Time for Inflationists to Put Up or Shut Up


As “dead” money continues to pile up in the form of unborrowed bank reserves, we’ve grown increasingly skeptical about the possibility of an inflationary spiral. Hyperinflation seems inevitable somewhere down the road, but what about now, as real estate deflation continues to asphyxiate the U.S. economy?  To all who have continued to insist that the Fed would not “allow” a deflation to occur, we say once again: Look around you. Even those two intractable engines of inflation – college tuition and health care – appear, finally, to be slowing down.  Moreover, an even more powerful source of inflation — government spending – has begun to decelerate with the lethal speed of a crash dummy. Yes, the party may continue for a while in Washington D.C. and its suburbs, since that is the epicenter of an unprecedented fiscal blowout. But the ripples from fiscal stimulus cannot reach New Jersey and New York, even, let alone California.  These states and quite a few others face grim budget realities that will continue to deaden whatever short-lived stimulus the federal government can create. And let’s not lose sight of the fact that stimulus itself implies borrowing down the road from a dwindling number of taxpayers who, miraculously, have money left after paying for life’s necessities.


We told the inflationists to wake us when tract homes were selling for a quadrillion dollars, since that would imply deflation had been reversed by true helicopter money.  That would be terrific news for the perhaps 50 million homeowners who currently are underwater on their mortgages, since it implies that the main source of household debt had effectively been liquidated.  But before you get your hopes up, consider who would lose if mortgage debtors were allowed to skip out on trillions of  dollars worth of obligations.  Lenders and savers would take a bath, for one, and all of the financial firms that the U.S. has worked so diligently to bail out, and to keep bailed out, would become as helpless as flies in amber. Do you really believe that the Masters of the Universe – the very same plutocrats who supposedly manipulate Democrats and Republicans alike to do their every bidding – would abide a political decision that would reduce them to penury overnight?

When Can We Expect $500 Eggs?

Whenever we comment on the inflation/deflation supposed debate, we are deluged by e-mails, mostly from misguided inflationists who still implicitly believe that Helicopter Ben and his monetarists minions are all-powerful.  This crackpot idea has been tested and found wanting, to say the least. It is time for the inflationists to acknowledge this.  If you guys were wrong three or four years ago, when you began arguing, for one, that inflation is “simply” an increase in the money supply, then you are even more wrong now.  Please tell us when, and how, the inflation you have been predicting for too, too long will commence.  Will we soon see an outbreak in wages? Eggs for $500 a carton? Zillion-dollar homes and billion-dollar Mercedes Benzes?

In Japan, which has trained its fiscal and monetary artillery on deflation for nearly two decades with no success, noodle wars have broken out between the three biggest fast-food restaurants.  And here in the U.S., burger franchisees are in revolt against orders from above to sell double cheeseburgers as a loss-leader for $1.00.  In a nation whose GDP is 70% consumption, does that sound like a harbinger of inflation?


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  • John Epperson February 7, 2010, 12:51 am

    Unemployment will never be under 7% unless there is a bubble/scam brewing. This goes back to the Euro Powers. Euro Powers want to be umber one and control the planet therfore the dollar must be destroyed and the Euro solidified. Enter Great Web Holdings LLC of Great Britain that purchases Experian under U.S. Congressional approval around 2005. By the way Experian owns FreeCredtReport.com.

    The housing boom fires are stoked. Credit score criteria is loosened and more people qualify for mortgages. Credit Repair becomes virulent also boosting scores. Hordes of now qualified buyers get new homes and the 6% contribution by sellers towards closing costs by sellers. Soon it appears all the credit bureaus have relaxed scoring criteria. Most lenders will take the lowest or middle credit score on the three bureau report to qualify the applicant. The housing spiral goes parabolic. Europe makes tons of money off mortgage securities. Federal government rakes in tons of income tax dollars. Property tax revenues erupt like Old Faithful. Everything is good.. or is it?

    The housing Ponzi scheme which makes Madoff look like a kindergardener finally stops producing. The bankers and hedge fund bunch get the blame. Let’s look deeper at the cancer. The roots are the credit scores which allowed for this anomaly to take hold. Without qualified applicants there is no overnight eruption in the housing market. Once in place, it is nurtured by every level of government so as to squeeze more and more tax dollars from the unsuspecting public. Yeah, right ..they were blind to this. Perhaps they shouldn’t have approved of some foreign power having access to most of the credit files of the entire U.S. population.

    In the end, the gamble fails for the Eurogreedsters. One world government and one world currency..well not yet anyhow. Cap and Trade, Global Warming, Al Gore, Socialist agendas etc. .. Americans are allergic to these irritants and will react against them. The Euro is down and the USD up.

    Unfortunately, as the USD rises the stock market and gold decline these days. This occurs up to a certain point though. Look at the end of January 2009 and you will see gold holding hands with the USD through the middle of March. This is encouraging . Most know that gold is a hedge against inflation; however, it is a hedge against equity instrument declines. In other word, somewhere around $INDU 8100 gold ends its romance with the market and turns to the USD as its new lover. Thats the good thing about that old Casanova Gold.. when the romance sours it finds a new paramour. Thus the Euro is diddly, the U.S. ecnonomy is in Dr. Hyde mode, and gold is doing well waiting to hitch a ride to new highs.

  • Brad P. February 6, 2010, 7:56 pm


    Another one of those dreaded Austrians Murray Rothbard makes a good point in “Mystery of Banking” that there is significant lag between the increase in the supply of money and the eventual rise in prices. Like you said, lots of dead money lying in the banks with no one to lend it to. But look out when confidence starts to return and credit demand starts to pick up. There is a tremendous amount of potential energy stored up in personal and corporate savings as well as bank balance sheets. When the fear subsides and this energy begins to turn kinetic you will have price inflation. When people feel a palpable sense that their money is depreciating rapidly, you will have hyperinflation and a currency crisis. It’s happened many times before in history. Technology does not change human action.

  • EB February 6, 2010, 7:42 pm

    I am not a currency expert but my hunch is that inflation will show up in the fiat currencies in direct correlation to a rising yuan.

