The deflation case: caught, gutted, poached and eaten

[FRED]

Re: The Deflation Case: Caught, Gutted, Poached and Eaten

I would expect that many of the institutional fixed income and pension fund managers are required to maintain investments in the bond/fixed-income universe. In that respect moving to sovereign debt is understandable.

And hedge funds that actually hedge something would be a welcome development...:rolleyes:

Did we say "Hedge Fund"? We meant Unregulated Speculative Investment Pool (USIP).

[GRG55]

Re: The Deflation Case: Caught, Gutted, Poached and Eaten

GRG,

The bond market's buying into commodities may be logical given the dramatic lowering of rates, but this does not automatically mean that increasing commodity prices are driven by fundamentals.

Commodities are not being driven by pixie dust. However, the primary fundamentals driving commodities today are not the same as the fundamentals that started this cycle in the aftermath of the 2001 recession.

The question which I still do not considered settled is whether the increases in commodity prices are truly representative of underlying economics rather than sector rotation.

Sector rotation? Well if that is what you think then we have had the longest period of multi-year sector rotation into an asset class that I can ever recall - and although I am not the age of Buffett or Russell, I have been around a few years...

This is not to say there is not money to be made in the oil/gold run up, but knowing what true 'sea level' is makes exit decisions much more accurate once the money tide abates.

After all, even the massive Internet money flows eventually abated - and only those firms with real businesses retained much of their previous value. Even for these, few of them have come close to their salad Y2K prices.

Oil is thus better in many respects than gold as it is a fungible commodity - gold is driven far too much by 'investment demand'..

Well as far as I know gold is a fungible commodity also. But I accept your point that oil has useful purposes other than solely as a financial speculation or store of value. And I've held oil for much longer than precious metals, perhaps because of the same reasoning. Please note that my comment was not restricted to just oil and gold, but all catagories of capital intensive commodities and the producers.

One item which I do not see studied much is the dynamics of capital destruction..

Well we may get our chance to watch this up close and soon, if my expectation that Bernanke will draw a line in the sand on inflation comes about.

It is because of this study that I am not so eager to jump on the gold/oil bandwagon, but have preferred to choose investments in areas where underlying economic growth is higher and in businesses with structural monopolies thus pricing power - but also with flexibility engendered by having labor as the highest single cost.

Cannot disagree with your general philosophy in this regard C1ue. My experience is the best investment returns I ever made (in every respect, not just financial) were those times I invested in myself.

[c1ue]

Re: The deflation case: caught, gutted, poached and eaten

GRG,

Your investment philosophy is quite sound - merely different than mine.

We're all in a world where there is no single right answer.

As for Bernanke drawing a line in the sand - I would posit that it is more likely he gets fired and Volcker II comes in.

Burns did not get much chance to fix his 'errors'.

But of course, it is not clear to me that Volcker II could do what Volcker original got away with.

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

Any possibility that the increase in money supply reflects the movement out of Commercial Paper, etc., going into Fed. account that show up as money supply.

As for commodities, any possibility that as economic and financial conditions deteriorate further, speculators will unwind their positions to cover margins, bringing down commodities in a fast dash, greatly filtering out the crowded trades?

Any possibility that the above unwinding mirrors (in a feedback loop) the unwinding of the yen carry trade, further exacerbating the commodities unwinding, and thus further drying up of liquidity?

Any possibility that as the recession deepens and unemployment grows, declining aggregate income results in significantly reduced spending, coming at the same time that the global uncoupling theme loses all steam?

Any possibility that as the shadow finance economy shrinks further and things like the CDO market continue to wither away that lending and borrowing will largely evaporate, leading to less liquidity, less velocity, and consequently less cash in circulation?

Any possibility that as the US deficit grows under strains of declining local, state and fed. tax revenues that the Treasury is forced to push forward an oversupply of treasuries for which Fed monetization can't over compensate for?

Any possibility that as the US plunges deeper into a consumer-driven recession, it is accompanied by a loss of incentive of FCBs to buy US Treasuries, forcing up US interest yields and thus forcing down even more borrowing and lending, exacerbating the credit/debt crunch and rising insolvency?

Any possibility that as goods inflation in China, M. East, etc., goes higher, that pressures to unpeg from the dollar rises as well, further reducing their interest in buying Treasuries backed by a weakening dollar?

