INFLATIONISTS vs. DEFLATIONISTS -- a compendium in progress

[Amerocan]

Who cares how much paper they print when it's worthless? 

Let's talk about the value of a US dollar which is much more than a simple analysis of the rate of money printing. 

[kats]

My big 'aha!' moment came when you said Stoneleigh (from the first link above) "Money and credit are not the same thing, although people currently use them interchangeably. Money is a physical commodity, while credit is virtual wealth borrowed into existence. Money can be subject to inflation, either by printing currency or by debasing specie (reducing the precious metal content of coins), but does not disappear. Credit, on the other hand, can expand dramatically through financial alchemy, but has no physical existence, although its effects are certainly tangible.  Weimar Germany or present day Zimbabwe are examples of hyperinflation, but the Roaring Twenties and our situation are instead examples of credit hyperexpansion. Inflation is a chronic scourge, but credit expansions are self-limiting – they proceed until the debt that creates them can no longer be serviced, at which point that debt implodes in a sea of margin calls."

That is expressed with great clarity. I must quote it when the argument about what money is comes up on the forum, which it often does. THANKS.  Off to read all your other work.

[ninakat]

I've added Adam Hamilton to the list on page one of this thread, at the bottom of Inflationists - Part 2. -- ninakat

January 23, 2009

Big Inflation Coming
by Adam Hamilton
 
Late 2008's stock panic has certainly had a complex and multifaceted impact on popular psychology. Mindsets and outlooks that were scoffed at as recently as 6 months ago have suddenly become fashionable. One of the more intriguing is the meteoric rise to prominence of the deflation thesis.

The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today than in any other time in modern memory.

In light of these universal falling prices, how could we not be entering a sustained deflationary period? The case may seem airtight, but I'd like to offer a contrarian view in this essay. Believe it or not, despite 2008's price collapse there is plenty of overlooked evidence suggesting big inflation is coming. You won't hear much about this on CNBC, but it could have a big impact on your investments in the years ahead.

Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation.

~snip~

Until late 2008, I hadn't looked at M0 for years. Why? Even the Fed isn't foolish enough to change it too much. For decades it has traveled in a tight range between about 2% and 10% annual growth, with a pre-panic average since 1960 of 6.0%. M0 growth less real economic growth is one of the most basic measures of inflation. If M0 grows at 6% and the underlying economy at 3%, then there is relatively 3% more money available to spend on goods and services. This is inflation.

I was reading a book last month that discussed the monetary base's direct impact on inflation. So I decided to take a look at M0 again. I could not believe what the data showed, I almost fell out of my chair it was so mind-blowing. Per the Fed's own data, we have just witnessed the most inflationary event in modern history. This crazy monetary base chart will make even the most rabid deflationist very uneasy.



M0 has gone parabolic! Year-over-year in December 2008, it was up 98.9%! This is so shocking it defies belief. In late September as the stock panic started, it had grown by 9.9% over the past year. By October, this rate ballooned to an all-time high of 36.7%. In November, it rocketed again to 73.0%. And in December, it surged up to the staggering 98.9% you can see above. Ben Bernanke's Fed has doubled the monetary base in a single year! Holy cow.

~snip~

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.

[Chesyre]

Deflation for useless shit you wouldn't  take if it was free.  Singing fish for over the bar  anyone ?

Inflation for everything you want to buy . batteries for fish 8 dollars each on sale 

[Faceless Bureaucrat]

Okay first of all, anybody who at this point is saying, "Inflation and deflation are purely monetary phenomena." and then blathers on about how the M0 is expanding either doesn't get it and isn't going to get it or is trying to sell you Gold. Right now the M0 is actually MORE than the M1, that's not something that supposed to be able to happen in this guys universe.

The "money" that was spent over the past 8 years isn't expressed by the M1 and M2 reports and it wouldn't have been expressed in the M3 had it been continued.

Something in the neighborhood of 4 - 6 trillion dollars of this new "money" went *poof* Goodbye! last year and an similar amount will probably go *poof* this year and the inflationists instead focus on the fact that "Helicopter" Ben waived his magic wand and *zapped* a mere 800 billion into existence.

Eventually, once the credit collapse is complete, there will be either be serious inflation or a major devaluation of US currency via US goverment default. These are not the same thing and neither one is likely to happen in less than 2 years.

[graveday]

Okay first of all, anybody who at this point is saying, "Inflation and deflation are purely monetary phenomena." and then blathers on about how the M0 is expanding either doesn't get it and isn't going to get it or is trying to sell you Gold. Right now the M0 is actually MORE than the M1, that's not something that supposed to be able to happen in this guys universe.