    My other hunch is that the yuan’s rise in the Spring of 2008 led to the spike in USD oil in the summer of 2008. And that if the yuan was freely floated, we would be paying a minimum of +$10.00/gallon for gas.

    In which case the central banking system would be under direct fire from Congress as Congress has the ability to pull the plug on their fixed game. Americans will tolerate many things but being the loser isn’t one of them.

  • Jason February 6, 2010, 6:11 pm

    This article was written to spark debate…at least I hope so. Rick, if you can’t understand the differences between inflation and high prices and the fact that a deflationary environment is the very driver of an inflationary environment, you have lost all financial credibility.

    Before the Weimar Republic fell into an inflationary trap, was the economy in good shape? What led to the inflationary spiral?

    What led to Rome falling into the inflationary spiral?


    What on earth are you talking about, Jason? RA

  • richard February 6, 2010, 5:47 pm

    “All debts will eventually be paid, if not by the borrower, then by the lender”

  • Chris T. February 3, 2010, 6:18 pm

    to RichIÖ

    Chris T: Yes, Liquidity, Velocity and Volume are all decreasing.

    my point though is that V is an irrelevant and discredited concept altogether, that does nothing to inform us either way in the inflation/deflation debate.

    Another apt analogy to money velocity is inventory velocityÖ

    Whether the goods are going out the door at a rapid pace or not has no effect on their price, as neither does the V of money.

    MV=PT thus becomes M=P, how much meaning is in that?

  • Rich February 3, 2010, 3:56 am

    It might seem the inflation/deflation argument is less factual and ultimately temperamental. Guess that’s what makes a market. Right now Big4 short copper, dollar, gold and silver and long vital asset classes.

    As prima facie evidence of potential being in the eye of the beholder, please enjoy one of the better summaries of Federal debt far exceeding the ability of the world, let alone the Republic, of repaying it.

    To me it looks like default-driven deflationary implosion making dollars scarce from the house of cards built on sand waiting to collapse as debt crowds out productivity. What’s that game piling on and removing wooden sticks until they collapse?

    Scriptures for millennia forbade Riba/Usury because they ultimately eat the seed corn with the borrower slave to the lender. That’s how Russia put Long Term Capital Management out of business.

    To Stewart Dougherty on the link below, he see’s inflation benefiting gold.

    Chris T: Yes, Liquidity, Velocity and Volume are all decreasing.

    Edwardo: please get your facts and quotes straight or cease and desist.

    John: Yes. I for one will be happy to reacquire gold and silver closer to original cost basis.

    Other Paul: Goodonya. The day may come when Safeway takes Eagle PM coins, why we are still raising money for an ATM exchanging paper money for PM coins.
    That day is not here (yet) when PM coins and goldgram spreads and costs well exceed the 1% Constitutional uniform Transaction Tax. The 1% TT on a quadrillion transactions a year with a spending freeze on discretionary items can quickly end the deficits, return private productivity and maybe even get us back to Andrew Jackson in 1835 when we had no Central Bank and no Treasury debt. Of course government may have to go on a diet. Can we all imagine a reality show called Biggest Loser for various government bureaucracies?

    Robert: According to posts here and elsewhere, the Fed is already monetizing as much as 80% of Treasuries, which Geithner is trying to extend from 49 months average duration to 72 months “before interest rates rise.” The 10 year T Note rate almost doubled in a year. With 20:1 leverage, the $2 T capital of the Fed can acquire $40 T in debt assets, with nowhere to put or sell them. Doubtful Congress, Debt markets and Taxpayers may tolerate too many more TELFs, TARPS or PPIPs before raising iRates further due to sovereign credit risk, a big talking point today. $40 T may seem like a lot of buying power until we remember no one on the Street nor the Fed could swallow Lehman. Wait until Stewart spells out the staggering total of IOUSAs that dwarf the global economy, let alone America. If interest rates go up 5% the Federal Reserve is underwater.

    YT Moey: We may see $5 oil and $500 eggs in that order.


    Regards All*RichI

  • Robert February 2, 2010, 7:13 pm

    RichI wrote:

    “If Uncle Sam can’t pay his bills, who will want his paper?”

    My response is that we will see the day (sooner rather than later) when this question will be definitively answered, and I’m guessing that the answer will be the US Federal Reserve.

    I’m firmly in the Schiff camp- when the “real” buyers of US debt stop showing up, the FED will step in under enormous political pressure and fire up the presses. I say that because if the choice was between printing money, or having Congress join the Ron Paul “Banish the Fed” movement- the Fed will choose the presses.

    The USZ (United States of Zimbabwe) will be underway long before we see 300 dollar gold- and the reason for this (in my opinion) is that once debtors realize that deleveraging over time is akin to hopelessly losing a race- they will simply throw in the towel on the starting line and decide against even running the race at all.

    How many of us “Good and decent” US citizens are seriously thinking about walking away from our mortgages because we feel we are throwing good money after bad? There is a very telling macro level psychology to be studied in that question.

    From where I sit, the rates of defaults on debt appear to be moving upward at a far faster pace than the rate that asset prices are moving down, and I don’t believe that default counts as deleveraging- deleveraging requires compromise between lendor and debtor- default is the debtor lifting a big middle finger to the lendor- leaving them holding the bag…

    With the public sentiment toward banks being what it currently is- I don’t think it will take much more pressure to see a lot more middle fingers over the next few years.

    Perhaps the gov’t will get smart and side with the people (not the banks) when the next wave hits, and that might be a game-changer, but I’m not counting on it.

  • Chris T. February 2, 2010, 9:10 am

    One thing should be pointed out, because it appears here very often, that being “velocity of money”:

    This is a bogus concept, and should not be used to underpin any argument either in for inflation or deflation.

    While the notion predates him, Irving Fisher (some call him the original deflationis, though charlatan or bufoon are more apt), famously placed that concept in his (many times) refuted equation: MV=PT

    Sadly, the “V” part has survived as a concept even so.
    Henry Hazlitt over fourty years ago did a great job at debunking this, anyone interested needs to investigate.

