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Although I am still firmly in the stagflation camp, I do allow at least for the possibility of a protracted deflation or a bout of serious inflation, or even a hyperinflation.
Just because something is possible does not make it probable, much less inevitable. I exhausted the subject of deflation, at least to my satisfaction, some years ago. Please do not recommend I read anything more about it. Those who believe it is coming will believe it no matter what, as Gary Shilling has done, with an exquisitely unrequited love, for many, many years.
Deflation is the outcome of a policy choice, nothing more, in an independent fiat currency regime. So as you can see I am not intolerant of the Modern Monetary Theorists when they repeat what Lord Keynes, and even Friedman and Schwartz, have said for so many years. It is the 'deficits don't ever matter' meme, wrapped in sophistry, that is cloying. The overlay of state fascism on monetarism is repugnant, and it has been attempted, and failed, several times in the last century. And it will fail again if it is tried again, as do all Ponzi schemes that fail to conquer the majority of the world.
On the other hand, I am still struggling with the mechanism that John Williams believes makes hyperinflation in the dollar so likely. I made a study of the forty or so serious inflations since WW II a couple of years ago, and think I understand it.
The difference here is that none of these hyperinflations involved the world's reserve currency, or a country not set upon by the compulsion or after effect of a highly destructive war, or some other exogenous force, or even a fatal political collapse as in the case of the former Soviet Union.
I am going to read the paper referenced below again to try and understand why John thinks a hyperinflation fits the case so well here. I still believe it is not probable. But if the American political structure collapses, then it is a different story. But I cannot think how likely that may be, at least for now. It is not that I cannot imagine it; a major policy error in response to a derivatives collapse that threatens the TBTF Banks is one such scenario. A concerted financial attack on King Dollar by a coalition of large economic powers is another. It is just that none of these seems particularly likely at this time.
From John Williams at Shadowstats:
Opening Comments and Executive Summary.
Inflation increasingly is the issue. Looking at February data, where the headline retail sales number put in its strongest monthly showing in six months, headline consumer inflation likely showed its strongest monthly gain in at least 11 months. Higher prices accounted for much of the February sales gain. Whatever gain was left over for the series—net of inflation—was accounted for by unseasonably mild winter weather in much of the country, in the context of ongoing concurrent seasonal factor distortions and normal monthly reporting volatility.
Along with labor data, trade balance, industrial production and housing construction, real (inflation-adjusted) retail sales—as a measure of the physical demand for consumer goods and services—is one of the key monthly economic releases. Accordingly, today’s Commentary is relatively brief, just outlining the nominal (not-adjusted-for-inflation) retail sales detail. A more comprehensive discussion on the latest inflation and economic information will follow in Friday’s (March 16th) Commentary, which will cover February inflation (CPI and PPI) and key economic (industrial production and real retail sales) reporting.
Hyperinflation Watch.
Irrespective of any intervening economic, inflation and financial-market developments, the broad economic, inflation and hyperinflation outlooks discussed in Hyperinflation 2012 of January 25th are not changed...
A few asked me about the monetary situation in Europe, one person prefacing it with the statement that 'they are collapsing.'
Well, they are not, at least not yet. And there is nothing that says that they must. But since the person saying this has been desiring this outcome for more than ten years now, I should have known they were not.
We are now in a global deleveraging after a massive credit bubble was allowed to form, or one could even say promoted, by the Anglo-American banking system. So it is a tautology to say that there are strong deflationary forces in the economy. Of course there are, and we know from where they have come, and who profited.
And the management of this situation is why a central bank exists, for better or for worse. The long term cure is not to allow them to have created this in the first place. But that horse is out of the barn, and so one must deal with what they have now, and not what they might have had if they had done differently many years ago.
Ray Dalio has published an interesting historical study of policy responses to deleveraging, and although I obviously do not agree with everything he says I strongly recommend it. An In Depth Look at Deleveragings.
I keep a general eye on most of the major money systems, but obviously the reserve currency in the Dollar is of keenest interest. My inquiries with the others confirm that in a fiat currency regime, in the absence of external constraints, inflation and deflation are the result of policy decisions. So one may fairly deduce what their money supplies are doing based on the nature of their national economic policies, allowing for incompetency of course.
The prevailing incompetency, or erreur de politique du jour, is shoveling money into the major banks and financial corporations without engaging in serious systemic reforms, in some vain attempt to trickle down a recovery by saving those made wealthy through fraud and economic distortion, and making their victims pay for it. Austerity is the policy of the oligarchs. And the coup de grâce is delivered in supporting a global currency regime that distorts international trade and fosters instability.
Where one does not control their currency, they take the policies which they are given by the central authority, unless there is some political decision made to change the arrangement.
In the case of Europe, there is an odd situation. It has the currency of a political union, but the policies of a much looser confederation. The Europeans always seem to gravitate towards these unstable hybrids and compromises. They have a streak of the romantic, perhaps, or it could only be willful self-deception.
These are somewhat independent economies joined under a common currency, but without the sort of transfer payment system that marks a real political union. The euro is founded on a faulty premise, and therefore on sand, Or on the sandy soil of Berlin, perhaps.
In the States, for example, the monetary policy is set largely by the Northeast, but the tax and spending system transfers wealth to the poorer member states, largely in the South and Southwest. This is the trade off when a region with a somewhat independent local economy surrenders its ability to manage its own monetary policy and the ability to devalue and revalue its currency in trade.
The ECB and the major political powers are choosing a fiscal deflationary course that seems to favor their own powerful national banks and industrial interests. And yet they are faced with printing enormous amounts of money to smooth over their rescue of their banks and the continuance of their arrangement.
Those who are sitting on their loot from the bubble dearly wish for deflation, and tight money policies, and austerity for 'the others.' What better way to acquire even more income producing assets, and power, and to continue to widen the gap between the haves and the have nots.
While I have a general preference towards a hard money supply and organic restraint, the time to impose this is not after a general looting of the public has occurred by the monied interests. They promote easy money and profligacy when it suits them, and then cry out in alarm for sound money and austerity AFTER they have the cash. They swing from one bad policy decision to another. Their hypocrisy is almost as boundless as the economists, intellectuals, and politicians who serve them.
The most likely outcome is for a breakup of the European Union as it is constituted today, and a continuing union with fewer members. The key is obviously the relationship amongst the big Five. Whether a powerful group attempts to 'unite' the greater Europe under a more comprehensive rule remains to be seen.
Personally I think the former is more desirable, at least within my lifetime. The latter course most likely presumes an eventual bloodbath that will be historic even compared to the century of blood just passed.
As a reminder, in a purely fiat monetary system, inflation and deflation are the result of policy decisions, and not any endogenous factors in the economy. Extreme outcomes such as a protracted deflation or hyperinflation are almost always the result of some policy decision which may be in error, unless they are caused by some exogenous shock or force.
This is a fundamental fact of how a fiat money system works, and what makes it different from a system in which the money is tied to some external control or standard, or some other relatively inflexible metric from the perspective of the system.
Please see Money Supply: A Primer if you wish for an explanation of some of these money supply measures.
And for all the Austrian economists, I have included True Money Supply as the second graph.
The metals are coiling for a move.
The odds favor an upwards breakout, but there is still the possibility of a drop, most likely if stocks drop as well, most likely in a liquidation driven sell off.
