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**vcif** · April 19, 2008, 09:41 AM

Re: A Stroll With Mish - "Through da-flation looking glass"

Does he do this on purpose?

This post by Mish, more than most, is littered with logical fallacies so transparent as to render a point by point analysis tedious and almost silly.

I have just one question for Mish:

How on earth do you think the dollar has been weakened? The Chinese? Oil companies? Real Estate Agents? Buyers of Gold? Space aliens?

Nevermind. I get it. Through DEFLATION!

**metalman** · April 19, 2008, 09:56 AM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by vcif View Post

Does he do this on purpose?

This post by Mish, more than most, is littered with logical fallacies so transparent as to render a point by point analysis tedious and almost silly.

I have just one question for Mish:

How on earth do you think the dollar has been weakened? The Chinese? Oil companies? Real Estate Agents? Buyers of Gold? Space aliens?

Nevermind. I get it. Through DEFLATION!

he has utterly, hopelessly boxed himself in with his deflation theory. he never knew what he was talking about in the first place... now it's becoming obvious... painful to watch him try to spin his way out of it. or amusing... depending on your sense of humor.

we're all ka-poomers now. my only question is when do the poom floodgates open and treasuries fly up to 8%, 9%, 10% to catch up to the true rate of inflation? santefe2 is already averaging into that trade. i don't have the balls, yet... maybe i should get a pair.

**Guest** · April 19, 2008, 01:35 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Mish's new articles (intercontinental ballistic missives) buttressing the deflation case are getting more disjointed and esoteric by the month, as inflation gets unchained not just in the US, but worldwide. Having chosen to require reality to modify itself to conform to his theorems, rather than to gracefully let the theorems modify themselves over time to the reality, Mish cannot be enjoying peaceful night's rest these days.

The anxiety level requiring that he "prove the deflation theorem once and for all" is rising, as the massive groundswell of inflation rising worldwide paints him ever further into a tight corner.

Soon it will be time to haul out the really big guns - the explanations reminiscent of advanced physics: "dark matter" and "attractive vs. repulsive force" and "weak vs.strong force" and "quarks and muons" and "string theory" are invoked, to explain the strange repulsion and opposite behavior ocurring between "dollar money" and "gold money". The dollar inflating oil prices but not inflating anything else will require an entire chapter devoted to it, to nail this illusory phenomenon soundly to the floor.

Lots more pioneering theoretical work to do! :rolleyes:

**Spartacus** · April 19, 2008, 01:39 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by vcif View Post

Does he do this on purpose?

This post by Mish, more than most, is littered with logical fallacies so transparent as to render a point by point analysis tedious and almost silly.

I have just one question for Mish:

How on earth do you think the dollar has been weakened? The Chinese? Oil companies? Real Estate Agents? Buyers of Gold? Space aliens?

Nevermind. I get it. Through DEFLATION!

He believes himself. So of course he'll present data supporting his view, or spin data that doesn't support his view such that it looks supporting.

Plenty of people agree with him & support his views. Apparently many on Minianville and couple of months back Gary North & Mish started quoting each other and trading numbers back and forth.

He staked out a position and needs to defend it.

In 2005 he wrote about the prices of manicures and sandwiches at Arby's and Outback Steakhouse dropping and declared that deflationary psychology had arrived, and with it, actual deflation.

**Spartacus** · April 19, 2008, 01:46 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

The fat lady has not sung yet, Metalman.

We all think Bernanke will achieve his inflationary goals

but Seriously, we're in the first innings, there are trillions worth of resets and foreclosures and CDSs and MBSs to devalue
and there is NO GUARANTEE that Bernanke's actions will work.

There's even a small chance that someone convinces Bernanke tomorrow that inflation is the wrong course and the chairman gives up the ghost.