    V is not an independent variable, it is always = T, thus the notion is bunk. Hazlitt sums that up:
    “What we have to deal with, in the so-called circulation of money, is the exchange of money against goods. Therefore, V and T cannot be separated. Insofar as there is a causal relation, it is the volume of trade which determines the velocity of circulation of money, rather than the other way around… the velocity of circulation of money is, so to speak, merely the velocity of circulation of goods and services looked at from the other side. If the volume of trade increases, the velocity of circulation of money, other things being equal, must increase, and vice versa”
    Changes in the demand for money DETERMINE the velocity, not the other way around.

    Hazlitt again:
    “Average individual cash holding must always be the total supply of money outstanding divided by the population… People who are more eager to buy goods, or more eager to get rid of money, will buy faster or sooner. But this will mean that V increases, when it does increase, because the relative value of money is falling or is expected to fall. It will not mean that the value of money is falling, or prices of goods rising, because V has increased… It is the changed valuation by individuals of either goods or money or both that causes the increased velocity of circulation as well as the price rise. The increased velocity of circulation, in other words, is largely a passive factor in the situation.”

    Finally, a little Mises on this concept:
    “The service that money renders does not consist in its turnover. It consists in its being ready in cash holdings for any future use. The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals, but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available.”

    So, please, leave this long discredited idea behind, it is not a “lack of velocity” that is deflationary, nor is an “increase of velocity” inflationary, because it has no bearing on the value of money, because it is not causative.

  • Doc February 2, 2010, 6:45 am

    $1.99 for a can of pears! They were 2/$1.00 last I checked. If that isnt inflation… If the Feds monetize say $10 Trillion to cover Medicare and Welfare for the next few yrs, our money is toast. Inflate or die. Deflation would make our debts even greater.

  • john February 2, 2010, 5:31 am

    RichI- Wow 350 for gold and 4 for silver. I dont know if I would have a heart attack because of depression or excitement for getting in at such a low price. I hear both sides of inflation and deflation and they all make sense. As I posted before (not sure if you read it) but I own a small company and our insurance premiums went up 30% this year alone!! That is some serious inflation. If I want to fly, they now charge 20 dollars per bag, per way…that too is inflation as far as I am concerned. My property taxes went up 10% last year.. The only thing really going down in value is housing. WHEN the s**t hits the fan, I have little doubt the US will continue to print more and more money so I think deflation may very well happen but will be short lived. Either we print more money or default on our loans.. both scenerios make the dollar worth less and real assets such as gold, worth more. If I am missing something please let me know as I really enjoy hearing both sides of the argument.. also, I really dont think the central banks in India, China, Russia etc would let gold go down that low..I think the would be buying hand over fist well before that…but who knows, anything can happen!! I am hold plenty of cash though in case of a big deflationary event..

  • Alexander February 2, 2010, 5:13 am

    It appears that foreigners are no longer lining up to buy U.S. government debt. The Federal Reserve is now buying around 80% of the debt issued by the U.S. government to fill its $1.4 Trillion record annual budget deficit. This is a disturbing development and confirms that the U.S. government is essentially broke.
    But have you seen headlines about this in any mainstream media outlet? No. However, the fact that the Federal Reserve is now buying approximately 80 percent of U.S. government debt was recently admitted on CNBC. The video clip below is from January 8th, and at the 1:45 mark of the video CNBC anchor Erin Burnett mentions the 80 percent figure and uses the term “Ponzi scheme” to describe the current state of affairs….
    This monetizing the debt ie the Fed creating the money and then buying the Bonds itself – unlike the creation of debt – issuing IOU’s to third parties is HIGHLY Inflationary. Real Estate and stocks may yet have some way to go down but inflation is here and Hyper Inflation is on the way. No one can predict if it will be two years or 5 year down the road but CPI is cooked and not reflecting the real picture. 70% of Fortune 500 companies pay for the inflation statistics of John Williams at shadowstats.com ..
    “Last point there are now free markets anymore just interventions” Gold and Silver are the only ways to prosper (or at least protect oneself) in this scandalous and corrupt environment.

  • Other Paul February 2, 2010, 4:17 am

    We’ll know when the ___ has hit the fan for the dollar when Safeway posts two prices: not the “member” and “non-member” price, but one for fiat dollars and one for silver.

  • brian February 2, 2010, 3:54 am

    Hey Rick.

    I’m a faithful reader of your comments. Thanks very much for posting them. I’d like to take you up on your invitation to us inflationists to step up and say when.

    The present deflation in credit money is merely the current step in the FRN death dance. Since FRN money has to be borrowed into existence, and retail borrowing is basically on its butt, we lumpen suffer a reduced (deflated) supply of money.

    However, after I learned a bit more in 2005 about the FRN recycling mechanism that is the Treasury market, it hit me: the monetary inflation has Already Occurred. It’s residing in the existing $12T of FedGov Debt. That debt MUST mature into MZM. As that happens, we’ll begin get hot and heavy retail price inflation, and the $FRN reserve status will vanish.

    How will this price action occur? Courtesy of Congress, the Federal Reserve Bank, the Treasury, as they monetize Treasuries to fund vastly increased Federal spending that will push the cash directly into the hands of the lumpen. Think of a combination of tax credits, more stimulus madness, and direct payments a-la G.W. Bush.

    As an increasing number foreign buyers choose to redeem their Ts, rather then roll them over in perpetuity, they WILL spend that money. China is already doing so on the Q.T. with the long bonds they can’t easily convert to short-term paper.

    Then, as the domestic sources of existing cash are depleted and thus not available for Treasury purchases, the FedGov debt will be paid in an ever-larger portion with newly-created $FRNs . This process is already under way. As discussed in another thread, individual IRAs and 401(k) accounts, along with private pension plans, are already in the FedGov confiscation crosshairs.

    Is the inflation over yet? Not by a long shot, in my opinion. IIRC, the Fed promised the TBTF players that the biggest part of the $23T of bad loans of all stripes that are currently ‘off-balance-sheet’ would be made good. At that point, the TBTF banks will again be free to resume large-scale lending.