Lets say an at least some of the above is true and in combination materializes. Would U.S. inflation still grow and expand at a level that quantifies as debt deflation?

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

Any possibility that the increase in money supply reflects the movement out of Commercial Paper, etc., going into Fed. account that show up as money supply.

As for commodities, any possibility that as economic and financial conditions deteriorate further, speculators will unwind their positions to cover margins, bringing down commodities in a fast dash, greatly filtering out the crowded trades?

Any possibility that the above unwinding mirrors (in a feedback loop) the unwinding of the yen carry trade, further exacerbating the commodities unwinding, and thus further drying up of liquidity?

Any possibility that as the recession deepens and unemployment grows, declining aggregate income results in significantly reduced spending, coming at the same time that the global uncoupling theme loses all steam?

Any possibility that as the shadow finance economy shrinks further and things like the CDO market continue to wither away that lending and borrowing will largely evaporate, leading to less liquidity, less velocity, and consequently less cash in circulation?

Any possibility that as the US deficit grows under strains of declining local, state and fed. tax revenues that the Treasury is forced to push forward an oversupply of treasuries for which Fed monetization can't over compensate for?

Any possibility that as the US plunges deeper into a consumer-driven recession, it is accompanied by a loss of incentive of FCBs to buy US Treasuries, forcing up US interest yields and thus forcing down even more borrowing and lending, exacerbating the credit/debt crunch and rising insolvency?

Any possibility that as goods inflation in China, M. East, etc., goes higher, that pressures to unpeg from the dollar rises as well, further reducing their interest in buying Treasuries backed by a weakening dollar?

Lets say an at least some of the above is true and in combination materializes. Would U.S. inflation still grow and expand at a level that quantifies as debt deflation?

Are any of these events dollar positive? No. Then they are all inflationary.

Quantum's Jim Rogers says US 'out of control'

Leo Lewis, Asia Business Correspondent

Jim Rogers - who co-founded the now closed Quantum Fund with George Soros - told 750 global fund managers in Tokyo today that, America is “completely out of control”, there will be a 20-year bull market in commodities and that prices will be in turmoil.

And he also warned that it “made sense” if global competition for resources ended in armed conflict.

Mr Rogers told delegates to the CLSA investment forum that the prices of all agricultural products would “explode” in coming years and that the price of gold, which hit an all-time high of $964 an ounce yesterday, will continue its surge to as much as $3,500 an ounce.

Gold would continue to rise, the analyst Christopher Wood told fund managers, “because it is the exact opposite of a structured finance product”.

In a blistering attack on US monetary policy and the “helicopter cash drop” responses of the Federal Reserve, Mr Rogers described the American dollar as a “terribly flawed currency”.

He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up the money-printing machines and run them until we run out of trees” had exposed America’s weakest point to her rivals and enemies.

[Guest]

Re: The deflation case: caught, gutted, poached and eaten

... Jim Rogers - who co-founded the now closed Quantum Fund with George Soros - told 750 global fund managers in Tokyo today that, America is “completely out of control”, there will be a 20-year bull market in commodities and that prices will be in turmoil.

Hear! Hear! Tough to bet against a Jim Rogers macro thesis. He may have made a wrong call or two (e.g. Russia in the 2000's) but he is a wily player. Also worth noting that Ty Andros's description of the near future is in lock-sync with what Jim Rogers describes.

As this plays out at some point Rick Ackerman and Mish are going to be doing some acrobatics - hanging off the chandeliers to continue interpreting this as a global or even US net deflationary outcome. The pundit armchair may not be warm enough yet, but if 'waves of global goods-price deflation' had been my platform for the past four or five years, I'd be quietly looking for some rhetorical exit from that public position by 2010, lest my ability to manoeuver within that argument were reduced to the size of a handkerchief.

_________

Edit: Donalds - I recommend reading some of Mr. Andros' articles to add to, or broaden the picture on commodities inflation - he draws a panoramic, global picture. These commentaries are all brimming with intelligence and astute reads on the macro trend. At least I found it excellent reading. If you are unfamiliar with his comments, you can review a complete set of his articles at the Safehaven website (safehaven.com). Just go to the archives and look up "Ty Andros". The global inflationary bias comes into very sharp focus in his collected letters. Gary Dorsch is also excellent on the same themes. The quality, depth and breadth of their collected comments present a powerful case.

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

Fred says:

"Are any of these events dollar positive? No. Then they are all inflationary."

