Friday, November 14, 2008
In what continues to be one of the biggest wastes of breath and digital ink in recent memory, the debate over "deflation" continued this week with Eric Janszen of iTulip contributing one of the more stinging attacks against the "deflationistas" in some time.
Maybe someone should lock Eric and Mike Shedlock in a room together until they finally come around to realize that the only thing they disagree on are definitions and timing.
After listening to this interview from just a few months ago, I'm not even sure that Mish deserves the label "deflationista", loosely defined as those who think we are about to sink into a 1930s-style deflationary depression from which, if things go according to plan, we will all emerge sometime around 2020.
[And, while I'm at it, stop stealing my charts - I've been doing these for over a year now.]
The deflationary abyss is apparently preordained, even though there is no gold standard this time around and, as a consequence, virtually no limit to what central banks and governments can do in an attempt to "paper over" the basic problems we now face in the global economy.
For that group, which includes most of the folks at Elliot Wave, I have these thoughts:
The fundamental problem with "deflationistas" is that they transfer their own apocalyptic view of the world onto the two groups who will ultimately determine whether we sink into a deflationary abyss:This probably doesn't add anything to the debate, one that, as noted above, probably isn't worth conducting anyway.
a. Central banks and governments who, with a pure fiat money system, have the ability to create money and credit out of thin air with virtually no limit;
b. Ordinary consumers in the West who are innately optimistic about the world and more than willing to borrow and spend when presented with favorable terms as well as new consumers in emerging economies around the world who aspire to be as profligate as those of us in the West
Nonetheless, it felt good to get it off my chest.
Back to Mr. Janszen... He has penned another memorable piece this week:
The deflationistas apparently think what comes after post-bubble deflation is more deflation, as occurred in the early 1930s in the US but nowhere else ever since. It has not occurred to the deflationists why no similar period of deflation has ever occurred since the 1930s, or when they do confront the question they explain that the debt is really, really, really big debt this time, bigger than the Fed. Or that differences between the kind of money that the Fed prints versus the kind of money that the endogenous credit markets create when money is loaned into being by businesses and consumers means the Fed cannot impact the latter.Eric then goes on to describe his own Ka-Poom Theory of rapid inflation sometime in the period ahead, beginning shortly after everyone who is currently talking about "deflation" stops doing so as they notice all kinds of prices rising again.
As we explain that in The truth about deflation, the reason no deflation spiral has occurred in any nation since the one instance in the US in the 1930s is because since then no nation has chosen to remain on the gold standard through a debt deflation. Needless to say, the US is not on a gold standard today.
In this crazy environment what is likely to happen, as has happened in the past, is that the bond market will figure out all at once that pricing signals it mistook for a long term deflationary headwind were actually the deflationary down draft of a collapsing asset bubble followed by a powerful inflationary tailwind that started off as Fed induced money growth years before. Anyone caught on the wrong side of the market when that epiphany finally occurs will suffer the consequences. The deflationistas can take this as their final warning from the inventors of the original deflation/inflation cycle theory.
The piece is well worth reading in its entirety and is highly recommended.
I'm in the process of writing something up for my weekly investment newsletter and will probably provide excerpts of the wasted digital ink here sometime next week.