    Who will borrow? Why, the FedGov of course.

    Why not the consumer? Because ‘he’s dead, Jim’.

    Too many are and remain un- or under-employed, so there’s no way the lumpen can resume on sufficient scale, and any time soon, the consumer lifestyle that would borrow and spend all that cash. As well, the Boomers will try to retire in droves in about a year. We already know how broke THEY are.

    However, that new cash WILL be lent, because that’s how banks make money, and I expect that they will also be under a LOT of CONgressional pressure to stop ‘sitting’ on the cash, and ‘do something’ to ease the continuing economic malaise.

    So, I believe that the FedGov WILL borrow and spend that $23T, and in shorter order than we’ve ever seen. Keep in mind that the proposed 2011 FedGov Budget is $3.8T, and is now growing at a geometric rate. The CBO recently projected FedGov budget deficits for the next seventy years. How hard is it to blow through $23T feeding THAT beast?

    The way I see it, the inflationary price action should commence sometime in late 2012, and run like a wildfire for several years. I’ve guessed that the biggest part of the TBTF bad loan book will be made good by then, the monetization of FedGov debt will have been running hard for most of 2 years, and the election-year Congress and White House will have been panicked by stubborn high unemployment into whipping out the checkbook and flying some ginormous kites.

    This ran really long. Thanks for being patient.

    Best Regards,



    You’re arguing Peter Schiff’s scenario, which I’ve always thought entirely credible. He predicts a day when the U.S. has to rescue the T-Bond market after no bidders show up and foreigners begin dumping Treasurys. All other U.S. bond and money markets — corporates, munis, etc. — would collapse when they perceive that they are NOT being rescued. The Fed would then step in and start monetizing all debt, triggering a hyperinflation. It is because I strongly doubt this will happen in time to “save” underwater homeowners that I have remained firmly in the deflationist camp. RA

  • PhotoRadarScam February 2, 2010, 2:20 am

    In Rick’s radio spot today he said: “We’ll know it [inflation] in a bigger way when the fed has to more and more monetize it’s own debt.”

    There was plenty of debt monetization in 2009. Did you miss this Rick or did you mean printing at a higher rate? Do you think the fed will make it through 2010 without monetizing more debt? Do you think the rest of the world is prepared to INCREASE their US treasury holdings while the fed tries to auction off over $1.5T – more than it ever has?

    Inflation is defined as an increase in money supply, but there are many factors other than the number of dollars in existence. The speed at which they circulate (velocity) is a factor that is affected by the amount of bank lending that is ocurring, as well as the general amount of normal economic activity generally encouraged by low unemployment and/or low savings rates and lots of investment (usually inspired by lower taxes).

    But there’s another side of the equation as well. Not just supply of dollars but also DEMAND. The USD has been sunk into every corner of the globe, and the globe is awash in greenbacks. How much longer can we pawn these off on the rest of the world? To my knowledge, the number of greenbacks exported has risen every year since who-knows-when, but at some point this trend will reverse, and the point is coming soon it it’s not already here. And if the people of the US and the world start to question the direction and sustainability of the US, the demand for USD will drop further, and people will demand more of them for the goods they sell. I think we’ve seen this reflected in the price of oil. OPEC has repeatedly said that they are not raising the price of oil, but rather our dollar is losing value – NOT GAINING IT! But just because entities don’t DEMAND the USD, doesn’t mean they won’t accept it – it just takes more of them (inflation). If USD holders become concerned about the future value of their holdings, they will seek to convert their USD into assets. This is why you end up with stores with bare shelves during wild inflation.

    Demand for the USD has been robust due to alternative currencies that are struggling (Yen, Euro). Unemployment is high, savings rates are high, investment levels are low, and bank lending is low. This is counter-acted by the printing presses in Washington. It would appear that we’re at some sort of balance at the moment, as things are actually pretty stables where they are now.

    I would have to argue that this is all about to change, as the printing presses will continue to run, and due to many factors, employment levels will probably start to stablize or improve slightly, people who have not been spending the last few years may start to spend (although not anywhere near previous levels), and investment may start to pick up… we may even see more bank lending.


    Although sovereign lenders have deserted Treasury debt en masse, U.S. households, forced out of money markets by paltry yields, have picked up a significant portion of the slack. So far, this has spared Treasury the embarrassment and difficulties of no-show auctions, although at some point households may choose to put the money in their mattresses. Not yet, though, since the idea that the U.S. is already bankrupt will take a while to seep in. RA

  • Edward0 February 2, 2010, 12:38 am

    Rich, the man who understands deflation where millions do not, wrote:

    “The challenge to gold and silver bugs still applies: let us know when Safeway accepts your coins. ”

    What challenge? Precious metals advocates, at least not the ones I am familiar with, make no claims along the lines that gold and silver will become legal tender, so your challenge is, among other things, a non starter.

  • Cameroni February 2, 2010, 12:30 am

    Looks like you are right Rick. Without some serious consumption up-tick, a return to full(er) employment and plenty of velocity for the dollars floating around out there we will simply continue to deflate. At least on the asset side. The wage growth and cost rise in health care really puzzles me though and it will take a nasty crisis to reverse that trend. Like significant layoffs in order to balance State books and budgets.

    Where consumables are concerned though we have a notable difference today compared to the dirty Thirties. At that time a great deal more of all goods purchased were actually produced in America. And so the waves of price declines were quickly matched with falling incomes as factories slowed or closed. There was a closer relationship on the domestic level between consumption, wages, production and prices. That is no longer the case and so we are not experiencing price reductions in consumer goods in the same magnitude as we did in the Thirties. Those prices are largely set by overseas markets and from economies that differ significantly from our own.

    We can therefore expect continued asset value declines in the years to come if employment levels do not rebound while simultaneously facing increasing prices of foreign goods (or at a minimum, prices that resist falling).