So that's it; it all rest on what happens to the dollar.

As one who has invested on the bet of a declining dollar (much of it in foreign bonds - harkening back to Eric's book), and having made 25% in doing so, I fully understand the reasoning behind a declining dollar. But I can't help but think that there must be more to the inflationist theme - than all things hinging on the dollar continuing it's fall.

Seems to me there is still something to be said about the safe haven phenomenon. Won't the unwinding of the excesses in speculative trades result in supporting the dollar, at least to a degree? Is investing overseas all that attractive even when global stock markets come down significantly, and will putting one's money in commodities still prevail even in the face of a global economic decline? Perhaps all this hinges not so much on what happens with the dollar but on the belief in global decoupling.

I'm just trying to figure this all out. I don't find the inflationist theme very convincing, but when I do find it at least somewhat compelling, I find them at iTulip. Perhaps in time I'll be convinced. But I'm not there yet.

[WDCRob]

Re: The deflation case: caught, gutted, poached and eaten

Just my opinion, but it seems to me that while we may still be in the early phases of an unwinding, it HAS started.

And during that start the dollar has collapsed and inflation seems to be soaring.

I haven't heard a good argument yet why inflation would stop unless something changes the underlying dynamic. Bernake hasn't even reached into his magic bag of tricks yet really.

[DrYB/C]

Re: The deflation case: caught, gutted, poached and eaten

EJ,

The fish was tasty; thanks for the mind food, but can one fish really feed the multitude plus the prophet?? I think not…in my opinion, there is no and never was a Testament Jesus.

Since I’m sure you’re still hungry, and since I like the way you cook, let’s continue fishing; however, be warned: the two species we are trying to catch are masterfully elusive…I repeat, masterfully illusive…and neither you, nor I, nor any of the other readers, may be able to land them, much less gut, poach or serve them up for all to eat (let’s hope we don’t starve first):

1. Q: Major Dollar Inflation or Dollar Hyper Inflation??
A: Hyperinflation.



2. Q: War (International Conflict: the world paints itself blood red before it paints itself forest green)

or

Peace (The old, dying U.S. takes its final calming bubble bath, yet this time it exits the tub clean

[and green with an envy so overpowering that it causes it to cease its voracious overconsumption of the world’s resources and turn itself into the world’s greatest and greenest underconsumer, recycling and reusing every single consumptive item so many times over that its consumption/production ratio effectively becomes zero. It even learns how to recycle its food by studying the nurturing habits of female pelicans and their chicks].

Why the behavior change??

Because the Chinese and Middle Easterners who bathed it were so kind and generous in their behavior toward the dying old greedmonger that the greedmonger had to prove it could be a thousand times kinder and a million times more generous before it passed into oblivion….it was a contest for moral superiority, and the U.S. would not die before it had won; it even hedged against its death with life-default swaps to ensure/insure it would win before taking its last breath…luckily, it achieved its goal of moral superiority before its rather unassuming death, for the swaps turned out to be worthless)??
A: War

I think I can hook these fish, using the following logic to underwrite my argument:

a. Sociological fact: populations revolt when freedom is taken away.
b. Under the current international currency regime, the U.S. population consumes the rest of the world’s goods and services for free (in reality, it isn’t consuming them for free, as the costs have been deferred until now, but the deferment had the feel and appearance of freedom, so I will characterize it as such) or for very little cost relative to the products the U.S. produces to trade for the goods and services it consumes; this method of consumption is a massive and massively temporary freedom only possessed by the U.S.
c. The value of dollar pegged foreign currencies, of gold, and of commodities is inversely proportional to U.S. consumptive freedom.
d. More inflation=more loss of U.S. consumptive freedom, yet U.S. must hyperinflate, at this point, to prevent a debt hyperdeflation. The simultaneous occurrence of “Ka” and “Poom” indicate the truth of this statement.
e. But hyperinflation=destruction of U.S. consumptive freedom, yet hyperdeflation = destruction of U.S. consumptive freedom.
f. In terms of outcomes, hyperinflation=hyperdeflation=loss of consumptive freedom by U.S.
g. Since, in terms of outcomes, hyperinflation=hyperdeflation=loss of consumptive freedom by U.S, the only course of action that may provide an alternate outcome= revolt by U.S., i.e. war for direct control of the natural resources (mainly oil) that will allow U.S. to maintain its consumptive freedom, since indirect control of these resources by the U.S. via dollar hegemony will soon be relinquished via hyperinflation or hyperdeflation (which are, again, in turns of outcomes, the exact same thing), unless the U.S. acts to prevent the relinquishing before it occurs; moreover,
h. The U.S. ruling class (FIRE economy owners) and the U.S. upper class (non-financial mega-corporations and politicians) are mega risk takers, given the relative ease with which they can socialize the costs of taking risks. They will take the risks associated with a war for hegemonic resource control rather than take no risks and be guaranteed to pay the costs associated with the loss of international hegemonic power and the freedom that comes along with said power. The speed at which they will move toward war is directly proportional to the increase in value of dollar pegged foreign currencies, of gold, and of commodities.
i. In other words, if U.S. fails to go to war, it is guaranteed to lose its status as world hegemon; if it goes to war, it may win or it may lose. If it loses, it ends up in the same place it would have been if it hadn’t gone to war: a debt slave to its creditors, with a massive loss of consumptive freedom. But, if it wins, it maintains its position as King of the World-Hill, with more power than it possessed before it went to war. It will choose war.