Originally posted by metalman View Post

he has utterly, hopelessly boxed himself in with his deflation theory. he never knew what he was talking about in the first place... now it's becoming obvious... painful to watch him try to spin his way out of it. or amusing... depending on your sense of humor.

we're all ka-poomers now. my only question is when do the poom floodgates open and treasuries fly up to 8%, 9%, 10% to catch up to the true rate of inflation? santefe2 is already averaging into that trade. i don't have the balls, yet... maybe i should get a pair.

EJ · April 19, 2008, 03:15 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by Spartacus View Post

The fat lady has not sung yet, Metalman.

We all think Bernanke will achieve his inflationary goals

but Seriously, we're in the first innings, there are trillions worth of resets and foreclosures and CDSs and MBSs to devalue
and there is NO GUARANTEE that Bernanke's actions will work.

There's even a small chance that someone convinces Bernanke tomorrow that inflation is the wrong course and the chairman gives up the ghost.

Depends on what you mean by "work." Bernanke is NOT creating inflation, not directly, anyway. The inflation as we forecast and as anyone can see is resulting from a deflating dollar. The Fed can only prevent a continuation of dollar depreciation as a source of inflation marginally, not structurally.

I have given up debating Mish. It's like arguing with a creationist, which goes like this.

Creationist: The earth is 10,000 years old.
Scientist: How much do you weigh?

Creationist: 180 lbs. Why?
Scientist: How do you know you weight 180 lbs?

Creationist: That’s what the scale says.
Scientist: But the scale is measuring the force of gravity on your body in units of pounds. You’ve never seen gravity yet you believe in it. Same with the age of the earth. No one can observe the passage of 10 million years but you can prove that an organic material is 10 million years old by measuring the rate of decay of radioisotope carbon-14 which is a continuous process just as gravity is a continuous force. Using carbon dating we know that the world is at least 4.5 billion years old. Why do you believe in gravity, which can be shown empirically as your weight of 180 lbs on a scale but not in the age of the earth which can be shown empirically to be 4.5 billion years old?

Creationist: I don't have time for this. I've already explained how the world is 10,000 years old. I don't need to explain it again.

With Mishites the argument is similar.

EJ: Inflation is rising.
Mishite: Inflation is always a monetary phenomenon.

EJ: Fair enough, but what is the result of inflation, how can you prove that it is occurring? Empirically, in rising prices of goods or assets denominated in units of a currency such as the dollar.
Mishite: Rising prices are not inflation.

EJ: That is correct. Rising prices are the result of inflation. If inflation did not result in rising prices, who’d care about it? It’s everywhere around us – oil, commodities, food – just as I told you it would and you told me it would not. Do you claim that prices are not rising?
Mishite: Some prices are rising and others are falling.

EJ: You'll have to show me falling prices in anything but inflated assets like housing, but for the sake of argument for those items that are rising in price what if not inflation is causing prices to rise?
Mishite: Current price inflation is the result of past credit and money creation. Recent declines in credit and the money supply will cause price deflation to begin any day now.

EJ: But you asserted previously that rising prices "are not" or “do not result from” inflation.
Mishite: I’ve been over this 100 times and don’t have time to explain it again.

Conclusion: Rising prices are the empirical evidence of inflation. Mishites don't accept basic price inflation measures, such as rising goods prices, as evidence of inflation so they invent their own measures to get a result that agrees with the ideology.

Mishites are monetary creationists.

Why do I persist in pointing out these flaws in Mish's arguments? We live in an era of unreason and I feel compelled to fight instances of unreason wherever and whenever they crop up.

**grapejelly** · April 19, 2008, 03:33 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Mish argues for his "M Prime" money supply number.

What is happening with MZM and why is that so off? It seems that MZM has been zooming up, which makes sense given the economic news.

Fundamentally, people like Mish do not understand that defaults are not deflationary. They may cause a shortage or credit which may result in falling asset prices. But defaults are not deflationary of themselves.

Money is lent. The money is spent. The borrower gets bent. A default notice is sent.