    We searched the world for all the cheapest goods and got them. The inputs for those goods are already so low though that there is often little or no wriggle room for price declines. How much of a wage cut is a worker from India or Africa going to take after all when he is only getting one or two dollars a day now? I expect instead that over the coming years what we will see is the disappearance of the “variety” that we have become used to in stores and shops.

    It’s back to basics already for anyone on the dole or anyone who is already unemployed.

  • RichI February 2, 2010, 12:18 am

    Aloha John
    My crystal ball is broken.
    (Threw it against the wall too many times.)
    Sold XOM just after Thanksgiving for cash, not gold.
    Both seem risky here, gold and silver more so.
    $63, $350 and $4 maybe not out of question.
    Bought QID about three weeks ago.
    Over the weekend recommended another asset to Big4 subscribers,
    up 5% so far.
    Thanks back to you.
    Warm regards for cool times*Rich

  • john February 1, 2010, 10:40 pm

    RichI- just curious.. are you saying it is better to hold gold or cash? interesting post..thx.

  • RichI February 1, 2010, 9:37 pm

    Put up or shut up, eh?
    Thanks for the inspiration Rick et al.
    Well folks, just read all 24 comments.
    Saw some good points and further evidence not one man in a million understands deflation. (Not that I do;)
    One way to see through the fiat money illusion is to construct charts divided by gold.
    When we do that, we see the dollar already inflated/lost -86% since 2001 with W’s drugs and guns government. We see houses and stocks fell off a comparable amount in real terms, while debts continued to compound and suck the life out of the economy. So most returns since 2000 except bonds were not real, but inflation illusion, and now the worm has turned. If we could believe the $14.3 Trillion debt ceiling was topping out as 0 claims with budget cuts and cheaper healthcare, then long bonds might continue to be the excellent investment that outperformed most others since 1981 when we got 13% compounded on zero coupon Tigers. Hank Paulson put his tax-deferred $480 Million in GS shares into T Bonds when he became Treasury Secretary and denied engineering a reverse bailout. However, if we look closer at the Hall of Mirrors in the Fed and Treasury, we see another $5 Trillion owed on FNM and FRE gov mortgage guarantees, and $104 Trillion in present value of other unfunded government agency mandates, according to the President of the Dallas Fed. ($90 Trillion of that is Medicare.) Then we have $197 Trillion of Derivatives at the five largest US Commercial Banks continuing the fiction that their net credit risk is ‘only’ $425 Billion and they do not have to mark toxic assets to market because the Fed and Treasury Taxpayers will support them indefinitely. ie Corporate Welfare replaced Citizen Welfare.
    But wait, there’s more: $171 Trillion of the American OTC unregulated off-balance sheet derivative obligations are interest rate sensitive, meaning higher interest rates will give big banks a second death. The Fed and Treasury recently warned banks to prepare for a doubling of interest rates despite FOMC minutes.
    Bernanke had announced the Fed was going to support bonds and mortgages until March 2010. The few mortgages issued these days are priced on Ten Year Treasuries that called his bluff by losing half their value and almost doubling their yield last year. It did not help that Geithner announced last fall he was going to extend the average maturity of Treasuries from 49 months to 72 months ‘before interest rates rose.’ We will not be surprised to see a serious bulge in 5 to 7 year T Notes and others, maybe even an inverted yield curve, typically the sign of an overheated economy coming to an end. So many like Kudlow are so accustomed to three generations of Fed and Treasury inflation that they may be missing the forest for the trees, thinking a steepening yield curve is a bullish thing. As Arch Crawford, Robert Farrell, Bob Prechter, Dave Rosenberg or Gary Shilling might say, we are not in a continuing inflationary or even disinflationary secular environment. Rising interest rates is not inflation, but credit risk defaults from deflation. If Uncle Sam can’t pay his bills, who will want his paper?
    The day of reckoning appears to be upon US, with Rick correctly noting American corporate and government spending has peaked across the board. Profits are achieved by amputations. Yes the 1980 nominal CPI is approaching 10% again, but in terms of gold it is falling, hello, wake up, get out while we can. Debt leverages gains on the way up and losses on the way down. Saving America by saving and buying very low is the key to conquering deflation and depression.
    We think the USA is at the end of its credit line, as recent empty-handed trips to surplus nations like China, Japan, Germany, Switzerland and offshore havens like the Caribbean banks show. (Why else were UBS and Alan Stanford pursued?) People thinking to get something for nothing may hope the printing presses will pay off their crushing compounding debts with funny money. They forget hyperinflationary costs go up faster than incomes and would further decimate US productivity. The challenge to gold and silver bugs still applies: let us know when Safeway accepts your coins. The Big4 still think with a few profitable exceptions shared with subscribers, the right trades are deflation shorts, particularly in precious metals. The bigger risk now may be manmade Armageddon as the devil’s debts come due… http://www.youtube.com/watch?v=iq6q2BrTino
    Regards All.

  • kEVIN February 1, 2010, 9:14 pm

    Let me know when houses cost 1 dollar is the answer to when will houses cost 1 quaddrillion. Food up, medical up, negative wage to inflation growth, taxes up, government liscences up, vehicle registration up, car insurance up, credit card rates up, and your counter arguement is tuitions not up as much and houses down. HAHAHA. Com’on Rick. 1.56 trillion new dollars at least created this year and you think there will be no price inflation on top of the 1.4 trillion last year.

    You had your 8-10 months deflation, a speed bump, last year as inventory was liquidated to pay creditors, that’s over. Price inflation in reponse to inflation has returned with a wrath and will accelerate to hyperinflation by 2012 if not earlier. Garanteed dollar crisis before 12 months is up.


    So then, the deflating of that $600 trillion (per BIS) global derivatives bubble is pretty much over, Kevin — presumably overwhelmed by your lettuce-and-eggs inflation? RA

  • Dave February 1, 2010, 9:02 pm

    Deflation is the midwife to inflation.

    There, now you can all be right, don’t you feel better? XD

  • Chris T. February 1, 2010, 8:47 pm

    here is one thing that WOULD be deflationary:

    Why are so many buyers of T-bills willing to pay for a negative yield? Holding the actual “money” would be preferable.
    UNLESS holding this “money” is fraught with counter-party risk, that having the Feds hold it is safer.

