Guest Post: The Case for Inflation

By George Washington of Washington’s Blog.

As I have recently pointed out, there are strong arguments for ongoing deflation.

But even deflationists think that – after a period of deflation – we might eventually get inflation. For example, in October, I guessed 1 1/2 to 2 years of deflation, followed by inflation.

Moreover, noted deflationist Martin Weiss – after predicting for 27 years straight that we’ll have deflation – has now changed his mind, and thinks inflation is a greater short-term threat than deflation.

For these two reasons – and to make clear that the inflation versus deflation debate is complicated and includes many factors – this essay will focus on the arguments for inflation.

Faber and the Dollar

PhD economist Marc Faber said in May:

“I am 100% sure that the U.S. will go into hyperinflation.”

Faber said he thinks – in the medium-term – we could have high levels of inflation (and see this and this).

Faber’s argument is that a weakening dollar will lead to inflation (as every dollar will buy less goods and services).

Government Printing

The government has injected trillions of dollars into the economy in the form of TARP bailout funds and other programs. Indeed, the government’s own watchdog over the TARP program – the special inspector general – said that number could be $23 trillion dollars in a worst-case scenario.

The basic argument for inflation is – as everyone knows – that the government has injected so much money into the economy (through bailouts, quantitative easing, purchase of treasuries, etc.) that there will be a lot more dollars chasing the same number of goods and services, which will drive up prices. In other words, the supply is the same, but demand has increased.

Indeed, the U.S. has also provided huge sums of dollars to foreign central banks. Could dollars given abroad cause inflation inside the U.S.? Yes – because some proportion of those dollars will be spent by citizens in those countries to buy stocks, commodities, goods and services within the U.S.

Three well-known advocates of the inflation argument are Rogers, Buffet and Schiff.

Specifically, billionaire investor Jim Rogers said we are facing an “inflationary holocaust”.

Warren Buffett said:

The policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

And Peter Schiff has argued for years that hyperinflation will wipe out the value of the dollar, so people should get all of their money out of dollars and into foreign currencies and assets.

But is all this government printing and quantitative easing really enough to cause inflation?

The back-of-the-envelope figures I’ve seen bandied about say no. Because of the massive destruction of credit (which – as Mish has repeatedly pointed out – must be included in discussions of inflation versus deflation), the government would probably have to print one-and-a-half to two times as much as it already has in order to create inflation.

The government could still do so. Yes, it would be suicidal for the dollar and might cause foreign buyers of U.S. treasuries to stop buying, but the boys in Washington could – if they were crazy enough – increase the money printing and quantitative easing to the point where inflation actually kicks in.

Will they do so? Summers, Geithner and Bernanke have proven themselves willing to do a lot of crazy things over the past year, so I wouldn’t rule the possibility out altogether.

Indeed, when the Option Arm, Alt-A and commercial real estate mortgages start defaulting in earnest, there will be a lot of pressure on Washington to “do something”. But again, doubling the amount of money printing would turn the dollar into monopoly money, and so there will be a lot of pressure not to turn America into Zimbabwe.

Devaluing the Dollar

Many commentators also argue that the U.S. is intentionally devaluing the dollar in order to increase trade.

And – as everyone knows – the dollar might tank even if the boys don’t intentionally devalue it into oblivion. Just look at the amount of printing and easing which has already been done, the tidal wave of debt overhang, and the lack of fundamental soundness in the giant banks, the financial system, and the U.S. economy as a whole.

Moreover, some people argue that the dollar carry trade will drive inflation. Specifically, they argue that we’ll get “spec-flation”, meaning that investors will buy dollars and – in a carry trade – use the dollars to invest abroad. This will devalue the dollar, creating inflation.

And, importantly, the U.S. is quickly losing its status as the world’s reserve currency. Therefore, the “premium” on the value of the dollar for its status as reserve currency will also fade, and the value of the dollar decline.

For these and other reasons, Faber and other inflationists would argue that the dollar will continue to substantially decline and inflation will therefore kick in (Note: Mish is still a dollar bull, and so doesn’t concede this point).


I have previously argued that the rising tide of unemployment will contribute to deflation for some time.

However, Edmond Phelps – who won the Nobel Prize for Economics in 2006 – and PIMCO Chief Executive Officer Mohamed El-Erian both say that the “natural unemployment rate” has risen from 5 to perhaps 7 percent.