The money that was already spent...does not go away. It is filtering through the economy.

Only paying back debts is deflationary. That's not the only thing that could cause deflation, of course, but by definition, paying back debts shrinks the money supply while debt default DOES NOT.

**FRED** · April 19, 2008, 05:30 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by grapejelly View Post

Mish argues for his "M Prime" money supply number.

What is happening with MZM and why is that so off? It seems that MZM has been zooming up, which makes sense given the economic news.

Fundamentally, people like Mish do not understand that defaults are not deflationary. They may cause a shortage or credit which may result in falling asset prices. But defaults are not deflationary of themselves.

Money is lent. The money is spent. The borrower gets bent. A default notice is sent.

The money that was already spent...does not go away. It is filtering through the economy.

Only paying back debts is deflationary. That's not the only thing that could cause deflation, of course, but by definition, paying back debts shrinks the money supply while debt default DOES NOT.

EJ writes in:

The force of gravity remains poorly understood but, at least for large objects, is easily measurable.

Inflation is a man-made phenomenon. Its complexity makes it poorly understood and yet it is also easily measured as inflation results in rising prices. Anyone who refuses to acknowledge that oil's increase from $20 to $115 in a few years as anything but evidence of inflation is not being truthful, and anyone who will not acknowledge that high energy prices are feeding an inflation cycle in the economy cannot be trusted to tell you anything about the economy.

That which cancels debt is debt deflationary. Debt defaults are debt deflationary. Monetary inflation is also debt deflationary. Can debt deflation feed into the economy to produce a price deflation spiral as in the 1930s? Yes. But it has been demonstrated over and over, and we have provided many examples, that preventing this is trivial for a country that is willing to devalue its currency. US leadership in the early 1930s was not until FDR, and the leadership in Japan is not willing to do so to this day.

What is more difficult to demonstrate is how the inflation cycle that currency devaluation policies produce can be stopped without the government taking extreme measures to convince market participants that politicians are willing to accept the political consequences of an extended period of negative GDP and money growth that eliminates inflation growth expectations. The political consequences of disinflation were internalized within US borders in the early 1980s, after Volcker spent 10 years getting his ducks in a row, and quite a lot of damage occurred outside US borders but US policy makers did not concern themselves with that.

The essence of Ka-Poom Theory is that the political consequences of inflation are to be externalized rather than the political consequences of disinflation internalized in the cycle. My thinking in 1999 was that US policy makers were going to blame oil producers for the inflation needed to cancel debt, again; the Fed has to print the money to pay for the oil but can't control where the money printed for that purpose goes. Now it appears that the political planets are aligning to make domestic energy consumption itself the political target, using global warming, energy security and perhaps soon peak oil as a policy backdrop. This was hard to foresee in 1999 when oil was so cheap and the memory of crashing oil prices so fresh. But here we are with OPEC promising to maintain high oil prices, even as demand declines within the OECD, in order to maintain prices above $70, the level at which most alternative energy projects remain viable.

**Guest** · April 19, 2008, 07:44 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

SOME EXTRACTS FROM A DOUG NOLAND ARTICLE AT SAFEHAVEN

Shows how much "explaining" Mish needs to do. It's either that, or abandon his leaky theses entirely.

Either Mish never reads Noland, or he systematically discounts everything Noland is pointing out of our current environment. I have underlined a number of observations of Noland's ( inflationary effects ), which match E.J.'s observations - and they also highlight Mish's deflation inspired arguments as increasingly "closed", self referent, or hermetic. "Hermetic" in that there are more and more areas of the global economy which Mish's arguments "just can't tread into" without treading on facts which summarily trip his theories up. He'd have to do some acrobatics here to convincingly refute that inflationary events are not occurring as Noland describes, i.e. inflation being created and issued, and playing out beyond the direct credit or money issuance of the FED.

___________

April 18, 2008

Setting the Backdrop for Stage Two - by Doug Noland - (Extracts from a current post of his at SAFEHAVEN's website).