    Could these buyers ever come to the point where the cost of holding physical paper is less than the loss of the negative yield.

    That rise in demand for physical paper “money” would be deflationary, as it will increase the value of the physical relative to everything else because physical supply is a limited quantity in the short+ run.
    And, even with the ability to run the presses 24/7, paper quantity is not that easy to ramp up, unless one adds 0’s to the bills, something hard to convey to the public.

  • Steve February 1, 2010, 7:39 pm

    I thnk inflation hinges on oil. If the cost of oil starts moving up due to war, production problems, terrorist strikes on refineries, etc, then we will see inflation in the grocery store, fast food establishments and the like.


    We’ve already seen $150 oil and no inflationary spiral. RA

  • YT Moey February 1, 2010, 7:23 pm

    When can we expect $500 eggs ?!?

    Er …perhaps a better question is

    WHEN CAN WE EXPECT $5.00 oil ?

    LOL !!

  • Robert February 1, 2010, 6:56 pm

    “Please tell us when, and how, the inflation you have been predicting for too, too long will commence.”

    Since price inflation historically has typically trailed the expansion in the money supply by a period of 4-5 years- I will go out on a limb and declare that we will start seeing domestic consumer prices rise in 2011, and the gov’t will react by tightening the criteria for consideration as part of the CPI (cooking the books even further) until the only items that count toward CPI are garden rakes, heavy equipment/machinery, and chinese manufactured toys. At that point, the CPI gig will be up and the rising price trend will accelerate into 2012.

    I will propose that the reason for this rapid price rise will be the steady rise in Bond yields that is coming. This will finally pop the Bond market bubble and drive the re-patriation of the over 2T US dollars currently residing in offshore accounts- these dollar Treasuries will be redeemed, converted to greenbacks, and put into circulation, forcing the Fed to hike interest rates even higher- forcing even more redemptions of current long dated Treasuries.

    Once this cycle starts- it is unstoppable; and the FED knows this- which is why they will try to keep the FOMC rate at 0% for far longer than they should.

    The global bond market still rules the world, and by the time it signals its displeasure- it will be too late.

    Only a military war will prevent or displace the inevitable global economic war that looms just over the horizon.

    I fully agree with Rick’s assessment that economic activity will slow to a crawl- but I don’t label that slowing as “Deflation”- I label it as “Depression” and no matter how you label it- it will be gold that proves (once again) that it rightfully belongs as the last (only) true form of money on the liquidity triangle.

    All JMHO 🙂

    I hope I’m wrong and that the powers that be are actually successful in inventing a way for the currently rich to get richer, while simultaneously transforming the currently poor into the future rich, which is the ultimate hat-trick that they are attempting…

  • john February 1, 2010, 6:35 pm

    Hi Doug- Is there a specific company that does this? I am in Atlanta and I couldnt find anything…thx..

  • Doug February 1, 2010, 6:04 pm

    and john,

    i did just get my house reappraised and the assessment was reduced by over 25%
    and I save like 4k a year. lawyer wants almost half of that as a fee… not bad

    the 2010 appeal date has passed so set up a lawyer for next year

  • Richard Landwirth February 1, 2010, 6:01 pm

    I am looking forward to your predicted deflation-true, home prices have come down-ditto gadgets at Best Buy-I’m long a lot of cash-so I look forward to my health insurance premium of $13,000 for my wife, kid & I to go down to $200 a month–and his $35K college tuition to go down to $3K a yr…..and dollar a gallon gas–cash is king in a deflation….BTW, the 18 room home my father bought in 1947 for $42K-in Peoria, Illinois’s finest neighborhood is still $550K

  • Earl Allison February 1, 2010, 5:57 pm

    Rick…..This debate about inflation/deflation can go on ad-infineitem. The bottom line is, does it cost more for the goods and services that you purchase every day now than it did last year or 5 years ago or 10 years ago? I think we all know the answer. Fiat money is the vehicle(currency) used. Debt(Fiat money) only goes away by two means. Eithor it is paid off or bankrupted out. There is not enough fiat money in the world to pay off the U.S. debt(public & private). Sooooo the debate is futile….Think about this….one oz. of gold bought a good suite made in the USA in every decade since the Federal Reserve came to power….What can be said for the fiat dollar? (bankruptcy anyone)

  • Doug February 1, 2010, 5:33 pm

    inflation is the pipe dream of the indebted.

    also, why are people always amazed that the dollar rallies on a market sell off?
    think of it this way, when you sell something, you are “buying” dollars, if everyones buying the same thing it will rise in value. simple

    So if you have no/little debt and your a conservative investor you should be praying for deflation to occur so you can buy assets when the blood starts flowing.

  • john February 1, 2010, 4:57 pm

    oh yeah.. forgot to add my property taxes keep going up. Last year they went up 10% and this is during the biggest housing bust in history. Now I just need to find a good lawyer to fight against the appraisal…

  • john February 1, 2010, 4:55 pm

    Hi Rick- nice article. I am struggling as to whether we are going to have inflation or deflation. My guess is both. I think things like housing will go down. HOwever, almost everything else is and has been going up. Two quick examples. I am running a small company now and our health insurance premiums went up 30% for 2010!!! That is an absolute joke. I wish it only went up the10% a year it has been going up for the past 10 years.. Healthcare is some SERIOUS inflation. Also, I have a family of 6 and lets say it costs us 250 dollars to fly somewhere. For each person that has a suitcase they are now charging us 20 dollars a person to check the bags. That is an extra 240 dollars per trip or about 10%.. They call it a “fee”.. to me it is inflation… inflation or deflation, whatever happens we are screwed..

