Monday, January 12, 2009
An article by Rich Toscano and John Simon of Pacific Capital Associates makes a very good case for why an extended period of CPI-deflation is highly unlikely in the U.S.
The motivation of policymakers is summarized nicely in this paragraph:
There is a powerful combination at work. Mainstream economic pundits, academics, and policymakers are united in their opinion that deflation must be prevented. They are providing a theoretical justification for highly inflationary policy, and right or wrong, this justification is widely accepted as truth. Meanwhile, from a politician's standpoint, inflation is a far more viable and easy path than deflation. This combination of real-world incentive and theoretical justification induces our monetary and fiscal leaders to overwhelmingly favor an inflationary outcome.And with a pure fiat money system, where the whole idea of printing up hundreds of billions (if not trillions) of new dollars is quickly becoming the consensus "lesser of two evils" in how to best avoid another Great Depression, it all really boils down to whether or not they'll be successful.
Who knows what the world will look like when they're done, but they will be successful.
The entire piece is well worth a look, particularly the discussion of nine counterpoints, one or more of which have "deflationists" so excited at the moment:
- Pushing on a StringThe conclusion is as follows:
- Lost Financial Asset Wealth
- Credit Deflation
- Debt Defaults
- Foreigners Won't Let Us Inflate
- The Fed Doesn't Want Inflation or a Dollar Crisis
- The Fed Will Reverse Course
We in the United States have been dumping our dollars into the world for years and we continue to do so. We owe a staggering amount of foreign debt denominated in dollars and we are gearing up to borrow even more. Our legislators and the stewards of our currency are rabidly hostile to deflation -- they are hostile, in other words, to the idea of the dollar gaining purchasing power. They have shown via word and deed that they will do whatever it takes to prevent deflation from taking hold. When deflation is viewed as even a remote possibility, there are effectively no limits to the amount of money the government can create nor to what they can do with that newly minted money.The next look at the Labor Department's Consumer Price Index is due on Friday and the year-over-year reading as of November - the commonly accepted, definitive measure of "inflation" in the U.S. - printed at a lowly 1.1 percent.
Under these circumstances, we just don't believe that the dollar is going to gain purchasing power in any sustainable way. The current deflationary storm could continue for a while yet, but the longer it goes on, the more violent and severe its reversal is likely to be.
Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure -- but deflation isn't one of them.
It is possible that, with energy prices that have continued to plunge through the mid-December reporting period combined with a few other falling prices elsewhere, we'll get our first negative inflation number since 1955.
Just wait to you hear how acceptable the idea of "printing money" becomes then.
The word "deflation" (and, by inference, the threat of another Great Depression) may become President-elect Obama's most powerful tool in convincing Congress and hundreds of millions of Americans that "debasing the currency" has become our national duty.