Federal Reserve has injected roughly US$300 billion into the banking system without a proportionate increase in its non-banking liabilities via deposits by the US Treasury. In simple terms, what this means is that the Federal Reserve is now increasing bank reserves without the US Treasury removing an equivalent amount of money from the system.  Usually, when the Federal Reserves provides surplus reserves to its member banks, the US Treasury borrows this money from the market by issuing bonds; thereby offsetting the inflationary impact of the Federal Reserve’s monetary injections. However, this is not what is happening now and this has inflationary implications. Essentially, the Federal Reserve is now creating money ‘out of thin air’, debasing its currency and sowing the seeds for sky-high inflation.

At present, commercial banks are hoarding this cash, but I expect this newly created money to seep through the economy over the following months. When that occurs and credit starts flowing again, business activity will pick up and prices will start appreciating.

In the past few weeks, we have received numerous queries from anxious investors who want to know if we are heading into deflation. Obviously, we don’t know what will happen in the future, but for now, data shows that all the deflation hype is absurd.  If you have any doubt whatsoever as to whether we are facing inflation (expansion in the supply of money) or deflation (contraction in the supply of money), you need to look no further than Figure 2 which highlights the rate at which various nations are inflating the money supply. There is no doubt in this writer’s mind that deflation is out of the question when the money supply is expanding at such a frantic pace. For the sake of clarification, I must state that what we have witnessed over the past year is not deflation but a contraction in asset prices due to forced liquidation (non-availability of credit).

[shamaness]

Ninakat, this is some very useful and clear stuff you've put together.  Thank you!   

At present, commercial banks are hoarding this cash, but I expect this newly created money to seep through the economy over the following months.

Based on what, cowboy?    

One thing I've been wondering is what happens if the Fed keeps inflating the money supply to the banks, but the banks don't create any movement/velocity through lending.  Does that count as both monetary inflation at a macro level and monetary deflation at the micro level?

Another thing, if total derivatives outstanding add up to something like $600 trillion, and the central banks "only" pump, say, $10 to $20 (or even $50) trillion into commercial and investment banks, isn't that a bigtime deflation of what "money" "existed," at least theoretically, a couple of years ago?

I am pretty convinced personally that (as has been discussed in other threads lately) what we can expect is price deflation on things people don't really need, and price inflation on necessary items like food and energy.  (We're already seeing this to an extent, and it's being referred to as "hyperstagflation".)  Because, though the central banks might be inflating the money supply into the stratosphere, I don't expect the new money to make it into the wallets of most people. 

Between the continuing tendency of banks to hoard (and to cover their own bad bets), and the rapidly deteriorating job market (which means no raises, lower wages, etc.), I don't get how J6P is going to see any extra buckage anytime soon.

Are we witnessing a "decoupling" of the traditional, theoretical correlation between money supply and prices?

In any case, what I don't know is what this will mean for gold and silver.   

[tron]

The market for TIPS currently has deflation priced in.  However, we haven't had any significant deflation since the gold peg was released, and last time the market was anywhere near it was levered like it is today, Roosevelt released that peg and the dollar lost ~40% of its value.  Today the dollar is backed by the foreign investors in United States debt, and if that "peg" is released, a 40% drop would be an extreme upside case.  And the foreign investors will stop buying our debt (or order it issued in other currencies).  If you don't believe me have a look at shadowstats.com, you can see that the US debt as if calculated according to GAAP is nearly $70 trillion.  Only $10t has been issued and is outstanding as treasury securities, however, to keep meeting its obligations, the US government will have to start issuing it.  All that PIK is a hammer just waiting to fall on the USA.  There are only 3 ways out (or some combination thereof):

Raise taxes - will stifle economic activity and therefore could actually raise the US debt/GDP multiple and hurt the ability of the government to service its debt.

Default - needless to say, that would be a godawful mess, would shut off the government's ability to borrow, and therefore, severely constrain its operations, or if the default was on the governments stated obligations to its citizens (Social Security & Medicare primarily) the result could be civil unrest on an absolutely unprecedented scale, as people's incomes and access to medical care are suddenly cut off.