What is the natural unemployment rate? It just means that if unemployment falls below that a certain percentage, then inflation will be created.

So if the natural unemployment rate has risen, that may mean that we will get inflation sooner (when unemployment falls to 7%, instead of when it falls all the way back to the previous peg of 5%).

End of Foreign Bond Purchases?

Tiger Management founder and chairman Julian Robertson warns that – if foreign purchasers stop buying U.S. treasury bonds – inflation will strike:

If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said. “It’s not a question of the economy. It’s a question of who will lend us the money if they don’t. Imagine us getting ourselves in a situation where we’re totally dependent on those two countries. It’s crazy.

Bottleneck Inflation

Finally, Andy Xie argues that “bottlenecks” can cause inflation. Specifically, Xie argues that inflation in a single key market – say oil – can cause inflation, even in a weak economy.


As I have argued for a year, we will probably have a period of deflation followed by inflation. I still believe that.

When inflation will kick in is the million dollar question. The inflation camp argues that inflation will kick in any second now without any warning. In the deflation camp, David Rosenberg argues for years of deflation, and Dr. Lacy Hunt argues for decades of deflation.

Bottom line: In my opinion, the question is when, not if.

But in investing, being too early is being wrong. Someone who is positioned for inflation decades too early will get creamed. Likewise, someone who is betting on deflation for 20 years will get hurt if inflation kicks in next month.

Note: Remember that we could also get mixed-flation. In other words, inflation in some asset classes and deflation in others. Indeed, given that speculators drove up the price of oil last year, it is possible that – especially in a stagnant economy – speculators could drive up the prices of some asset classes and drive others down.

Print Friendly, PDF & Email


  1. DoctoRx

    Nice capsule of views. I suspect the PTB will continue to give the worst of both flations: inc costs of toothpaste and food and inc home values that lag financing costs so that homeowners continue to be made serfs.

    IMHO the cries for hyperinflation are too apocalyptic.

    Japan here we come?

  2. mikkel

    I long ago came to the conclusion that both camps could be correct simultaneously and lead to the result that you note at the end. Basically anything that has a global scope (imports, commodities, etc.) could increase dramatically in price as foreigners start turning away from the dollar, but there won’t be credit or wage activity to support domestic inflation.

    Thus housing and other asset classes will continue deflating, continuing the crippling of our financial system, but the high cost of energy and materials will negate any benefits. That would pretty much be the worst of all worlds.

    On the other hand, it’s so hard to predict because that assumes strong demand internationally, and in reality our consumption decreases are already putting too much strain on the rest of the world. If that scenario did occur — leading to even more currency adjusted consumption decreases — then it would probably not last very long as the globe would be crippled by excess capacity again.

  3. Stevie b.

    Perhaps “inflation” needs to be clarified a little? I can see inflation in e.g. raw resource prices and perhaps some import prices, but as we’ve seen for many years, wage inflation is another matter. In today’s ultra-competitive world, the move towards greater global levelling of wages still has a fair way to go, which means a declining standard of living with slower growth for the developed economies. This will be no bad thing, as anything else will just lead to an immediate, growth-choking surge in e.g. energy prices. Slower growth would instead allow for the full development of alternatives.

  4. jimh

    Hmmm, “may cause inflation”? I suggest you use the same inflation calculator that was used in the Carter administration. You know, the one that actually includes food and energy. If that is done, we already got nice inflation of 7-10%/yr. If you print more and get inflation that shows up with the current calculator, which massages the numbers very well, it will be bad – way worse than the “official” inflation number.

    Look at prices in the last thirty years. Do they comport with the “official” rate of inflation? Hell no. Get ready for a biiiig surprise.

  5. jimh

    To StevieB: I disagree. Just because there is mitigation in the growth of wages, or an explosion in energy prices, does not mean there will be no inflation or a slower rate of it. Its called diminution of living standards. Nothing says the costs cant increase so much that much of what we take for granted as to personal lifestyle, won’t just simply go away. If energy and food increase a bunch then more will be spent on those things and less on discretionary goods slowing overall growth, but not necessarily slowing overall prices.

  6. zanon

    The Government has been printing lots of money (running big deficits) but all that money is being saved. US households have a lot of catch-up to do in the savings arena.

    If households save all the money that is printing, how will that cause deflation?