  • Rick Ackerman February 1, 2010, 4:47 pm

    Posted by Rick Ackerman for Charles Reed:

    Sir: may i put my 2cents worth in?
    I keep hearing about all the home mortages that are under water. So what? It really doesnt matter what your house is worth unless you intend to sell it or borrow on it.What about the people that have jobs & intend to stay in their homes for many years? They have to live somewhere, so the payment is just rent to them. If they have a fixed rate the payments stay the same.
    The only thing is, their taxes, insurance, heating & cooling, upkeep, lawn mowers etc. keep inching up in price. One elect Co. here just rasied their rates 12%. So for some there is still inflation, maybe there is deflation for others.
    I keep hearing about all the money lost in the stock market. I think only the last man to buy it (stock) is the man that can lose & then only when he sells it. The money wasnt lost, it just went in another persons pocket, except for what the commision was.

    thanks for letting me have my say

    Charles Reed

  • Robert February 1, 2010, 4:36 pm


    Your arguments regarding inflation seem to always revolve around real estate and high priced consumer goods (cars, etc). In fact, when someone mentions the “grocery store” variety inflation you poo-poo them and tell them to come back when tract houses sell for a quadrillion dollars.

    I’ll remind you that grocery store prices are staying stable, but packaging sizes are decreasing faster than at any time since 1980. Just look at the old stable, Coca-Cola. They just launched their new bottle shape that harkins back to the 1950’s, but it is no longer a two-liter- it is 1.5 liters, yet it sells at the same price you could get a two liter in 2005 (at least here in the arid southwest; I have done no price research on the new coke bottle in any other parts of the country)

    You asked the question once that if airline fairs go to $10,000 but the airlines only sell 500 seats a day, then how is that inflationary? I will submit that yor example is the very nature of the effects of a hyper inflation: prices rising beyond the means of the masses to aquire the goods and services they require/desire.

    In a hyper-inflation, there is still a depression- that is, an overall slowing of economic activity (like booking flights or buying high end goods such as houses or cars)

    Rather than call you when housing is a quadrillion dollars- I think I’ll call on you when a can of coke is still 65 cents- but only holds 2.5 ounces, or when gas and milk have reached parity- and I still reckon that this will be sooner rather than later.

  • Edward0 February 1, 2010, 4:09 pm

    I have a request, please peplace my last entry with this better edited version.

    Let’s do a little, um, thought experiment, shall we?

    Let’s imagine that a very large round of local government layoffs takes place in the coming months. Let us further assume that various areas of the private sector continue to worsen. In short, the nation’s employment portrait, already tinged with rusty reds and deep browns, manages to become even darker. Tax receipts plummet further, and governments of all shapes and sizes find that they cease to have the necessary funds to operate. What will they do? What can they do?

    We know what the Feds can do, don’t we? So, to repeat, what will they do? When they can not acquire the necessary funds via taxation, or borrowing , do you think that elected officialdom will simply take their medicine? Do you think that when there isn’t enough money coming in from you and me, and “lenders” that they will look up at the debt ceiling and say it can not be raised, yet again? Will they look at the proverbial (electronic) printing press and utter the words, “hands off?”

    Take a deep breath before you answer, hear the voice of Rod Serling, and realize that you are about to enter The Sinclair Zone.

    Do you think that the U.S. bond market, which already operates as something of a sham, will not, if need be, allowed to be altogether trashed? Who needs a (real) bond market? Do you think that the prospect of an officially-as opposed to unofficially- trashed bond market, will stop officialdom from entering The Printing Zone if that is what is required to put debased currency into the hand of those who need to make payroll? And we haven’t even talked about a further expansion of U.S. military expeditions. Yes, MORE WAR! Just imagine what can be accomplished there.

    In conclusion:

    Hyper-inflation is a monetary event that will come about as a result of the forces of deflation. The response to a lack of funds, the result of vanishing tax payer receipts, and evaporating sovereign debt purchases, will be to print.

  • Andy February 1, 2010, 3:04 pm

    In all my years of trying to understand inflation I have to thank Harry S. Dent for the BEST explanation, and why inflation is going to cease to be a problem for the next 5-10 years, as the growth of the labor force shrinks because of retiring baby boomers:


    We won’t be getting much of a recovery to spur inflation in the conventional sense until we both wipe the debt slate clean and restart the labor force growth. Declining incomes do not generate recoveries.


  • paul February 1, 2010, 2:48 pm

    Lets get real fokes … right now it takes “more paper” then a dollar to feed to a cow to generate a burger … just because a farmer accepts one dollar for a burger today does not mean there is no inflation … the books will be balanced at some point if the farmer wants to stay in business … yes, the deflationists can say that the present low burger price means deflation … but when a farmer is presently feeding his cow many paper dollars to generate a burger … what do you think that burger will eventually sell for? … deflationists are simply people who live in the present … inflationists are people who live in the present but see the future …

  • George Parker February 1, 2010, 2:11 pm

    All I know is that my gas heat, insurance(car,medical,personal liability,house) keep going up . That is the necessities of life. You only need one house to live in and if one day it is worth 750k and 3 yrs later 500k so what . The same with the stock market. Inflated or deflated as long as you haven`t used it as a cah machine it becomes meaningless to most. It s the every day things that keep going up mixed in with the loss of income when jobs are lost. Think about it , When you have a job groceries are purchased daily when you don`t have a job those same groceries at any price seem inflated to you because you haven`t the dollars to pay for them. Unless you get a hand out everthing is inflated that you need. A jobless recovery then seems to be the likely outcome with things ecoming unatainable at any price. Is that deflation or inflation to the average Joe.???

  • Tom Sugar February 1, 2010, 12:00 pm

    I am no expert but here is my guess…..

    Everyone knows the basic economics supply / demand theory.

    Prices may be going down now, but that is due to over supply.

    Do you really think production / supply will remain static or increase in the next few years??

    Producers will go bankrupt / get bought out until supply drops below demand. Then prices will start rising significantly.

    Rick’s example referred to the $1 burger, which Rick admits is a loss making product. Surely a company that sells at a loss will eventually go bankrupt, resulting in less supply to the market.

    Just wait until supply has adjusted to the new lower demand levels. Then prices will rise significantly.