Martin Feldstein, Harvard professor and former chairman of the President's Council of Economic Advisors, wrote an op-ed piece in Wednesday's Wall Street Journal - "Enough with Interest Rate Cuts" - worthy of commentary.

QUOTE: "Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices - by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains. Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates. An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol."

While I concur with the basic premise of the article (stop the cuts!), the substance of Mr. Feldstein's analysis leaves much to be desired. First of all, I find it strange than he would address the issues of overly accommodative Federal Reserve policy, commodity prices, and inflationary pressures without so much as a cursory mention of our weak currency. The word "dollar" is nowhere to be found - not a mention of our Current Account Deficits. The focus is only on interest rates - and such one-dimensional analysis just doesn't pass muster in our complex world.

Most remain comfortably oblivious to today's inflation dynamics. Mr. Feldstein mentions increased demand from China and India. He seems to imply, however, that portfolio buying (financed by low interest rates) by "commodity investors and speculators" is providing the major impetus to rising inflationary pressures generally. Perhaps it could have something to do with the $2.5 TN increase in global official reserve positions over the past two years (85% growth)? I would also counter that destabilizing speculative activity is an inevitable consequence - rather than a cause - of an alarmingly inflationary global backdrop.

I'll remind readers that we live in a unique world of unregulated Credit. Excess has evolved to the point of being endemic to an apparatus that operates without any mechanism for adjustment or self-correction. There is, of course, no gold reserve system to restrain domestic monetary expansions. Some years back the dollar-based Bretton Woods global monetary regime lost its relevance. And, importantly, the market-based disciplining mechanism ("king dollar") that emerged at times to ruthlessly punish financial profligacy around the globe throughout the nineties has morphed into a dysfunctional dynamic that these days nurtures self-reinforcing excesses. The "recycling" of our "Bubble dollars" (in the process inflating local Credit systems, asset markets, commodities and economies across the globe) directly back into our securities markets rests at the epicenter of Global Monetary Dysfunction.

A historic inflation in dollar financial claims was the undoing of anything resembling a global monetary system, and now this anchorless "system" of wildcat finance is the bane of financial and economic stability. To be sure, massive and unrelenting U.S. Current Account Deficits and resulting dollar impairment have unleashed domestic Credit systems around the globe to expand uncontrollably. Today, virtually any major Credit system can and does inflate domestic Credit to create the purchasing power to procure inflating global food, energy, and commodities prices.

The long-overdue U.S. Credit contraction and economic adjustment could change this dynamic. But for now there are reasons to expect this uninhibited Global Credit Bubble to instead run to precarious extremes - and for resulting Monetary Disorder to become increasingly problematic. Destabilizing price movements and myriad inflationary effects are poised to worsen. The specter of yet another year of near-$800bn Current Account Deficits coupled with huge speculative flows out of the dollars is just too much for an acutely overheated and unstable global "system" to cope with.

I hear pundits still referring to a "deflationary Credit collapse." Well, the U.S. Credit system implosion was largely stopped in its tracks last month. The Fed bailed out Bear Stearns; opened wide its discount window to Wall Street; and implemented unprecedented liquidity facilities for the benefit of the marketplace overall. Central banks around the globe executed unparalleled concerted market liquidity operations. The Federal Home Loan Bank system was given the ok to continue aggressive liquidity injections and balloon its balance sheet in the process. And now (see "GSE Watch" above) we see that the Federal Housing Administration (with its new mandate and $729,550 loan limit) is likely to increase federal government mortgage insurance by as much as $200bn this year, while Washington's Ginnie Mae is in the midst of a securitization boom.