Comments please!!

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

Fred says:

"Are any of these events dollar positive? No. Then they are all inflationary."

So that's it; it all rest on what happens to the dollar.

As one who has invested on the bet of a declining dollar (much of it in foreign bonds - harkening back to Eric's book), and having made 25% in doing so, I fully understand the reasoning behind a declining dollar. But I can't help but think that there must be more to the inflationist theme - than all things hinging on the dollar continuing it's fall...

The dollar may be the epicentre, but I agree it isn't the only issue. Last summer the world was watching news pictures of the lines outside UK's Northern Rock branches. I doubt a single person in any of those lines gave a moment of thought to the US$. What crossed my mind then was the question "If I had just removed all my savings from Northern Rock, what would I do with it?" Go across the street and open a deposit account at Barclay's? Not likely. Put it into US$. Not likely, given the recent experience with cable...

Seems to me there is still something to be said about the safe haven phenomenon. Won't the unwinding of the excesses in speculative trades result in supporting the dollar, at least to a degree? Is investing overseas all that attractive even when global stock markets come down significantly, and will putting one's money in commodities still prevail even in the face of a global economic decline? Perhaps all this hinges not so much on what happens with the dollar but on the belief in global decoupling.

I'm just trying to figure this all out. I don't find the inflationist theme very convincing, but when I do find it at least somewhat compelling, I find them at iTulip. Perhaps in time I'll be convinced. But I'm not there yet.

The dollar support argument on unwinding is the same as Richard Russell's "US$ synthetic short" argument.

If you expect a "global economic decline" then you certainly do not want to be in commodities.

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

GRG,

Your investment philosophy is quite sound - merely different than mine.

We're all in a world where there is no single right answer.

As for Bernanke drawing a line in the sand - I would posit that it is more likely he gets fired and Volcker II comes in.

Burns did not get much chance to fix his 'errors'.

But of course, it is not clear to me that Volcker II could do what Volcker original got away with.

Bernanke won't get fired. There's enough uncertainty in the US financial markets already; they aren't so stupid that they will add to that by dumping the head of the big kahuna Central Bank in mid-crisis. This isn't the same as the 1970's.

Ben is going to prove to be a bigger inflation hawk sometime in the next year or so, than most currently expect. Helicopter Ben is actually doing a reasonable job given his policy options and the situation he's facing. THe USA may come out of this mess better than Europe.

[touchring]

Re: The deflation case: caught, gutted, poached and eaten

Inflation hawk? What can Ben do to force down oil prices? Impose import curbs?

All this inflation is an excuse, i only see a coordinated effect by OPEC to ensure high oil prices. High oil prices will flow down the system and cause inflation in everything else from food to metals to services.

Bernanke won't get fired. There's enough uncertainty in the US financial markets already; they aren't so stupid that they will add to that by dumping the head of the big kahuna Central Bank in mid-crisis. This isn't the same as the 1970's.

Ben is going to prove to be a bigger inflation hawk sometime in the next year or so, than most currently expect. Helicopter Ben is actually doing a reasonable job given his policy options and the situation he's facing. THe USA may come out of this mess better than Europe.

[simon galbraith]

Re: The deflation case: caught, gutted, poached and eaten

"The epitome of what I don’t like about the attitude of the right toward the poor is summarized in Margaret Thatcher’s comment that any man who finds himself riding a bus to work at the age of 26 can count himself a failure."