  • Keith February 1, 2010, 7:54 am

    [let’s not lose sight of the fact that stimulus itself implies borrowing]

    This is what the inflationist fails to recognize… government spending via borrowing does not inflate the money supply. A stimulus funded by selling bonds simply takes money out of the private sector for the government to distribute throughout the working class (or the banks). Most likely this money will go first to pay down debt. To my understanding borrowing by the treasury and monetization at the Fed are two completely different things.

    [inflation is “simply” an increase in the money supply, then you are even more wrong now]

    I don’t adhere to inflation as an increase in the money supply song and dance either. Fiat money is worthless whether there is 100 billion or 100 trillion of it out there. Any currency can hyper-inflate (lose it’s respect as value) at any time given the right circumstances. We really don’t have the ingredients for hyper-inflation right now… i.e. a collapse of government, foreigners rejecting the dollar or worse, war. A modest increase in the money supply would cause inflation I’m sure, but not the kind where an egg will cost $500.

  • Senor Cuidado February 1, 2010, 6:49 am

    but what about now, as real estate deflation continues to asphyxiate the U.S. economy?

    Yep. Simply amazing that the Alt-A type Pay Option Arm reset mortgages (next wave starts now) are no longer really news in the mainstream finance media.

    First wave of this bad paper hit us hard. This next wave is bigger. By the way: The issue of the payment resetting at a higher rate as per the mortgage agreement is not even the real problem. These home buyers are coming up short on the payments before the reset even occurs. Because they were unqualified buyers from the get go.

    And this is the group that was originated in 2006-2007. But the truly insane bad paper wave, the crap recently originated in 2008-2009 – the 100% Fannie/Freddie Government Backstop Handout Stimulus Liar Loans – that wave won’t hit us for a while still. That fiasco will occur in the kicking-us-when-we-are-down phase that will begin circa 2012.

    But still there is talk about the economy recovering in time for an Obama re-election, a la Clinton in 1996, but that is ignoring all of the bad mortgage paper that simply has no cash flow that will be blowing up in the next three years.

    There is no cash flow on this bad paper. It is toxic and we can see that the banks are finally running out of extend & pretend room on the calendar. In Florida they are beginning to foreclose en masse on the free riders (who haven’t been making their mortgage payments for 12-24 months).

    There is only so much extend & pretend elbow room for any bank. Eventually it comes down to cash flow. And free riders don’t generate cash flow.

    Therefore: Unless someone can magically retroactively qualify all of these unqualified buyers, by bequeathing to them much higher paying jobs and much more take home pay, then otherwise we are in for another big leg down in real estate here in the gold old USA. And the math says that it will continue for several more years.

  • Rich February 1, 2010, 6:25 am

    You need to change Inflationst to Hyper-inflationist in your title.

    That’s who you are purposely targeting with the outrageous Weimar like price increases.


    Thanks, Rich, but I set the bar low on purpose. Show me mere inflation — other than the grocery-store variety, that is — and I’ll cut the inflationists a little more slack. RA

  • James February 1, 2010, 5:54 am

    So, does that mean you’re loading up on long-term Treasuries, Rick? They would do well in a deflationary environment, no?


    Incredibly, Treasurys look like they’re ready for another run. RA

  • Peter Montgomery February 1, 2010, 5:19 am

    inflation is an increase in money supply that MAY lead to higher prices

    if you want to define higher/lower prices as inflation/deflation, then deflation has been occurring in gold terms for the last 10 years

    mises.org will give information on the Austrian school


    The Austrians have trouble choking out the word “deflation” when the credit environment is as loose as it has been. The late Kurt Richebacher, for one, assiduously avoided the word for years before finally appearing to come around not long before he died in August 2007.

    Concerning the notion that an increase in the money supply “MAY” lead to higher prices, I’m not going to let the monetarists off the hook so easily, since not a one of them on planet earth would have predicted that the increase in money supply that we’ve had so far would not produce a spectacular inflation. RA

  • Other Paul February 1, 2010, 5:08 am

    Rick, thanks, again, for periodically resurrecting the inflation-deflation debate and for logically presenting your arguments.

    The essay, linked, below, is one of the best explanations for the mechanisms of US inflation and deflation that I have read in the past year.


    I would have those who don’t want to wade through the entire article to at least look at the graph just below the label: “Contrast the preceding chart with the relationship between CPI inflation and the growth of U.S. government spending.”

  • johnjay February 1, 2010, 4:32 am

    I think the Fed/Treasury has one last ace up it’s sleeve that they can play before it hits the wall. They can make Federal Government paper tax free to all comers in this country. That should drop the interest they have to pay and move a lot of paper domestically. Should more than compensate for any lost tax revenue.
    A good solution if interest rates start to head up due to lack of foreign demand.


    Nothing like tax-free income on paper yielding 2% or less. RA

  • Mitch February 1, 2010, 3:59 am

    Hey Rick, Fair article. Points taken. I really don’t know how this is going to end up but what exactly has gone down in price for you over the last ten years? Food, Insurance, Tuition, Cable TV, Power bills? Eggs and cars are not dropping in price either. Milk in 7-8 bucks a gallon here in Kihei. Before you hammer the “inflationists” too hard, take a look around and tell me where you see deflation other than housing? Cheeseburgers? LOL! Japan’s RE market remains hugely expensive. Where have priced dropped there? Can you please explain 20 years of “deflation” in Japan where prices are still so absurdly high? Noodle wars? Come on.

  • photoradarscam February 1, 2010, 2:23 am

    It may be true if you price things in fiat, but if you price things in real money – like gold and silver – prices have gone up well over 10% in the last year alone, even despite some fiat price tags being reduced.

    Estimates do show that M2 and M3 money supplies have actually been declining. Not sure how long the fed can keep that up. And watch out if the banks ever do start to lend money. With signs of a recovery popping up, they just might start to do this. I personally don’t believe a recovery is underway, however, there are a lot of economic indicators like the ECRI and such that say that one is, and a lot of people believe these numbers. Many companies are forecasting and expecting a great 2nd half of 2010, and this optimism could spread.

    Still not sure what the point of this debate is… Gold doesn’t need inflation to do well.

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