Together, the Fed and Washington have effectively nationalized a large portion of both mortgage and market liquidity risk. ... Sure, the Credit system remains under significant stress, with additional mortgage and corporate Credit deterioration in the offing. But, at least for now, policymakers have successfully stemmed systemic deleveraging. The Credit system is simply not in deflationary collapse mode. ... Fed funds are today ridiculously priced in comparison both to the inflationary backdrop and to global rates. ... I would today argue that the risk of a precipitous economic downturn has been reduced in the near-term. As a consequence, U.S. Credit growth could surprise on the upside with risk to global Price Instability increasing markedly.

With crude hitting a record $117 today, there is every reason to expect that newly created global liquidity will further inflate energy, food, and commodity prices generally. The Goldman Sachs Commodities index has gained 21% already this year. But when it comes to Monetary Instability, our financial markets might just prove the unappreciated wildcard. When the Fed and Washington radically altered the rules of U.S. finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of "Stage one" arises a major short squeeze in the Credit, equities, and derivatives markets. ... It is not beyond reason that a disorderly unwind of "bearish" Credit market positions could incite a mini bout of liquidity, speculation, and Credit excess that exacerbates Global Monetary Instability

**Mega** · April 20, 2008, 10:34 AM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by EJ View Post

Depends on what you mean by "work." Bernanke is NOT creating inflation, not directly, anyway. The inflation as we forecast and as anyone can see is resulting from a deflating dollar. The Fed can only prevent a continuation of dollar depreciation as a source of inflation marginally, not structurally.

I have given up debating Mish. It's like arguing with a creationist, which goes like this.

Creationist: The earth is 10,000 years old.
Scientist: How much do you weigh?

Creationist: 180 lbs. Why?
Scientist: How do you know you weight 180 lbs?

Creationist: That�s what the scale says.
Scientist: But the scale is measuring the force of gravity on your body in units of pounds. You�ve never seen gravity yet you believe in it. Same with the age of the earth. No one can observe the passage of 10 million years but you can prove that an organic material is 10 million years old by measuring the rate of decay of radioisotope carbon-14 which is a continuous process just as gravity is a continuous force. Using carbon dating we know that the world is at least 4.5 billion years old. Why do you believe in gravity, which can be shown empirically as your weight of 180 lbs on a scale but not in the age of the earth which can be shown empirically to be 4.5 billion years old?

Creationist: I don't have time for this. I've already explained how the world is 10,000 years old. I don't need to explain it again.

With Mishites the argument is similar.

EJ: Inflation is rising.
Mishite: Inflation is always a monetary phenomenon.

EJ: Fair enough, but what is the result of inflation, how can you prove that it is occurring? Empirically, in rising prices of goods or assets denominated in units of a currency such as the dollar.
Mishite: Rising prices are not inflation.

EJ: That is correct. Rising prices are the result of inflation. If inflation did not result in rising prices, who�d care about it? It�s everywhere around us � oil, commodities, food � just as I told you it would and you told me it would not. Do you claim that prices are not rising?
Mishite: Some prices are rising and others are falling.

EJ: You'll have to show me falling prices in anything but inflated assets like housing, but for the sake of argument for those items that are rising in price what if not inflation is causing prices to rise?
Mishite: Current price inflation is the result of past credit and money creation. Recent declines in credit and the money supply will cause price deflation to begin any day now.

EJ: But you asserted previously that rising prices "are not" or �do not result from� inflation.
Mishite: I�ve been over this 100 times and don�t have time to explain it again.

Conclusion: Rising prices are the empirical evidence of inflation. Mishites don't accept basic price inflation measures, such as rising goods prices, as evidence of inflation so they invent their own measures to get a result that agrees with the ideology.

Mishites are monetary creationists.

Why do I persist in pointing out these flaws in Mish's arguments? We live in an era of unreason and I feel compelled to fight instances of unreason wherever and whenever they crop up.

Thanks EJ
I quite enjoyed that and for once i think i follow you...........Might i trouble you for your thoughts on this (also Mish)
http://globaleconomicanalysis.blogsp...footsteps.html

Mike

**Spartacus** · April 20, 2008, 08:34 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by grapejelly View Post

Only paying back debts is deflationary. That's not the only thing that could cause deflation, of course, but by definition, paying back debts shrinks the money supply while debt default DOES NOT.