This is a misquotation, Margret Thatcher said and thought no such thing. http://en.wikiquote.org/wiki/Margare...#Misquotations

On your first statement Margret Thatcher was very much in agreement: "We have inherited a tax system that was deliberately weighted against success. There was neither sense nor equity in such a system. Success at every level needs encouragement not harrassment. Already we have made major tax changes and we shall return to this theme in future budgets." http://www.margaretthatcher.org/spee...p?docid=104167

In the same speech she offers some sage advice "we are committed to getting inflation down by essentially a monetary policy. The aim is to restore sound money. A situation where the currency of the realm can be a store of value as well as a means of exchange."

[EJ]

Re: The deflation case: caught, gutted, poached and eaten

"The epitome of what I don’t like about the attitude of the right toward the poor is summarized in Margaret Thatcher’s comment that any man who finds himself riding a bus to work at the age of 26 can count himself a failure."

This is a misquotation, Margret Thatcher said and thought no such thing. http://en.wikiquote.org/wiki/Margare...#Misquotations

On your first statement Margret Thatcher was very much in agreement: "We have inherited a tax system that was deliberately weighted against success. There was neither sense nor equity in such a system. Success at every level needs encouragement not harrassment. Already we have made major tax changes and we shall return to this theme in future budgets." http://www.margaretthatcher.org/spee...p?docid=104167

In the same speech she offers some sage advice "we are committed to getting inflation down by essentially a monetary policy. The aim is to restore sound money. A situation where the currency of the realm can be a store of value as well as a means of exchange."

Hard to say exactly why this quote stuck to her. She is also quoted making statements that contradict the sentiment.

"We want a society where people are free to make choices, to make mistakes, to be generous and compassionate. This is what we mean by a moral society; not a society where the state is responsible for everything, and no one is responsible for the state."

I agree with most of what she has to say. Many of her observations are succinct and accurate.

"There is no such thing as Society. There are individual men and women, and there are families."

I can especially relate to this one, as readers no doubt can attest.

"I love argument, I love debate. I don't expect anyone just to sit there and agree with me, that's not their job."

This is sound advice.

"Democratic nations must try to find ways to starve the terrorist and the hijacker of the oxygen of publicity on which they depend."

This is brilliant.

"Europe will never be like America. Europe is a product of history. America is a product of philosophy."

Margaret Thatcher Quotations

Thanks for jogging me to take another look at Maggie's words.

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

Rick and EJ had the following exchange by email after this was published.

Rick Ackerman: Thanks for your thoughtful response, my friend, but you’ve made it w-a-a-y too easy for me to dismiss nearly all that you’ve said with an imperious wave of the hand. For nowhere in your argument do you even mention the word “borrow” – which, in the absence of wage increases, is exactly what consumers would have to do in order to push prices for goods and services significantly higher.

Eric Janszen: This is a fundamental flow in the deflationistas argument.

First, commodity price inflation is a leading indicator of wage inflation.

Second, yes money is borrowed into existence by consumers and by businesses. But it is also borrowed into existence by the government. What occurs when the credit markets become dysfunctional and consumers and business reduce borrowing, the government steps in... unfortunately for holders of dollars. We depict the process this way.

Before credit bust and recession:

After credit bust and recession:

Third, you cannot have a commodity price deflation in a depreciating currency. The yen appreciated during Japan's modest deflation (never exceeding 2% in a year) and the severe US 1930s deflation, at least until FDR took the US off the gold standard and flushed the dollar down the toilet. Can you explain to me how a deflation in a weakening currency is possible or give me a single example in history when that's happened, or are you predicting that the dollar is somehow going to strengthen in spite of all the debt liabilities against it?

RA: But using what as collateral? Housing is spent for that purpose, and that is why prices for all goods and services tied to the consumer economy must ultimately fall.

EJ: Asset price deflation. Recession. Inflation. Ask any Russian who lived through the transition of the Soviet economy to oligarch capitalism in the early 1990s.

RA: Yes, we do have speculative torrents of cash flowing from paper assets into hard goods, as you’ve noted, and this has been driving inflation at many levels. But you act as though the value of the financial assets from which the speculative money is coming will remain constant. In fact, most of those paper assets are going to be acknowledged as worthless within a year or two, simply because they already are worthless, or very nearly so. At that point, whence will come the money to bid oil to $200 a barrel, or wheat to $50 a bushel? I hope you don’t try to argue that, in the coming economic depression, physical demand for oil and wheat will take up the slack.

