Monday, June 28, 2010

Hyperinflation or Hyperdeflation

This post is in repsonse to Dr. Fekete's recent article posted at The Daily Bell:

I attempted to reply on the site, but failed...several times.

I was subsequently encouraged by others who comment on the site to try again. I did, and failed...again (see in the comments section):

In any case, here are my comments to Dr. Fekete's article regarding Hyperinflation or Hyperdeflation:

There are too many fallacies in this commentary to list; I will only touch on a few:

1) "People postpone buying indefinitely because they expect prices to fall further."

In the one market where prices regularly have come down -- that is technology and consumer electronics -- do we see people postponing purchases forever? Especially as these goods are almost completely discretionary, it would seem easy to delay. I am amazed that Apple has sold a single iPod to date. I have been postponing that Blackberry purchase for ten years. Meanwhile, I have a nice hole in the wall of the family room because I haven't bought that flat screen TV yet -- I am waiting for that last price decrease. Of course not true – all of these products have done quite well in the market despite regularly falling prices and higher capability.

2) "This defeats the arguments of Turk and others who try to refute the case for deflation by pointing to high or rising costs of food and energy."

So, if we ignore the items where prices are increasing, we have prices decreasing....

3) "You cannot make a case, as Turk is trying to do, out of the fact that the price of crude oil doubled as compared to its recent low. Another fact, more startling, is that the price of crude oil has declined 45 percent as compared to its all-time high. We must see the general decline in world prices, even though in some cases they may be disguised as a loss of pricing power of the producers."

Both examples are flawed -- to pick a recent high or low to make a case is invalid. However, any long term graph of the price of oil in US Dollars makes clear that there is price inflation, not deflation.

4) "Deflation is the measure of wealth in the process of self-destruction — wealth gone for good."

What is this definition? One can speak of monetary inflation or deflation (that is, changes in the quantity of money), or price inflation or deflation (changes in the average prices). In either case, I am wealthier in deflation, and poorer with inflation. My dollar can buy more in a climate of deflation. By either definition, I am wealthier.

In the era of modern central banking, there is only inflation. One cannot even credibly use Japan as a proxy. Check the numbers; they have had some minor pluses and minuses -- but nothing coming close to wholesale deflation of prices. Plus or minus two percent per year is within error -- given the manipulation and randomness of the statistics used.

Central banks want inflation. This has proven difficult to achieve lately, however do not discount for a minute the desire to get it. There are still many tools available for banks and governments to get this wish. As long as we do not have price inflation in the standard government statistics, they will feel free to keep pumping. So they will keep pumping until they get price inflation. Any shrinking in credit markets only gives room to pump further.

The FED’s balance sheet tripled during the crisis of 2008/2009. Who says they will not keep tripling it until price inflation gets in the way? There is no argument one can make for the FED to not buy junk debt from the banks at face value in order to save the banks…until we get to price inflation or mass inflation. Nothing has stopped them from buying a lot of junk so far.

They may only stop to avoid hyperinflation, as this will destroy the banks. Let’s hope they do.

That's it. I will add, that since I first tried to post my comments there is now talk of the FED increasing its balance sheet to $5 trillion. As long as their yardstick is inflation as measured by the CPI, they will be under no constraints to continue pumping until they get serious inflation as measured by the CPI. And, as they cannot control things as well as they like, by then it will be too late to stop the runaway train.

All aboard!

No comments:

Post a Comment