  7. john haskell

    Oh my God, I just got to the part where he called Jim Rogers a “billionaire” – should I bother to keep reading?

  8. john haskell

    Well I went ahead and read the rest of the piece anyway.

    1. To mention potential reduction in foreign bond purchases without mentioning actual increases in domestic bond purchases is just stupid.

    2. People have been talking about the dollar “quickly losing its status as the world’s reserve currency” since before I was born (1971, Smithsonian Accord). Pathetic.

    3. You quote Julian Robertson saying the US could have inflation as a result of a funding crisis. But for some strange reason you don’t quote his 1995 prediction that inflation in Japan was a sure thing. Hmm, why not?

  9. PPrboy

    first lets get our definitions straight

    inflation/deflation = increase/decrease in money supply & credit

    when referring to changes in asset prices a better term is increase/decrease to avoid confusion and mingling of terms.

    increases in prices occur when demand is greater than supply (econ 101). With high unemployment and low production utilization rates (< 80% is a common cutoff) there is little demand and plenty of room to increase production before price increases across the board become a problem.

    With financial assets being swapped around, ie fed funds for all kinds of financial instruments good, bad and ?, there is no inflation. Since they swapping of good for bad is lagging we are seeing deflation, not inflation.

  10. Mark

    Let’s see. Foreigners need to buy oil. They must use dollars to buy oil. Their currency will have to fall via the dollar.

    That will always bring down the cost of imports to the U.S. other then oil which may spike.

    Therefore, I’d say that foreigners are going to be paying a lot more for foreign oil.

    The U.S. will continue to have oil priced in dollars in world markets for protection money. And the Saudi’s , Iraq and Kwait will voluntarly purchase our T-Bills.

    In addition, OPEC will agree to cancel a portion of those T-Bills so as not to put undue strain on the dollar and the U.S. taxpayer.

    Hey, let’s be honest. It’s always been the U.S. oil anyways via protection and drilling investment anyways.

  11. Davros

    Amazing analysis: there will in deflation then inflation or both at some point.

    I look out my window and I see clouds. It may rain at some point.

  12. Bob_in_MA

    Sorry, that was blogdom at it’s worst–high on hyperbole, low on facts.

    “Moreover, noted deflationist Martin Weiss – after predicting for 27 years straight that we’ll have deflation – has now changed his mind, and thinks inflation is a greater short-term threat than deflation.”

    So, this idiot predicted something for 27 years and was wrong year after year. Now he predicts the opposite, and suddenly you assume his thinking is clear?

      1. Fair Economist

        Someone who’s been predicting deflation incorrectly for 27 years now predicting inflation seems to me like the proverbial stopped clock falling off the wall. Quite a surprise, but not relevant for telling time.

  13. bob

    Schiff- Why does anyone listen to him? Oh, he’s running for the senate? That’s what this country needs, another asshole “fund manager” from Connecticut in the senate.

    If he gets elected will he sell all of his foreign holdings?

    Every time I hear him my head hurts, all he does is whine, maybe he does have a future in the senate.

    Can the money supply be shrinking (deflation) and consumer prices keep rising (not Inflation, rising prices)? That is the world I see from here.

    As so many in the last few years have pointed out, inflation (and deflation) is always and everywhere a monetary phenomenon. I am not one to quote Austrians that often, it hurts.

    Show me the money.

  14. constantnormal

    And to those who insist that inflation cannot occur so long as we have high unemployment and low capacity utilization, the old “can’t push a string” argument — please review the definition of stagflation.

    I know of no way to say exactly when inflation will be visited upon us, but it seems likely that it is baked into our future at this point. If I were to guess, I would say it will arrive when we hit bottom in our ability to reduce spending, or at least we are unable to keep cutting personal spending at a pace sufficient to stave off rising prices. As soon as spending stabilizes, we may see the wolf of inflation crash through the door and occupy the same space that we do.

  15. D

    Where is the deflation? I don’t doubt that deflation is happening, but it isn’t widespread. The dollar is worth less than it was a year ago. That is inflation, not deflation.

  16. Sivaram Velauthapillai

    You cannot have both inflation and deflation unless you use some narrow definition. In other words, if you define money supply as money plus credit, you will either have deflation (contraction in money supply) or inflation (expansion of money supply). You cannot have both.

    Those who are expecting both inflation and deflation are using some narrow definition. For instance, some talk of price inflation or asset inflation. You can clearly have price inflation in certain goods while the whole economy is undergoing deflation, and vice versa.

