Yesterday’s challenge – explain how inflation will get off the launching pad in a deflating economy – went unanswered, although the topic itself provoked quite a response in the Rick’s Picks forum. The question was not rhetorical, since in order to produce inflation there has to be a mechanism for all of that printing press money inflationists keep blathering about to physically make its way into the consumer economy. Anyone who thinks massive fiscal spending alone can create inflation should read Hayek’s The Road to Serfdom, since the equally massive borrowing needed to finance a public works economy will place a severe drag on the productive, private half of the economy (and that’s assuming there will even be a private economy once President Obama completes his fascist project of merging The Government with America’s biggest corporations).
One of the more interesting comments in the forum came from reader David White: “There will be no policy changes,” David writes, “only more of the same until the situation is so dire that handing out checks will be the only way to get money into consumer’s hands, thus depreciating the currency to save the economy. For a little while longer, at least. Rick obviously doesn’t believe that Bernanke won’t do what he said he would. But I assure you he will. For that matter, the government started handing checks out last you, setting the precedent for bigger and bigger checks.”
When Government Gives Up
My response: “Exactly: “…until the situation is so dire that handing out checks will be the only way to get money into consumer’s hands.” This is what I meant when I wrote the following: ” Hyperinflation will arrive when The Government decides that fiscal stimulus alone cannot ever get us out of debt, given the vast sums of debt that need to be inflated away.”
But I am not talking about some piddling $1800 tax refund; rather, the checks that the government hands out will need to be as big as the “underwater” part of everyone’s mortgages – plus some substantial cushion of perhaps $50k to $100k- in order to “solve” debtors’ problems and keep consumption numbers up. The cushion would tide us over until good jobs return – hardly a given, since the U.S. without a banking industry has little left to sell the world.
Bernanke Still Behind Curve
Concerning Bernanke, a political stooge, he hasn’t come even remotely close to shoveling $100 bills out of helicopters. Whatever the guy said he would do, and regardless of what he allegedly learned studying the Great Depression, in practice he has been too chicken-hearted to do what it would take. That’s why the $11 trillion shot at the problem so far has done nothing to reverse the deflationary slide in real estate. Bernanke has been behind the curve since the beginning, and he still is – still hasn’t copped to the fact that the only solution to deflation, other than via deflationary liquidations, is to hyperinflate, literally distributing large bills to the populace.”
The comments, in the forum, of “Jack” also raise some provocative questions. He believes in deflation but cannot see why, if that’s what’s coming, an investor should stick with gold:
“This is a great debate,” he writes, “and I appreciate everyone’s thoughtful opinions. Your opinion that deflation is a certainty and is underway is logical and I have no argument there. But you also say that inflation is not going to happen and that hyper inflation is only a possibility.
Sell Gold Now?
“Let’s assume that you are 100% correct and that deflation continues and that the possibility of hyperinflation does not occur. If that is true then wouldn’t I be better off to sell my gold and silver and stuff the cash back in my safe deposit box? With continuing deflation and no inflation then gold will soon be below $500 an ounce and my treasury bill hoard will double in value. Well, won’t it?
“The cash will buy twice as much gold and should also buy twice as much milk, eggs, gas…
“Or, am I missing something? If your deflation theory is dead on then how can U.S. treasury notes not be a better investment than gold or silver? I do believe you are right about the deflation but I just can’t force myself to make this trade.
Bogus Bills
“As an aside, did you know that the treasury says that 50% of all the U.S. paper money in circulation is outside of the United States? And they also admit that 50% of the money circulating outside of the U.S. is counterfeit. Not copy machine quality but bills printed on the same printing presses the Treasury uses and with equal quality printing plates, ink and paper. They are printed by sovereign governments and are pretty much indistinguishable from genuine currency.
“Just a thought. Rick, you may be right on but I’m going to hold back a little bit of that gold and silver. Jack.”
The short answer, Jack, is that Gold is likely to do well regardless of whether we hyperinflate or deflate. If the latter, bullion will be one of the very few monetary assets on earth that is completely unencumbered by debt.
