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Thursday, September 22, 2011 10:04 AM


Bizarro World Inflation; About that 2011 Hyperinflation Call ...


Time has run out for that 2011 hyperinflation call made by numerous people.

Hyperinflation is not synonymous with all-time low yields across the entire US treasury curve.

Yield Curve as of 2011-09-21



It seems hyperinflationists forgot to factor in the possibility the Euro, the British Pound, and the Yen (yet to come), just all may be far worse hiding places than the US dollar.

Not in Love With Dollar

It's not that I am in love with the dollar. Indeed I am not. I like gold. Historically, gold does well in periods of deflation and periods of credit stress. I also point out that gold fell from $850 to $250 from 1980 to 2000 with inflation every step of the way. Gold is decidedly not a hedge against inflation in any practical sense.

As measured by credit (and numerous other factor) the US is back in deflation now.

I offered strong proof in Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over.

As a followup please see Bernanke's Waterloo; Midst of Deflationary Collapse or Brink of Inflationary Disaster? 12 Specific Recommendations

Don't Get Hung Up on the Term "Deflation"

I get emails nearly every day about prices. I also get emails nearly every day about money supply. Here's the deal:

  • If money supply is your measure of inflation, we are in it and likely will be for a long time.
  • If the CPI is your measure of inflation, we are in it, and may remain in it more often than not.

That really has been my stance for years. Nothing has changed. People get hung up on the term "deflation". Perhaps I should have made up a new name.

After all, the term "stagflation" was invented to explain what Keynesian clowns thought impossible (rising inflation and a recession). Keynesian thinking should have died right then and there. Unfortunately it didn't, and the economy still suffers today because it didn't.

Regardless of what you think about the Fed manipulating the yield curve (and they are), the market has to accommodate.

For example, the ECB bought and is still buying Italian bonds. Here is the result.

Italy 10-Year Government Bond Yield



Here is Germany for comparison purposes.

Germany 10-Year Government Bond Yield



The ECB also bought Greek debt then threw in the towel.

Greece 1-Year Government Bond Yield



The Fed and ECB can suggest, not mandate. If the market refuses to go along there is little central banks can do about it.

Bernanke's Waterloo

Here is a snip from Bernanke's Waterloo mentioned above.
Hyperinflation is complete silliness at this point. Were it to come, it would be an act of Congress that would create it, not an act of the Fed, and the Fed would probably have to play along. I doubt the Fed would. For all its many faults, the Fed does not want to destroy banks. Hyperinflation would do just that.

The Republican dominated House wants little or nothing to do with more stimulus. Certainly US government debt is going to mount, but it is going to mount in Japan, the Eurozone, and the UK as well.

Moreover, Eurozone structural issues matter now, while US government debt will matter more in the years to come.

Midst of Deflationary Collapse or Brink of Inflationary Disaster?

Although the Keynesian and Monetarist economists have missed the boat on what is happening and why, Austrian minded folks who fail to understand the importance of credit and how little the Fed can do to revive it have blown the call as well.

It pains me to see articles like On the Brink of Inflationary Disaster by Austrian economist Robert Murphy.

We are clearly in the midst of a deflationary collapse as noted in Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Focus on Money Supply Alone is Fatally Flawed

Deflation is about credit, it is also about attitudes that govern the demand for credit.

As I have stated many times over the years, and as stated above in the Contrary Investor, there is nothing the Fed can do to force businesses to expand or banks to lend.

That point explains why Austrian economists who focus on money supply alone have failed and will continue to fail.

Until consumer demand returns, businesses would be foolish to expand. Unfortunately, the Fed's misguided easing policies have stimulated commodity speculation thereby increasing manufacturing costs, while simultaneously clobbering those on fixed income and reducing final consumer demand.

I wrote about the plight of those on fixed income in Hello Ben Bernanke, Meet "Stephanie" back in January. Please give it a read if you have not yet done so.
Reversion to the Mean Nonsense

Yet the emails still pour in. Someone even told me collapsing housing prices, the collapsing stock market, etc, was not a result of deflation but rather "reversion to the mean".

What about 2-year treasuries at .2%. Let's forget about that. Let's forget about jobs, let's forget about banks not lending (because they can't), let's forget about countless things and conveniently label everything else reversion to to the mean. Imagine the reaction I would get if short-term treasury yields rose to 3% and I called it "reversion to the mean".

Bizarro World Definitions

Let's not call this deflation. Instead let's label this "banana soup" or "disinflation" as some propose.

I am tired of arguing about "definitions".

The term "deflation" in and of itself is meaningless. However, the lack of jobs, collapsing housing prices, inability of banks to lend, defaults, competitive currency devaluations, and everything else any reasonable person would equate with deflation are not meaningless.

I choose to believe that if vast majority of the symptoms match the disease most would associate with "deflation" we are in it, even if one or two symptoms don't match.

You are free to believe otherwise, but please do not tell me I am wrong. I am right, based on my definition: Deflation is a net decrease in money supply and credit with credit marked to market.

If you think we are in a period of inflation with 10-year treasury yields at 1.8% and short-term yields frequently negative, then we are. Not on planet earth of course, but on Bizarro World. It's all in the definition.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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