Inflate - this would involve a massive devaluation of the USD, just think about how much value a dollar has to lose for $70t to be a manageable sum.  The budget is already strained by the fixed charge on the $10t outstanding (accounting for ~$300b/y or ~10% of total budget)  the PIK on the other $60t (assuming a rate of 3%, unrealistically low for such enormous leverage) wold be another $1.8t/y for a total fixed charge of $2.1t, or around 15% of GDP.  Rates could easily double, (or more), so let's assume a 6% rate on $70t.  That means a interest payment of $4.2t (current+PIK) add to that another $3.0t of government spending (conservative number there) and you have $7.2t, ~50% of GDP in fixed charge.  Since we aren't paying that PIK it just accrues every year making the problem worse.  Government needs to amortize that debt, so they will probably inflate the dollar in order to do so.    

I think that there will be a combination of taxation, and inflation.  Hopefully more of the latter as I know how to profit off inflation, but hedging against people with guns taking our property is a much more difficult task.  I do concede that there could be deflation in the short term, but it can only last until the massive deleveraging  is currently in place is over.  Also, a rapid increase in the rate at which the treasury can borrow could be coming sooner rather than later, as toxic bank assets are poured onto the governments balance sheet, dramatically raising perceived risk, and therefore, rates.  This could conceivably lead to an inability of the treasury to roll over its debt, and a clusterfuck in the credit markets that makes the current problems look like a hiccup.  If the government can't borrow, I think they will print.  I see deflation here as an "if everything goes perfectly" scenario.  All it takes is one black swan to throw us over the edge and into rapid inflation.

I could be wrong, but my money is heavily where me mouth is on this issue.    

[Archer]

Great job.

[tron]

Another thing, if total derivatives outstanding add up to something like $600 trillion, and the central banks "only" pump, say, $10 to $20 (or even $50) trillion into commercial and investment banks, isn't that a bigtime deflation of what "money" "existed," at least theoretically, a couple of years ago?

But you have to remember that derivatives, though they behave like leveraged instruments, are, in fact, very different than normal debt.  To simplify things, imagine a horse race where there are bets on each of the horses to win.  The total amount of the potential payouts may be enormous, but since only one horse can win, it is only possible for the house to take a fraction of that loss.  Works the same with derivatives.  This is not to say that there aren't problems with derivative exposure (AIG's $80b margin call pretty much proves that), but the total losses on these things aren't going to be $600t.         

[txmudbug]

thank you Ninakat.  I will enjoy sharing this.

[ninakat]

Thanks all. I did put quite a few hours into this.... mainly to get a better handle on the controversy for myself, but also to share with others here. I know the list is anything but complete, and perhaps I only focussed on the more outspoken economists and analysts, but unless others here can find more deflationists, they seem far outnumbered by the inflationists.

When I first started the research, I really thought there would be just two categories: inflationists and deflationists. But I soon discovered that quite a few of the deflationists actually expect inflation or hyperinflation after that. Hence, the 3 categories.

But I could be wrong about the last group of staunch deflationists (Mish, Denninger, etc.) in that one or more of them may ultimately believe inflation could follow deflation -- I just couldn't find evidence of that. Maybe somebody else here knows more about their respective outlooks. They do seem adamant about deflation and only deflation. But as Stoneleigh at The Automatic Earth put it: "Down that road lies a currency hyperinflation on a Zimbabwean scale, but we are nowhere near that point now. You must survive deflation in order to have to worry about hyperinflation." The implication of this statement is that the deflation will be so severe and possibly long lasting, that there's not really any point in even considering hyperinflation now. But my view is that gold should be a smart move now, for capital preservation in the long term, regardless of which of these forecasters are correct.