On these and other matters we welcome your further comments, dear readers, since we don’t claim to have all the answers. Let the dialogue continue.
(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)
Re-post:
An earlier post (April2&3) that explains how money gets into the system.
Rob writes:
As far as this issue about money needing to be borrowed into existence in order to create inflation, that is largely an academic argument. Look at any of the inflationary scenarios of the past and you will see there is almost no “borrowing” going on, especially by “consumers”. Zimbabwe, Argentina, Russia, Weimar Germany, etc. In all cases the money was not ultimately borrowed, it was printed up to cover cash flow needs irrespective of debt. Once the money is created, by whatever means and paid out, it is forever in circulation, no matter what debts default. The total M3 (or equivalent) money supply amount only increases. So yes the current U.S. monetary policies will ultimately be inflationary, regardless of debt. All previous countries started their inflationary trends based on too much debt. Had the debt overwhelmed the inflation of the money supply, then you would have seen no price inflation and no problems. However this has never been the case. Ever. So this argument about deflation is totally wrong based on observable evidence and is little more than science fiction based on a “conceivable” idea of what could, maybe happen, yet never has. In all cases the debt went bad, yet the printed money, electronic or physical, was still floating around and ultimately caused price inflation. Just because a debt write off happens, that does not pull the credit out of circulation. Throw in FDIC insurance and such and it actually increases the inflation of the total money supply and the future associated price increases. So stop this stupid deflationary talk.
Rick writes
Stupid deflationary talk? That’s a pretty silly thing for you to say, Rob, considering that perhaps $100 trillion in asset values have already been deflated out of existence, and considering that the real burden of debt is close to crushing the last breath from the global economy. Anyway, you can join the crowd in having failed to explain how all that alleged money will get into the system. You stupidly mentioned the FDIC, but if the FDIC bailed out the entire system it wouldn’t add one dime to what depositors believe is in their accounts. Finally, in none of the countries you have mentioned did hyperinflation simply “happen.” Rather, in each instance, the government willfully and deliberately hyperinflated. So far, Obama and his brain trust have shown no desire whatsoever to go down that path. In the meantime, mere fiscal stimulus will achieve almost the opposite, since, no matter how much you pour down the toilet of public works projects, it will only consume capital and destroy the wage base. As Fekete has noted, debt service is now consuming productive capital so that more borrowing/stimulating in itself has become deflationary. RA
Rob writes
No, stupid deflationary talk is not a silly thing to say. I did explain exactly how the money gets into circulation: “In all cases the money was not ultimately borrowed, it was printed up to cover cash flow needs irrespective of debt.” It does not take borrowing by consumers. The Obama administration/government and Federal Reserve itself did go down the hyperinflationary path even more last week when they announced that it would monetize the treasury purchases and other asset purchases with money simply printed up. Inflation/deflation is defined as the relative expansion/contraction of the total money supply over GDP. So using your own logic, with 100T in asset values lost (translate shrinking GDP) and the monetization of the treasuries and such (i.e. printing up even more money into circulation), total money supply increased relative to GDP. Go look at the total M3 and it has never gone lower, it only moves higher. Even today it is expanding over 7% a year (Shadowstats.com). This is inflation defined and will result in general price rises sooner or later, especially in gold, oil and agricultural commodities. The money can get into the system merely by the government spending the money on public work, giving it away through welfare, bailouts, military spending, etc. That gets money that is simply printed up, into the system. It is that simple and exactly how all the inflationary scenarios of all the countries listed above happened. The U.S. treasury used to print the money up as dictated in the constitution, but now they pay the private banks (i.e. Federal Reserve) to print the money up using treasury bonds as the vehicle to achieve such. The FDIC bailing out everyone certainly would add money into depositors accounts as it would replace the money previously borrowed and spent that is still in the system and add an additional amount visa via the printing press, so total money in circulation goes even higher. Just because a bank goes broke because of falling asset values on their books, this does not mean the money is pulled out of the system. The money is on someone else’s books as a credit and is still in circulation. Hence, that is part of the reason for an ever expanding M3 and the accompanying general rise in prices.