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Fallacies in the Inflationists’ Argument

By Rick Ackerman Posted on May 1, 2016, 8:16 pm EDT Last Updated May 2, 2016, 11:03 pm EDT

Like nearly all who have argued the case for inflation/hyperinflation in this forum, “Mary,” who posted here last week, failed to describe a plausible mechanism to make it happen. Like so many others before her, her argument rests on the assumption that the Fed can simply ‘gun the money supply’ to produce a desired quantity of inflation at any time. If it were that easy, one might ask, then why haven’t Japan’s and Europe’s desperate attempts to do so failed to stimulate any inflation whatsoever — other than in the price of homes, stocks and sovereign bonds? Below is my response to Mary’s post, which can be read in its entirety by clicking here.  

(Hyper)inflationists never like to discuss the nitty-gritty details of how it could happen, Mary. They seem to think they can win arguments by throwing around vague phrases like ‘gunning the money supply.’ But what, really, is this supposed to mean? Central-bank stimulus to date amounts to perhaps $20-$30 trillion, but the only inflation it has created is in the housing market, stocks and bonds, which are all vulnerable to a collapse — i.e., deflation — at any time.

Why ‘Plastic’ Will Fail

Having read Adam Fergusson’s insightful work, When Money Dies, you must be aware that the Weimar hyperinflation was propagated with physical cash money. We don’t use much of that any more, and that poses a key problem for the ‘helicopter-drop’ crowd. You could always argue that the fraudsters at the Fed would simply have the banks add a zero or two to everyone’s credit line. But just try to play that forward. As I’ve noted here many times in the past, the clearing system that makes plastic money “work” is exquisitely fragile, based as it is on ignorance, self-deception and egregiously misplaced trust.

Anyone who would argue the case for hyperinflation should be made to explain first of all what will happen to mortgage debt. Will we someday be able to peel a few megabills from a money clip to pay the balance due on our homes? And when you’ve finished with that question, please tell me how a hyper-expansion of credit would interact with such incipiently deflationary black holes as pension funds, Social Security, Medicare and life insurance? They all pay recipients in cash, as you know, and trying to hyperinflate away their obligations — i.e., stiffing beneficiaries — would start riots.

 

  • TC May 4, 2016, 7:26 pm

    Central bank buys all of it’s countries issued debt via QE (already well on our way in many countries). Central bank then wipes away all debt they own with the stroke of a key. Mortgage forgiveness act of 2018, “Make America Strong” Pension reform (bailout) of 2019. This makes the countries debt level high again. Central bank beings buying debt via QE… Central bank then wipes away that debt with another stroke of a key.

    &&&&&&
    Politically, economically and socially, TC, there may be more to it than that. RA

  • Jason S May 4, 2016, 11:37 am

    I see inflation and deflation as the different sides of the same coin. Both will devalue labor and cause misallocation of resources.

    It is a sign of how bad things are that both are present to such a degree. I think John Jay hit the nail on the head when he said, “Never in the history of the world has there been more people, or less of a need for them.” This lessens the value of labor. The tools we use to fight it are either erroneous or have been corrupted and lead to the misallocation of capital.

    At this time, with this level of dislocation, deflation is far more powerful a force. Like entropy, it will have its way sooner or later. As we try and manufacture inflation to fight it, it will only aid the destruction.

    &&&&&&

    Great post, Jason — a keenly insightful way of looking at the problem. Thanks for weighing in. RA

  • Rick Ackerman May 3, 2016, 6:56 pm

    I’m still looking for good inflation arguments, Mary, but consumer inflation is not one of them. Nor is Japan’s heroic attempt to inflate. Any actuary or demographer could tell you that they have already lost the battle. Meanwhile, compared to the QUADRILLION DOLLAR juggernaut of derivatives deflation sitting on the banking system’s books, grocery bin inflation, or even a periodic doubling of college costs, is just chump change. Concerning tuitions, by the way, this is just another deflationary time bomb, since the cost increase has been met with $1.6 trillion in student loans that will eventually default. That’s how deflation works. And how can consumer inflation be inflationary (that word implying a process at work) when real incomes have stagnated? The only answer is that, absent wage growth, we have been borrowing to meet the higher cost of things — borrowing against home equity, borrowing on revolving charge accounts, borrowing to buy or lease more car than we can afford. Click on this link — http://bit.ly/1rtV7kJ — for yet another black hole of deflation that could suck the gaseous global financial system into a vessel no larger than a soup can.