The "money" that was spent over the past 8 years isn't expressed by the M1 and M2 reports and it wouldn't have been expressed in the M3 had it been continued.

Something in the neighborhood of 4 - 6 trillion dollars of this new "money" went *poof* Goodbye! last year and an similar amount will probably go *poof* this year and the inflationists instead focus on the fact that "Helicopter" Ben waived his magic wand and *zapped* a mere 800 billion into existence.

Eventually, once the credit collapse is complete, there will be either be serious inflation or a major devaluation of US currency via US goverment default. These are not the same thing and neither one is likely to happen in less than 2 years.

Well, I don't know who you are FB (chuckle). It seems like your predictions will break even, but I would question your timeframe.  Could you back up your claims with links?

[Faceless Bureaucrat]

Links let's see

http://www.federalreserve.gov/Releases/ is a good place to start.

M1 and M2 are here http://www.federalreserve.gov/releases/h6/Current/ with historical info here http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

There's is no such thing as an M0 report, strictly speaking M0 would be the total value of FRNs plus the total value of US coins. Total value of FRNs in existence is found at the bottom of this report http://www.federalreserve.gov/releases/h41/Current/ or currently $1,024,646,000,000 face value with $176,447,000,000 actually in held in Federal Reserve Bank vaults. Total face value of all US coins ever minted is somewhere around 50 billion, no one really knows how much of that is still in existence. Red Book could give you exact production numbers if you really think it matters.

However, what Mr. Hamilton is referring to as the M0 is actually the "Monetary base" which is an aggregate of "liquid" bank deposits Also Known As "cash" reserves. That can be found here http://www.federalreserve.gov/releases/h3/Current/.

The reason why the monetary base is increasing is clear from the report, starting in Sept. '08 banks have been holding massive "excess" reserves, meaning reserves kept in addition to those they are required to hold by law. Furthermore they have been increasing these reserves as fast as they possibly can. This is totally unprecedented!!! If anything this is an indication of imminent deflation.

Regarding 4 - 6 trillion of credit destruction in 2008 and an equal amount this year these are merely my guesstimates as is the time estimate of at least two years before things change.

It's possible that the Federal Reserve will fire up the presses in a meaningful way before that but it will be obvious to everyone. The Herculean amounts of money creation that would be needed to plug this sucking chest wound enough to cause inflation in the short term would be impossible to miss.

 

[kats]

I guess my question would be, does it matter whether it's inflation or deflation? Money is eventually going to become pretty worthless, without either effect.

[memills]

From a recent "Money and Markets" newsletter  (safemoney.com)

Two Competing Expectations
For the Future

They are:

   1. Uncontrollable money-printing and excess spending on bailouts and stimulus are breeding a new, super-inflationary environment.

   2. The change in capital flow as evidenced by shifting consumer attitudes is ushering in a period of deleveraging and deflation that will force a global economic rebalance.

My expectations happen to fall in the latter. I'm of the feeling that expectations for an inflationary environment are a bit premature.

So what about my expectations for an ongoing bull market in the U.S. dollar?

For the Answer, Look Beyond the
Rotten Fundamentals ...
Consumers are abandoning stores. Instead, they're saving their extra money.
Consumers are abandoning stores. Instead, they're saving their extra money.

If you're looking solely at the U.S. economy's fundamentals and refuse to compare them to the expectations for competing economies, then my expectations for the U.S. dollar are way out-of-whack.

After all:

    * The U.S. government is running up its budget deficit to historic levels ...

    * The Treasury is printing money like it was newspaper ...

    * Unemployment has soared to a 16-year high ...

    * Consumers are spending far less ...

    * And Americans' wealth in housing and stocks has been smashed to smithereens!

But if you're looking at the U.S. on a relative basis, versus competing economies and currencies as I am, then my story for an ongoing bull market for the dollar begins to make a lot of sense.

Heck, the British pound just hit a new 23-year low against the dollar!

As I've explained in past Money and Markets columns, a sharp pull-back in U.S. consumer expenditures means any extra money is now being saved.

And here lies another point of contention:

Does Money Saved Automatically Mean
An Equivalent Amount of Money Is Invested?

It depends ...
Banks and institutions that are not willing to lend are hoarding their cash.
Banks and institutions that are not willing to lend are hoarding their cash.

You can argue that consumers simply placing money in a checking or savings account are investing, even though they aren't making a direct investment in, for example, stocks or real estate. That's because the bank loans out most of those funds to individuals and businesses.

However, we are experiencing an environment of bearish sentiment. This is an environment when consumers' expectations of future prices and outlook for their own employment are uncertain.