    Since I’m an investor (a small, newbie, investor with admittedly a dubious record :| ) I care about inflation vs deflation from an investment point of view. If you are an investor, you have to go with the first, true, definition i.e. money supply = cash + credit. Narrower definitions such as price inflation are almost useless because in a normal economy you always have price inflation and price deflation at all times. For instance, cost of something like television or communications has constantly deflated in the last 30 years, while cost of education has constantly inflated.

    Asset inflation, price inflation, inflation in terms of gold, or other definitions that people cook up, are also dependent on short-term supply & demand so it isn’t very useful to investors. For instance, there could be a serious hurricane damage in the Gulf tomorrow and energy (particularly natural gas) prices may skyrocket. Since energy is a big component of the CPI basket, you can be sure the price inflation, as measured by CPI, will instantly go up. But that is useless to investors because it is (i) hard to predict and (ii) not reflective of long-term fundamentals. Similarly, if you measure inflation by, say, gold, one can never be sure if it is due to short-term (or medium-term) supply & demand or fundamental inflationary changes in the economy. If there is hype over gold (i.e. bubble) then you may perceive long-term inflation when in fact it may not be.

    Unless you are very good at betting on specific markets, you will probably struggle if you bet on both inflation and deflation. To see how useless believing in both can be, consider the following: what would you do with (high quality) bonds if you believe there will be inflation and deflation at the same?

    1. George Washington Post author

      Sivaram Velauthapillai,

      I completely agree. I believe that the most accurate definitions of inflation or deflation include money supply plus the amount of credit (Mish – as one of the main proponents of this view – has repeatedly and for years made this argument).

      But since many investors think in terms of prices, I wanted to address that point of view as well.

  17. Hugh

    As I like to point out, Buffett is a wonderful investor but he is not an especially good macroeconomist. The same could be said of most of the others cited.

    El-Arian irritates me. Maybe it’s Pimco people in general. What is a “natural” unemployment rate? Does El-Arian ever lay out what the parameters are for defining it or the change in it, besides the BS one we all understand? Wages have been flat for 30 years. Every time employment has put upward pressure on wages, the Fed has intervened to prevent this dreaded “inflation”. To keep up, we saw first more workers per household and then assumption of greater and greater debt. Meanwhile the Fed never saw anything wrong with the resultant transfer of wealth to investors. Since most of this money could not be re-invested productively, it was used to fuel a succession of bubbles.

    Rising wages, just like high corporate and marginal tax rates somehow managed to co-exist with economic growth prior to the Reagan Revolution. The result was a strong and stable middle class that had the resources to drive the economy without sinking deeply into debt to do it. Yet as thoroughly discredited as the current economic and financial approach has been by events, this spurious association between wages, employment, and inflation continues and gets a respectful hearing.

  18. Hugh

    A further note. As I keep trying to explain, oil prices are not going up because of supply and demand. There is and has been an oil glut. Glut means prices should decrease. What we are seeing and have seen since 2004 is excess speculation by non-commercials like Goldman and Barclay’s. Read the 2006 Conrad-Levin report:

    or invite someone like Michael Greenberger at Maryland to write a piece explaining it.

  19. ScottB

    George, I appreciate this and the previous post. I would find it helpful if you would re-write it with clear definitions of “inflation” and “deflation”– assets vs. commodities vs. general price level. “Hyperinflation” in my mind is pretty clearly associated with oversupply of money AND rising prices–think of those of us who are wage slaves getting paid twice a day because prices are rising so quickly.

    I think it would be helpful if you shared your back-of-the-envelope calculations, as well.

    Finally, “In my opinion, the question is when, not if.” No, the question is “how much”.

    I’m not knowledgeable enough about asset prices to have an opinion. I think that goods and services prices will be going nowhere for a while. The deficit will continue to get bigger, and China and Japan will come to a point where they buy fewer bonds, putting upward pressure on interest rates. That will finally force us to do something about health care costs, to begin to bring the deficit down. Unfortunately, funding for things we need to invest in for the future–education, infrastructure, energy conservation, R & D–will be squeezed.