I think we've discussed this before, and just went around and around, so we'll have to agree to disagree.

If the bank closes immediately after you pay the loan, you paying the loan is deflationary.

But the bank doesn't close. It takes the profit from your payment & uses that as the basis to write new loans.

In the normal course of business paying off loans is not deflationary - it removes no monetary units from the total supply.

It's only deflationary if the bank doesn't turn around and lend that money out immediately, but that's a separate issue from the actual loan payoff.

Originally posted by grapejelly View Post

Only paying back debts is deflationary. That's not the only thing that could cause deflation, of course, but by definition, paying back debts shrinks the money supply while debt default DOES NOT.

If there's a bunch of defaults at once, banks are forced to increase Loan loss provisions - this is not immediately deflationary, but as it prevents the bank from writing the usual amount of loans, it reduces inflation capacity in the near future - in severe cases, it's deflationary.

**jtabeb** · April 21, 2008, 10:45 PM

Re: A Stroll With Mish - "Through da-flation looking glass"

Quoting MISH:

"Prices of things we absolutely need are rising (food and energy). Prices of things consumers are stuck with (houses and stocks, the latter via 401Ks and company options) are falling. This can go on longer than anyone thinks."

I think that is SPOT-ON actually. Re-attacks?

(He can see, he just can't see why?)

**metalman** · April 22, 2008, 10:54 AM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by jtabeb View Post

Quoting MISH:

"Prices of things we absolutely need are rising (food and energy). Prices of things consumers are stuck with (houses and stocks, the latter via 401Ks and company options) are falling. This can go on longer than anyone thinks."

I think that is SPOT-ON actually. Re-attacks?

(He can see, he just can't see why?)

nothing wrong with his observation but it's 100% the opposite of what he predicted.

he predicted incorrectly because he doesn't know what the hell he's talking about. his whole angle is to use the right words but without understanding what they mean, and it works because his readers understand even less than he does. that's cramer's and kudlow's game, too. they're all in the same bucket.

this is the only site i'm aware of that forecast debt deflation and falling asset prices WITH monetary inflation from a weak dollar and rising goods inflation at the same time. all this while exporters are still supporting the dollar.

ok, so what happens when they can't support the dollar anymore because of the inflation they're importing? :eek:

then the REAL inflation starts. spiking interest rates... hasn't happened yet. then the fire economy goes kablooey. then the dollar tanks for real. poom, baby!

**jtabeb** · April 23, 2008, 08:16 AM

Re: A Stroll With Mish - "Through da-flation looking glass"

Originally posted by metalman View Post

nothing wrong with his observation but it's 100% the opposite of what he predicted.

he predicted incorrectly because he doesn't know what the hell he's talking about. his whole angle is to use the right words but without understanding what they mean, and it works because his readers understand even less than he does. that's cramer's and kudlow's game, too. they're all in the same bucket.

this is the only site i'm aware of that forecast debt deflation and falling asset prices WITH monetary inflation from a weak dollar and rising goods inflation at the same time. all this while exporters are still supporting the dollar.

ok, so what happens when they can't support the dollar anymore because of the inflation they're importing? :eek:

then the REAL inflation starts. spiking interest rates... hasn't happened yet. then the fire economy goes kablooey. then the dollar tanks for real. poom, baby!

I agree with all the above. Problem I have is what is the precipitating factor and when is it going to occur?

We all have to hold SOME assets in dollars for daily transactions. At what time will every thing else be secondary to getting everything out of the dollar. When that time comes, I expect the stock market action will confirm the inflation by making steep rises in response to the loss of purchasing power of the monetary unit.

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A Stroll With Mish - "Through da-flation looking glass"

A Stroll With Mish - "Through da-flation looking glass"

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