  • Mary May 2, 2016, 12:04 pm

    Thank you for responding, Rick. I have been puzzling over the inflation/deflation problem for 30 years and don’t pretend to be able to predict anything.

    Not to argue the case for hyper-inflation, I beg to differ with you on the idea that the only inflation has been in financial assets. Unlike many who carry on this public discussion, I actually shop and pay the bills in our household. The fact is that there is plenty of inflation. All our bills have gone up, the ones for services that can’t be outsources by the corrupt fascist system under which we labor are the worst–TAXES, insurance, education, rent, plumber, electrician, car repairs, medical care, used cars… and food, too.

    So please, stop trying to sell that ol’ saw. There’s plenty of inflation in the real economy. Even the cheap doodads from China are more expensive in that the quality has plummeted–if that’s even possible–and the stuff breaks upon getting it out of the box. This is my experience and no amount of arguing back and forth will convince me otherwise. To be blunt, you are incorrect.

    How will the “helicopter” money be pushed out to us? The trial balloons are everywhere on the news. What do you think the talk of a cashless society is all about? In Japan, they are talking about sending households vouchers. There’s also been plenty of discussion about a guaranteed minimum income, too. One thing I bet we’ll agree on is that even though the creeps at the central banks aren’t geniuses, they do their dirty work for a living, 40 hours a week. We only have a few minutes here and there to devote to these ideas. They have plenty of time and unlimited resources to think up their schemes (trillion dollar coin, anyone?). They won’t let their system of graft and corruption collapse without a fight. How did they create inflation the last time in 2007-08? They changed the rules. They will do it again when their backs are against the wall.

    As for people with mortgages, if tptb succeed at the slow burn, yes, we will be paying our monthly mortgage payments in vastly depreciated dollars, just as our parents did. If there is a hyper-inflation accident, all bets are off. I can’t answer you. I wish I could. We’ll just have to live it to find out, heaven forbid.

    PS About Japan. My daughter and a family friend have been there in the past few months. The cost of living there is still very high. Please explain THAT if they’ve had 20+ years of deflation. They haven’t. They have had 20+ years of asset prices collapsing while their idiot central bankers inflate the money supply, the worst possible combination. Just like us.

  • John Jay May 2, 2016, 6:38 am

    Well Rick, what we have lived through in these last 50 years is, to a large degree, unprecedented in the history of economics.
    When LBJ ended silver coins overnight in 1964, he accomplished a debasement that it took the Roman empire several hundred years to achieve!
    He did that overnight!
    Think about that.

    Next, consider how the entire Western World Order is disintegrating before our very eyes.
    From the MENA, to Europe, to Puerto Rico, Mexico and South America, nothing but chaos, bankruptcy, and whole populations fleeing those conditions.

    Never in the history of the world has there been more people, or less of a need for them.
    Not to mention the collapse in morals.
    To paraphrase Putin, “Two thousand years of Judeo-Christian morality has been tossed in the rubbish heap.”
    And one 747 planeload of people own the entire planet!

    What the Fed is trying to do is not create Inflation, but to prevent catastrophic Deflation, especially in Real Estate and the Stock and Bond markets. There is a huge difference in those two tasks.
    So they buy up worthless MBS paper at par, and in the case of the CB of Japan, they are buying up their entire stock market, all in an increasingly obvious attempt to stop the natural consequence of Inflation, complete Deflation.

    The flood of buccaneers from China bidding up West Coast Real Estate from LA to Vancouver are essentially doing the same thing, escape the coming Deflation in China that their CB is also fighting.

    It would take a book to cover it all in depth, but everyone that visits this forum can see the truth without my doing that.

    To sum it all up in one anecdote, as I drive around out here in greater LA surrounded by brand new Beemer, Benz, and a plethora of other exotic cars, and 700,000 dollar shacks, I only have one thought……….

    This is nuts!

    Nuts!!!!!!!!!!!!!!!

    ‘

  • Ben May 1, 2016, 11:55 pm

    Oh, boy… Gonna be one of those weeks, isn’t it? 🙂

    All I’ve left to say is that I recently spotted a headline over at Drudge or Breitbart that read “Americans 16 Years Without a Raise!”, or something to that effect. And I’ve seen so many like them, over the years. Timelines vary, of course, but the point is: Inflation sure does make money tight!


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