  20. gepay

    loans that are not paid back means money going to money heaven. that is deflationary. Lot of that around these days which allowed Helicopter Ben to do his thing and keep the financial system from falling off a cliff by injecting trillions. But as George Washington readers probably know, they haven’t fixed the real probems – the blog where – they left the tumor there. FIRE – finance insurance real estate are basically a transaction cost to the real economy of providing goods and services. Beyond a certain point they create no real wealth just suck more out for themselves and their wealthy clients – isn’t this what was happening? What do you mean ‘was? the tumor is still there.
    The fact is an economy grows naturally at around 2% a year with the normal good years and bad years. Take a pre- fossil fuel economy like China and add fossil fuels one can accelerate to 10% a year which is what has been happening. Then an equilibrium will be reached and growth goes back to the mean of 2% at the new higher activity level. This isn’t enough for the elites so they usually suck more from the 3rd world (it used to be the colonies) so they can keep spending more and more. An equilibriun can be reached here also so then bubbles are created leading to depressions when the financial system breaks like it has now.
    oh yeah the war between inflation and deflation which as just as recently as summer 2007 with oil at $150 a barrel it sure seemed like inflation was winning – except there was no wage price stagflation like the 70s because the globalisation of labor kept wages from rising lock step which is the kind of inflation that the FED worries about.
    There was inflation in the costs of health care and education balanced by cheaper electronics (and other manufactured stuff) from Asia. American wages have been flat for 30 years as mentioned so more and more couples worked full time – the real productivity gains passed back to the working people (when there was a Cold War) stopped so we didn’t get the real gains from the computer internet – we got debt. now the American consumer is tapped out or debted out so the velocity of money has slowed way down. Capacity use of the procuctive economy is at record lows There is global overcapacity in many areas – automobiles, electronics, solar panels, etc There is an oversuppy of oil over demand but the price still went back up to where someone wants it to be. Is it banks ( and others in the financial system) who are using the money given to them by the FED and the Treasury who are causing the stock markets to rise? It certainly isn’t the fundamentals. Unless there is some break through in technology , there certainly won’t be a boom in the real economy to fuel inflation for a while. Most money is credit created. If the consumers don’t borrow and the businessmen don’t borrow, then the money multiplier doesn’t happen- 10 trillion given out by helicopter Ben) times one is the same as the previous 1 trillion loaned out 10 times if it stays in the banks – the velocity of money stays low meanwhile the number of previous loans made going bad continues to rise. So I agree domestically – house prices will not inflate for a long time. wages will not inflate for a long time. The hyper inflation could happen like it did in WEimar if the speculators are allowed to use the created dollars world wide in a dollar carry trade in a feed back velocity increasing fashion – if the Feds keep pumping out more and more to try and jumpstart the stalled economy -see we already were running a faux keynesian stimulus with the 500 billion a year military budget – the 6- 8 hundred billion trade deficit – the rest of the Fed deficit. Like the antifreeze in the car radiator, stimulus only works so much. Watch the interest rates and I-m not talking about the ones the credit card companies charge you.

  21. ComparedToWhat?

    Conflating “inflation” (Buffett) and “hyper-inflation” (Schiff, Faber, Rogers) amounts to ignoring the distiction between Iran possessing field artillery and ICBM-mounted hydrogen bombs.

    The standard of living in the US will decline both in absolute and relative terms for at least the next ten years.

    In absolute terms, this is because much of the “economic growth” since 1980 and especially after the dotcom bust was about accounting gimmicks and passing around sketchy debt as though it were real money. Whether you call it a Wile E. Coyote Moment or a Minsky Moment, asset values and credit perceptions have changed. The Pimco guys are correct.

    In relative terms, it has much to do with energy resources. Each day’s continuation of “drill baby drill” corporate welfare for the petroleum sector sucks us further into the black hole. Our ag sector marches in lock step.

    Another major factor in relative terms is that about half of American children in cities don’t complete high school, and of those that do many are functionally illiterate and innumerate.

    The third major factor in relative terms is that our China policy is pretty much the same as our Pakistan policy, which basically amounts to zip.

    Finally I would add that since I’ve been around (about a year), NC has seemed mostly about the social consequences of economic activity. The allure has been extremely informed commentary that makes explicit the deep or granular mechanisms of finance, and how they interact with politics and the wider society. Hurry back Yves!

  22. Troy Ounce

    I just noted KLM increased frequent flyer miles for a business class upgreade from Cape Town to Amsterdam from 35.000 to 45.000 points. That’s a 30% increase and inflationary!