Consumption is obviously on the decline. Investment is likely heading in the same direction. The result of uncertainty in expectations has created hoarding of cash; not just by individuals, but also by banks and institutions that are not willing to lend.

With a growing proportion of money under the mattress, I find it hard to believe we need to batten down the hatches for the coming "Inflation Armageddon."

Right now cash is reflecting the expectations of a rise in the purchasing power of money ... or in other words, falling prices.

To paraphrase an example Hazlitt uses:

    Consumers are making sure they have enough for dinner tonight and tomorrow; they're securing future dinners. The idea of two dinners tonight is a thing of the past; they're learning the dangers of over-eating.

Investment will return and consumption will eventually follow. But not until both are functioning normally should we expect the world economy and the investing environment to function normally.

In the meantime, I believe that inflation is not an immediate concern, which is a good sign for the U.S. dollar.

Best wishes,

Jack

[graveday]

Interesting post Jack.
Interesting post Jack.

[flash]

Links let's see

http://www.federalreserve.gov/Releases/ is a good place to start.

M1 and M2 are here http://www.federalreserve.gov/releases/h6/Current/ with historical info here http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

There's is no such thing as an M0 report, strictly speaking M0 would be the total value of FRNs plus the total value of US coins. Total value of FRNs in existence is found at the bottom of this report http://www.federalreserve.gov/releases/h41/Current/ or currently $1,024,646,000,000 face value with $176,447,000,000 actually in held in Federal Reserve Bank vaults. Total face value of all US coins ever minted is somewhere around 50 billion, no one really knows how much of that is still in existence. Red Book could give you exact production numbers if you really think it matters.

However, what Mr. Hamilton is referring to as the M0 is actually the "Monetary base" which is an aggregate of "liquid" bank deposits Also Known As "cash" reserves. That can be found here http://www.federalreserve.gov/releases/h3/Current/.

The reason why the monetary base is increasing is clear from the report, starting in Sept. '08 banks have been holding massive "excess" reserves, meaning reserves kept in addition to those they are required to hold by law. Furthermore they have been increasing these reserves as fast as they possibly can. This is totally unprecedented!!! If anything this is an indication of imminent deflation.

Regarding 4 - 6 trillion of credit destruction in 2008 and an equal amount this year these are merely my guesstimates as is the time estimate of at least two years before things change.

It's possible that the Federal Reserve will fire up the presses in a meaningful way before that but it will be obvious to everyone. The Herculean amounts of money creation that would be needed to plug this sucking chest wound enough to cause inflation in the short term would be impossible to miss.

 

FB,

  Here is wikipedia on monetary base:

In economics, the monetary base, or the money base (often called narrow money in the UK) is a term relating to the volume of money in the economy, or money supply. The monetary base comprises only currency (banknotes and coins) and commercial banks' reserves with the central bank. As such, it is a narrow definition of money supply, consisting of only the most liquid forms of money. Wider definitions of the money supply include the public's bank deposits and are therefore larger in volume and encompass money of a lower liquidity.

These definitions of the different types of money are typically classified as levels of Ms, where the monetary base is the lowest M-level: M0 [1]."Open market" operations are monetary policy tools that affect directly the monetary base [2]; the monetary base can be expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.


I am not trying to nitpick but it looks like M0 is the same as monetary base. The most liquid forms of money. Maybe wikipedia is incorrect here? Other question: where do the newly expanded bank reserves come from? Seems like it must be either citizens depositing currency (unlikely) or a government expansion of M0 (or monetary base). Or a shift of commercial bank reserves to the central bank (from their own vaults and loan portfolio, I guess). Maybe the latter is what you're saying.

[Dr. Doom]

I began thinking the thoughts in the fall of 2007 and started the Deflation thread back in December 2007. As a voice from the wilderness, preaching the gospel of Doom, I was subject to a certain amount of ridicule from friends, family and even some from others on this board. To be where we are now, looking back on then, I cannot even fathom the sea change in society. Less than 18 months ago, talking deflation was to be ridiculed. My how things have changed.

Something in the neighborhood of 4 - 6 trillion dollars of this new "money" went *poof* Goodbye! last year and an similar amount will probably go *poof* this year and the inflationists instead focus on the fact that "Helicopter" Ben waived his magic wand and *zapped* a mere 800 billion into existence.

Eventually, once the credit collapse is complete, there will be either be serious inflation or a major devaluation of US currency via US goverment default. These are not the same thing and neither one is likely to happen in less than 2 years.

