Please, Stop With the Deflation Talk

Is it still possible that deflation is a risk?  According to A. Gary Shilling, there are seven varieties of deflation, and five of these have already taken hold.

Now, it was confusing enough for me when there were only two ways to discuss deflation (and inflation) – monetary, and price.  Of the two, monetary is the proper focus; price is easily manipulated and is not usually the first visible distortion.  Due to varying factors, prices may not noticeably be impacted even though monetary manipulations are rampant – yet distortions are manifest.

But I digress.  Now, apparently there are seven.  The five that have arrived, according to Shilling, are:

Commodity Deflation

Wage-Price Deflation

Financial-Asset Deflation

Tangible-Asset Deflation

Currency Deflation

The two that remain open are:

Standard Inflation/Deflation

Inflation by Fiat

His definitions are silly, for example:

Inflation by Fiat: I developed this concept in 1977 to encompass all the ways by which Congress, the president and regulators raise prices.  Increases in the minimum wage are a case in point. So, too, are higher tariffs on imports.

There is nothing on the list that cannot be better explained simply by the manipulation of money credit, and interest rates – with the booms and busts that follow.

But I don’t intend to go through this list of seven one by one.  This isn’t my point.  Instead, why is anyone talking about deflation – of any kind?

For every argument toward deflation, I can raise you $222 trillion in opposition.  This is the estimate by Laurence Kotlikoff of the present value of the unfunded liabilities of the US Federal government.  The number is increasing by $11 trillion per year recently.  Add to this the unfunded liabilities of the 50 states and in addition the unfunded liabilities of every country in the world.  Let’s say, for discussion purposes, this is a couple quadrillion dollars (hey, if you have a better number, I am open to it).

Every time price deflation (as measured by the various, understated government statistics) even peaks its head out from its burrow, central banks will buy some of this government debt.  “Oh no, Ben, I see some price deflation over there!”  “Don’t worry; I will pick up that $7 trillion US government deficit for the year. That should cover it.  Fire up the helicopter!”

Every hint of price deflation will be met with central bank purchases.  Do you really believe the Fed has a plan to shrink the balance sheet back to someone’s definition of “normal”?  The balance sheet will see ten trillion dollars before it sees one trillion.

This is why I envision the juggling act could go on for an extended period of time – all the while, more and more resources are commanded by the government / political sector, shrinking the pie for the productive and impacting the standard of living for all but the politically favored classes.

There will be no deflation – not if your definition is monetary, price, or even the seven types offered by Shilling.  The central banks have your back, and the governments of the world will keep their promises thanks to central bank purchases for as long as there is little to moderate price inflation.

Up, up, and away!