  23. Charlie

    If NAIRU has risen from 5% to 7%, it won’t be because of any change in the employee side of the equation. It’s on the finance side, specifically in printed money floating through the financial system.

    The finance side is busted because consumers cannot support the recent historical levels of consumption nor can they support debt repayments, which tripped up the financial system. The debt was incurred when spending outstripped wage gains.

    IE, to bring the system into balance, the simplest variables to change are to increase wages and employment. Assuming away the rest of the world. Solutions which do otherwise , while perhaps being necessary given the baling wire holding the global financial system together, won’t do much to resolve that underlying balance, unless is is a resolution which further reduces consumption.

  24. fergerst

    Wages here in the united states are still far too high to compete globally. A public school teacher with a masters (i assume all readers of this blog can attain a masters if they so choose) after tens years of work will get tenure, a great deal of vacation time and a fat 100K salary. In most countries, a school teacher is not a job to aspire to – they are paid dirt. Big inflation is coming, and there is absolutely nothing we can do about it. And like the big mac index, if we were to use the teachers salary scale we may be in for a rude awakening if were to normalize to something that approximates the rest of the world.

  25. fergerst

    In the 1930s we had deflation first followed by inflation. So I expect the same to occur now. Both camps are right when timing is taken into consideration. Near term deflation, long term inflation, it’s really not too complicated to understand.

  26. Shaza

    And then there is this:
    Deflation dead and deader, Federal Reserve-style
    Posted by Tracy Alloway on Sep 28 13:56.

    “If the BofAML economists’ interest rate expectations prove accurate, then it would appear that the Fed may actually be ignoring the amount of the slack in the US economy in its zeal for fiscal easing. In other words, the Fed doesn’t just intend to kill deflation – it intends to kill it 2.25 times over.”

  27. Siggy

    Helicopter Ben has said that he fears most a deflationary spiral. So he has done all in his power to inflate, or if you prefer reflate the economy.

    My definitions of inflation/deflation are expressed in the rates of increase and/or decrease in the quantity of money. Money includes coin & currency and credit money, a loan of some form.

    By the foregoing measure, the Monetary Base, we have hyperinflation here and now! It’s in your face, can you see it? What is nearly miraculous is that we see limited upward pressure on prices. The general increase in prices is not occurring because the recipients of the bailout monies are bankrupt and the bailout monies keep them from being identified as being bankrupt. As the banks are not lending in quantity, the velocity of money has incurred a sharp decline. As the bailout money is being held as excess reserves the money multiplier has been reduced.

    What is needed is a bit of hyper-deflation. The loans that can’t be serviced need to be written down or repudiated. That reduction in the level of debt is deflationary. The first sectors that will reflect lower prices will be the asset sectors, houses, commercial real estate, going concerns. Price reductions in asset classes will be followed by price reductions in consumables. What should then occurr is that purchasing power of the dollar should increase.

    So long as the Fed, the Treasury, and the Congress and Administration throw money into the economy the process of deleveraging will be thwarted.

  28. Markus

    I have read a lot on the IN/DEflation speculation, thought about it a lot and I lean to deflation at least for now, though down the road in a year or two that could change.

    Faber and others say…”The basic argument for inflation is – as everyone knows – that the government has injected so much money into the economy (through bailouts, quantitative easing, purchase of treasuries, etc.) that there will be a lot more dollars chasing the same number of goods and services, which will drive up prices. In other words, the supply is the same, but demand has increased.”

    But, Econ 101 says that money is created when it is borrowed or loaned, not when it is printed, the money we all are talking about came into being during the last 20-30 years as we built a number of bubbles which saw prices rise dramatically, especially in housing which by 2007 had become unaffordable to all but a few households, like in California where only about 6% of all households could actually “afford” the homes they were in. Only vehicles like exploding ARMS and liar loans allowed people to buy houses that were dozens of times their income. That inflation was due to vast money lending and borrowing which was priming the pumps of inflation.

    Now, they are printing like crazy, but all they are doing is monetizing what had already been created long ago, and a fraction of it at that, just enough to keep the “too big to fail” from failing. The monetization will not extend to the general population. Sure there are home buyer credits targeted at people to manipulate some sectors, housing and cars mostly, but we are talking about a few billion in cash, a very small fraction of the total monetization going to the larger financial institutions who will not lend but rather use it to cancel out accounting entries from defaults on loans made long ago. It will chase no goods or services, that was done in past decades when the money really was created.