I heartily agree. I guess there should be a new category for us. Deflationist (Now With Currency Collapse^TM)

It's possible that the Federal Reserve will fire up the presses in a meaningful way before that but it will be obvious to everyone. The Herculean amounts of money creation that would be needed to plug this sucking chest wound enough to cause inflation in the short term would be impossible to miss.

The human mind breaks down at the unimaginably large and the infinitesimally small. We have a very hard time conceptualizing exactly how much one trillion of anything actually is. When you begin to speak of tens of trillions in lost "assets" and the destruction of many tens more in buying power due to the destruction of available credit, to expect that Fed and the government to "create" inflation through the "printing" of hundreds of billions of dollars of money for the banks to not lend is simply looking at the picture from too narrow of a perspective.

I guess my question would be, does it matter whether it's inflation or deflation? Money is eventually going to become pretty worthless, without either effect.

The destruction of the monetary system is a given at this point. My actual long term outlook is a devastating deflationary depression, prolonged for a decade by meddlesome government intervention, followed by total destruction of all linked fiat currencies as markets collapse and take entire national economies with them. The stunning unraveling now underway in Canada is instructive. This is what it looks like when the commodities markets turn upside down, with input costs for raw materials and labour coming in at many times market prices.

And I still don't have any seeds in the ground.

[graveday]

And I still don't have any seeds in the ground.

Dr. Doom weighed in with a post too long for haiku, but the last line still works fairly well as a haiku denouement.
I would agree that it is difficult to comprehend large and small numbers, but not that difficult.  I taught fifth graders to understand the impact of three zeroes.  One could spend 1,000,000 dollars in about eleven days, but it took thirty two YEARS to spend 1,000,000,000 dollars, if one were spending one dollar per second 24/7.  Trillions are beyond human lifespans at this rate of one dollar per second and, I warrant, difficult to grasp intellectually, let alone physically.
I have been waiting for this response.  Events have swung so sharply to the dire, that even the reticent Dr. Doom is forced to claim a new category.
Deflation, with currency collapse.
This is like popping the balloon and then inhaling and choking on the plastic rubber corpse.

For pure alliteration, let alone doom, one has to love his long term outlook of "a devastating deflationary depression, prolonged for a decade".
For ESL folks, that's ten years. 
Get your seeds in the ground.  It will take that long to know what they will do for you.

[peakoilmom]

I thought you all would enjoy reading this article. It's about how Chinese inflation will be what destroys the dollar. Sounds convincing to me. What do you think?

http://www.gold-eagle.com/editorials_08/decarbonnel012009.html

A couple of excerpts:

Hyperinflation Will begin In China And It Will Destroy The Dollar

Eric deCarbonnel
January 20, 2009


The conventional wisdom on China is dead wrong. Specifically, there is a widespread belief, as expressed by Goldman Sachs, that "China will keep the yuan trading within a narrow range in 2009 due concerns about exporters." Worse still, others are even predicting that China will devalue its currency! The sheer wishful thinking is astounding! The idea that "China will keep the dollar peg to help its exporters" ranks all the way up there with "Housing prices always go up" and "You can spend your way to prosperity".

THERE ARE NO FREE LUNCHES

If you have learned nothing else in the last year and a half, you should have learned that if something sounds too good to be true, that is because it IS too good to be true. The media overwhelmingly presents China's dollar peg as a win-win situation: Americans get cheap imports and low interest rates while China gets a strong manufacturing sector. While commentators do sometimes debates whether China will keep lending us money forever, they never talk about the REAL problem with the dollar peg.

....

The US's trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China's Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China's base money supply by an amount equal to the increase in its foreign exchange reserves. While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

The true threat to the dollar peg

If there is one development which could force China to drop its dollar peg, it is out of control inflation. Rampant inflation would result in millions of citizens starving and would create widespread social unrest. Keeping food prices low is a matter of political survival for Chinese authorities. So, facing the choice between losing their grip on power and losing the dollar peg, they will not hesitate for a second to sacrifice the dollar to save their own skin.

....


While China has been able to contain inflation to single digits for the last decade, that is about to change. All economic forces are aligning in China for a surge in inflation. ....

[PromiseLandAkitas]

Ninakat,

I wish to thank you for the time and effort that you put into this thread.  It is very informative and helps me understand were the "experts" stand in relation to this issue.  If we agree with them, or the data that they use at this point in time, is another thing.

What I would like to ask of the members that are currently reading and commenting on this thread is this;  where should we be putting our money (401K, money in the stock market, spare change, etc) for these different scenarios that have been listed.  The inflationary group, the deflationary now but inflation coming group, and the deflationary group.

I see gold being discussed a lot, from both sides of the argument, but what else might we want to look into?

Thanks