Drawing Some Different Conclusions

Some might be skeptical, but I've seen skilled technical analysts take nebulous-looking stock charts and add lines and descriptions that suddenly provide a great deal of clarity about what is going on.

While I'm not totally sure how talented he is as a chartist, Mike Shedlock, publisher of Mish's Global Economic Trend Analysis, draws (yes, that's a pun) some counterintuitive conclusions from a graph that has many inflationistas foaming at the mouth in "Parents Pull Kids From Day Care (And Other Deflationary Topics)."

Why Not Hyperinflation?

One person who gets it right is Professor Depew at Minyanville in his post Five Things You Need to Know: Why Not Hyperinflation?

Almost every day I get notes wondering, "Why not hyperinflation?"

This is a good question. I'll try and explain why I believe a deflationary debt unwind is now underway, and why I believe it will be many years before we should start worrying about inflation again. In fact, by the time inflation becomes a legitimate concern, I expect the vast majority of people will find it as outrageous to worry about inflation then as found it outrageous last year when I made deflation one of my Five Themes for 2008.

While it is true, as those anticipating hyperinflation argue, the Fed and global central banks are making record amounts of credit available, that is only one side of the credit equation.

The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter. ...

I concur with that opinion and by now it would seem that inflationistas would have caught on. But they haven't. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either including an implosion in China.

For more on China and a decoupling theory now totally blown out of the water please see Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China.

The latest chart that has the inflationistas going gaga looks like this.

Base Money Supply

Chart Courtesy of St. Louis Fed
Click On Any Chart For Sharper Image

I must admit that chart looks pretty scary. However, let's look at it another way.

Base Money % Change From A Year Ago

Now that looks even scarier. The only other times we have seen base money supply soar like this were in the Great Depression and World War II.

While on this subject let's look at the same chart as above one more way.

The only other time since 1918 that the base money supply chart looks like it does recently was right before the Great Depression.

Comments

[matt wilbert]

This would be a lot more convincing if we were still on a gold standard, not that I think that would be better.

I have total confidence in our governments' ability to create inflation. Mish apparently doesn't. I'm pretty sure I'm right, but we will see.

[Cornholio]

The problem will come when forgein inflows to treasures slow and the FED starts to just monetize the debt. See Iceland, or Argentina for how that works out as the creditors realize their holdings are being devalued threw the printing press. Then you get the worst of both worlds, skyrocketing interest rates, a collapsing currency, and equity markets. This seems like the most likely path. 1-3 years.

[Independent Accountant]

I read Mish and read the posts in question. All that said, I can't credit the deflation case at all. When we see bank failures all over the place, I'll consider it. Not until then. With the monetary base exploding, you ain't gonna see no deflation.

[Sackerson]

Hi, Michael

We're going to have interesting redefinitions of inflation in future, I suppose - it'll be a bit like the way Einstein changed scientific theory from absolute objectivity to relativity. Relative to Western wages, I expect stocks and houses to decline in value over coming years, and Eastern wages to rise. Nominal figures will disguise and distort appearances.

[Perry Groves]

"The only other time since 1918 that the base money supply chart looks like it does recently was right before the Great Depression"

It also happened in the late 40's, without ending in a major recession. Yes, the uptick prior to the drop is not as severe but it's definitely there.

[Joe M.]

I totally disagree with you. What we are about to see is the loss of the USD as the world reserve currency. When that happens we go Weimar. This will happen within 6 months, not years.

[Jesse]

The only people who will be wrong will be the stiff necked who believe in 'isms.' Looking at a problem one-dimensionally and finding data to support one's view follows naturally.

The adjusted monetary base is a fairly poor indicator of money supply growth. It expands and contracts as a result of choices people make on where to park their wealth. There are much better. On my most recent blog from yesterday I show just about all of them, and then some.

In a declining market and an unwinding such as we are now experiencing it would be unusual not to see a contraction, and we are indeed seeing it in MZM. The contraction is in the rate of growth, and in the velocity of money which is controversial because the Austrians dislike it as a tool of the monetarists and distort its meaning.

But we are slowing down. We are in a recession. It will probably get much worse. Aggregate demand is dropping (the precise definition of a recession and a decline in GDP).

But so far the money supply is not contracting. I've seen people from the deflationist camp point to the same Adjusted Monetary Base chart and say it is evidence of hoarding, and therefore the liquidity being added isn't working, and therefore the money supply figures are not valid.