EJ: Ka-Poom Theory says all the money needed to produce a massive inflation resides in the accounts of foreign central banks and private institutional and individual investors. As they sell dollar denominated assets, the sell dollars and buy local currency. Further, the borrowing that the US government used to be able to do this way did not monetize US debt on US accounts so it was not inflationary. Now evidence is that both are happening: foreign lenders are "diversifying" (i.e., selling) and the US government is monetizing to cover the expense liability: military spending, 23 million Americans on the government payroll (founding fathers spinning in their graves), and other Argentina-esque liabilities.

Meanwhile, as corporate bonds and other fixed income fall in value, fund managers move into "safe" government securities pushing up prices and yields down; these do not reflect the inflation premium because of demand so they hedge the inflation by buying commodities.

RA: You stated that “as long as long term interest rates remain below the rate of inflation, commodity prices will continue to rise until the debt deflation runs its course.” This mixes and conflates too much for me to parse, but there is no mistaking that you have implicitly dismissed the potential for deflation to tighten its death-grip on the economy. And when you talk off-handedly about deflation running its course, you neglect to consider a crucial implication of that process -- i.e., that the real (i.e., inflation-adjusted) cost of borrowing will become far too high to support even modest speculation, let alone sustain for yet more years a commodity mania such as we are currently witnessing.

EJ: You and I have talked about this before. Your hang-up is with the term deflate. All it means in economics terms is decrease. For example it is correct to say that the dollar is now deflating against gold and the euro or that gold and euros are inflating against the dollar. Both are correct. Debt deflates when debt levels decrease. As asset prices are largely credit versus cash financed, a debt deflation implies asset price deflation.

The inflation is coming from rising import prices, especially energy. Just read the headlines:

Energy, food push January's PPI 1% higher

Year-over-year increase highest since 1981; monthly core PPI up 0.4%

Why?

US Dollar Crashes Below Support

What is happening is almost incomprehensible, so I do not blame you and Mike for not getting it.

Our frigging government has allowed a situation to develop wherein wage earners are, so far, not seeing rising wages but the prices of everything... gasoline, heating oil, taxes, health care, interest rates... are rising while their wages remain stagnant due to labor competition via sourcing. At least things have been cheap at Walmart but soon that won't be true anymore either as the yuan rises against the dollar. We use the following chart at iTulip to show how price inflation is distributed.

J6P is getting royally screwed. I just got back from my local coin dealer who told me once again that the same dynamic has been in place for about a year in a half: working class folks come in to sell their coin collections and jewelry to raise cash to pay the bills. While I was there a woman came in to sell jewelry. She told me if she didn't she'd lose her house. She was selling to raise money to pay taxes on her house! Meanwhile, my coin dealer friend is selling gold coins in $100,000 batches to wealthy folks who have enough money to protect themselves.

See, unlike the 1970s when the savings rate was 8% to 10% the savings rate has been zero for years. Last time we had a period of inflation J6P has some savings to convert to hard assets. Not this time. He's broke. So J6P has to sell inflation hedges while the top 5% buy.

It just doesn't get any uglier from a political standpoint. You'd have to go to Argentina in the last crisis there to see the same dynamic of poor wealth and debt distribution and rising inflation as a currency tanks. To be blunt it pisses me off. But at least we've been able to warn our readers it was coming.

RA: Finally, and most crucially, you seem not to understand that borrowing power alone is what has sustained inflation, and that it has begun to dry up so precipitously as to all but guarantee a quick end to this last fling of inflation. Also, for obvious reasons, you keep your distance from the deflationary implications of the real estate collapse, saying only that it would continue for at least another five years (!!). But if Fed stimulus continues to drive up prices for everything but housing, that is hardly a recipe for inflation; rather, it portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton.

EJ: In a healthy economy consumers and businesses are borrowing money into existence. This is true under a gold standard or not. The Fed's balance sheet without constraint of a gold standard can in theory expand it's balance sheet infinitely, unfortunately.

You say: "Portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton."

You have been calling for all-goods price deflation. Don't you mean "prices at the pump reach $1, and eggs $0.50 a carton." What, now you're calling for inflation?

Welcome to the inflation team!