[memills]

From the RGE Monitor:

http://www.rgemonitor.com/168/Global_Monetary_Policy?cluster_id=4237


U.S. Inflation Trends: Technical Deflation or Genuine Deflation Ahead?
Print

      Inflation Indicators:
    * Core CPI (excl. food and energy) fell 0.3% m/m in Dec after falling (-0.1% m/m) in Oct for the first time since 1982, and slowed further to 1.8% on a y/y basis. Unadjusted headline CPI fell 1% m/m in Dec and slowed to 0.1% y/y, a 43-year low, after making the biggest monthly plunge in Nov (-1.7%) since 1947. Oct-Nov saw the sharpest 2-month price decline since Jan-Feb 1933, when prices dropped 1.5% and 1.6%, respectively
    * Inflation Expectations: According to Reuters/Michigan Consumer Sentiment Survey in January, consumers expect an inflation rate of 2% over the next 12 months, up from 1.7% in the December survey. Over the next 5 years, the figures tracked by Fed policy makers, Americans expect a 3% rate of inflation, compared with 2.6% in December's survey. Markets disagree - the TIPS breakeven rate foresees deflation of -2% in 2009 and -0.33% for next 5 years
    * Headline PPI for finished goods dipped into negative territory in December, falling to -0.9% y/y from the 9.8% y/y rate seen in Jul (fastest since 1981). Weakness was widespread across components. Food prices fell in Dec after remaining unchanged in Nov. Energy price deflation slowed, while food price deflation accelerated. Core PPI inflation sped up slightly to 0.2% m/m Dec from 0.1% m/m Nov while the annual rate ticked down to 4.3% y/y in Dec from 4.4% y/y Nov (fastest since 1989)
    * Import prices contracted 9.3% y/y in 2008, largest year-over-year decline since the index was first published in 1982 and the first annual decline since 2001. December's decline follows a 21.6% y/y rise in July, the biggest annual rise since 1982. Inflation deceleration was broad-based - petroleum, food, capital goods and consumer goods - but oil price plunge accounts for bulk of deceleration. The decline in consumer goods import prices reflects the firmer U.S. dollar
    * Core PCE deflator moderated to 1% y/y in Nov from 2.5% y/y in Aug (fastest since Feb 2007, due to pass-through from producer prices). Core PCE has fallen within Fed comfort zone
    * GDP deflator (3.9% q/q 3Q08, 1.2% y/y 2Q08, 2.6% y/y 1Q08) rising slower than headline PCE deflator b/c of increasing oil imports and decreasing residential investment. If headline CPI were used to deflate GDP instead, US would have already posted 2 quarters of negative growth - a recession
    * Wage Inflation: Earnings growth eased to 3.4% y/y in Sep from 3.6% in Aug. Employment Cost Index maintained a steady 3% y/y growth rate in Q3. Businesses are likely to keep labor costs down as the unemployment rate increases and economy suffers a recession. Workers will have much less bargaining power in regards to wages

      Outlook:

    * Goldman Sachs: Core CPI to slow to 1.9% y/y by end-2009 but could show year-over-year declines. Technical deflation expected in 2009 due to falling commodity & asset prices, high spare capacity, tightened constraints on growth, and easing inflation expectations. However, technical deflation may or may not result in true deflation, in which price declines generate expectations that they will continue to fall
    * MS: Reflecting commodity price declines and emerging slack in both product and labor markets, CPI inflation will decline from 3.9% to -0.2%. Headline inflation likely to go negative by mid-2009, with prices falling by 1.5% from mid-2008
    * BNP: Substantial economic slack suggests core CPI inflation should remain subdued at 1.1% in 2009, the weakest reading in the series' 50-year history
    * ML: By 2Q09, US will experience sequential declines in CPI and deflation in CPI on a year-on-year basis for the first time in 5 decades
    * Citigroup: Commodity prices affect retail prices with a lag—which is brief for energy but as long as a year for food. Gasoline price affects real income more negatively than food price. Housing and services deflation to dampen core CPI growth

Jan 16, 2009

[feelingweird]

I am going to sticky this post. This is a GREAT collection of thought regarding the possible outcomes to all of this and will hopefully serve to stop the weekly Deflation versus Inflation arguments.

Thank you Nina for the obvious time and effort you put into this.

Robert