    Until we see that change, we will continue to have the pundits crowing on CNBC that the recession is over, even as 15 million people lose hope looking for work and prices drop. Sure we can have periods where some prices like fuel rise, but there is no support for the higher prices generally and they will inevitably fall back to a market level that is lower. I could give ample anecdotal evidence of this, but in general the trends are down and seriously for most retailers.

    As to the vaunted “lower dollar,” have you all missed the fact that the dollar is being intentionally lowered, but in an environment of competitive devaluations that means little, the dollar is down a bit, but nothing historic yet and China, Japan/Eurozone will not permit that decline to become historic.

    I concede that money creation in excess of real production increases leads to higher prices, but just right now actual lending and money creation is strongly NEGATIVE in the US, consumer credit is collapsing, credit card issuing is off 80% y/y, and mortgage credit is not easy to get even as commercial credit is still very scarce.

    We are in fact on the knife edge of massive deflation, and all the monetizing of old debt will not change that, especially when it is a few dozen institutions getting all that freshly “printed” money, in fact little is printed it is all accounting entries and keystrokes at the Treasury and Fed which is extinguishing old and bad debt.

  29. ScottB

    fergerst says: “A public school teacher with a masters (i assume all readers of this blog can attain a masters if they so choose) after tens years of work will get tenure, a great deal of vacation time and a fat 100K salary.”

    LOL! My wife is a high school teacher with a master’s in a large urban area, after 5 years she’s earning in the low $40K range. Do some research! Average pay for a K-12 teacher in the U.S. is about $52,000. I believe it’s the lowest average wage for any career requiring a master’s.

    Teachers in most other countries get a lot more respect than teachers in the U.S.

  30. Praedor Atrebates


    The goal of developed nations should not (and MUST not) be to aspire to the income and lifestyle of 3rd world/developing nations. The goal should not (and MUST not) be to race to the bottom.

    That said, I am fine with decreased wages for actual productive humans (unlike financial/wall street trash) so long as the UN-productive leach class (CEOs, bankers, wall streeters, etc) also take a commensurate hit in income and wealth. If PRODUCTIVE people must eat shit, then those that believe themselves “above the fray” must eat more because they merely parasitize the actual producers of goods and services (ie, wage earners).

  31. Seal

    The inflation retarded the crisis for some time, but this broke out later, throwing
    millions out of employment. At first inflation stimulated production because of the divergence between the internal and external values of the mark [devaluation — ed. note], but later it exercised an increasingly disadvantageous influence, disorganizing and limiting production. It annihilated thrift; it made reform of the national budget impossible for years; it obstructed the solution of the Reparations [[ Federal Reserve debt kiting obligation ]] question; it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people [[ GS partners, FNM executives, politicians et al. ]] accumulating wealth and forming a class of usurpers of national property whilst millions of individuals were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation [[flipping houses, mortgage and interest rate speculations, day-trading ]] and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance. It is indeed easy enough to understand why the record of the sad years 1919–23 [[ 2009-12 ]] always weighs like a nightmare on the German [[ American ]] people. page 404, The Economics of Inflation, Professor Bresciani-Turroni, 1931 reprinted by Augustus M. Kelley, London, 1968, as referenced by Marc Faber, The Financial Implications of Reflation, A PUBLICATION OF MARC FABER LIMITED,

  32. dearieme

    I suggest that a useful analytical tool is the question “What would Goldman Sachs like?”. A second tool would be “But is it within the power and competence of the US government to deliver it?”.

  33. logan h

    I’ve been an inflation predictor for many years, but having lived in Japan both before and after their deflationary experience, there are *some* concerning parallels. I’m using a new news reader to track the discussion across the investment blogosphere. See In addition to tracking hundreds of investor blogs (including this one), it filters by topic, ranks articles by importance and remembers what I’ve read.

  34. fuguez

    The answer is not that complicated at all. It is not necessary to have a perfect system, simply we need to allow failures to happen. Each crisis has been bigger than the last for the simple reason that there is an effective government bailout each time. the question people should be asking is along these lines: “If LTCM would have been allowed to fail, would the outcome have been worse than what we have witnessed over the credit crunch.”. I doubt it. Stop the bailouts and let the reckless companies (and their creditors) go to the wall.

Comments are closed.