So how does one deal with that? Its not an economic discussion; its a religious discussion.

This is an age of 'fiat.' Both deflation and inflation are possible. Why? Because the limits are a policy decision, that's why. And no amount of made up 'rules' that people try to apply to this decision matter much, as the Fed has recently shown. HOw much more clear could Bernanke have been when he said the Fed owns a printing press?

Whenever I hear someone refer to Deflationistas or Inflationistas disparagingly I cringe.

There will be only one side to be on in what is coming: the right side. And if you are bound by an ideology, a believe, you might be right or you might be wrong, but it will be from no effort of your own, just luck. And the odds are better than 50-50 that you go over the cliff for your beliefs, because you will not react to what is, rather than what you think 'should be.'

This is not an arbitrary situation. One may not know what will happen with certainty, but you can determine what to look out for, and keep an eye on them. And look at several things, and analyze them, which means you seek to understand the correlations and causes.

This is basic scientific method. And so quickly tossed aside in economics, because for most its just opinions, and halfbacked anecdotes and poor comparisons with no eye to detail, all on the surface.

We can do better than that.

[VoiceFromTheWilderness]

Regardless of what the graphs are imputed to allow us to infer about the issue of deflation/inflation, looking purely at the data presented, a more accurate summary of what the current time period looks like relative to the past (on the chart) is: We have never seen anything like this. The current period most closely resembles the beginning of the great depression, but is clearly quite a bit more extreme.

[El Scorcho]

The raging Inflation v. Deflation debate is, IMO, fascinating.

This debate rages because it is basic human nature to predict (and thus prepare) for an eventual outcome.

Cash is trash v. Cash is king - you must pick only one?

I think it is wise to prepare for both outcomes.

Suicide by dogmatism is pretty silly.

[I'm Not POTUS]

I would love if Mish or another deflationist would answer me a simple question.
Why on earth would nations like China and Russia go along with propping up the USA?

Why compete with other nations to see who could dig the shallowist hole? Throw the US under the bus and poof.... half of global demand for resources disappears. Prices for 95% of the worlds population to take up the newly released supplies are then at affordable cost to them but not to the US consumer.

I, as an American, now have to worry about keeping a job because 70% of GDP is spent on consumption. Consumption can fall all the way down just buying food, gas and housing. That is 40% out of work right there. Tax revenue goes to nothing. Fed prints more money, just to keep up. Do you think I am going to waste a penny on insurance for my car or house if I can't afford to eat.

No one wants a dollar then. We don't have enough domestic industry to replace what is now too expensive to buy from imports. It will take a generation to rebuild this capacity and just where will the capital come from?????

The only way out is to throw away all entitlements for everyone and start over with pay as you go.

[Jim]

I think it would help if the adherents of each view would address the issues brought up by the other. I think this article Eric Janszen lays out a case for inflation better than any I've seen (preceeded by a period of "disinflation"). Could someone that is expecting a depression style deflationary spiral please point out where he's wrong?

http://www.itulip.com/forums/showthread.php?p=57193#post57193

[Chris Puplava]

Hi Mike,

I agree 100% with the premise that for inflation you need both the means (which the Fed has shown it is willing) and the motive in terms of some entity to increase their debt. I agree that we can count out the consumer as Mish points out, and thus indirectly business who will be hurt be falling consumption trends, but isn't Mish and others forgetting the 800 lb pound gorilla sitting in the corner? That being the U.S. government who can take upon itself (AND IS) new debt by issuing UST's that the Fed can buy, with the government then funneling the funds back into the economy. The US Treasury has currently been pouring funds into financial institutions, though it will likely hit the real economy through infrastructure spending next year.

So, while I agree with Kevin Depew and Mish that you need both a buyer and seller of credit for inflation to occur and that the consumer is down for the count and businesses are languising, aren't these guys forgetting about a third potential suitor, Mr. Door #3, the U.S. government?

[Michael Panzner]

I'm not forgetting about the U.S. government.
Unlike the die-hard deflationistas, I've believed all along that the Great Unraveling was going to be a two-phase process. The bursting credit bubble and accompanying deflation will eventually wreak so much havoc that Washington will be forced to augment its attempts to force-feed trillions of dollars of credit into the financial system with outright printing of currency, much like the Zimbabweans (though with a digital age twist).
In other words, first deflation, then hyperinflation.

[Chris Puplava]

When do you see the tide between the two switching to inflation? When asset prices stabilize next year and/or credit standards ease?