Inflation is a danger

[metalman]

Why Inflation Isn’t the Danger

By ALAN S. BLINDER
Published: June 20, 2009

SOME people with hypersensitive sniffers say the whiff of future inflation is in the air. What’s that, you say? Aren’t we experiencing deflation right now? The answer is yes. But, apparently, for those who are sufficiently hawkish, the recent activities of the Federal Reserve conjure up visions of inflation.

flying monkeys coming out in force!!!

[Raz]

Re: Inflation is a danger

Here's another take on the subject.

Gary North blew it big-time for me with his "Y2K Disaster" obsession back in 1999, but he's been slowly redeeming himself over the past few years.

Well anyhow, while the arguments he presents here aren't new to iTulipers, it is worth reading.


Pushing on a String

by Gary Northby Gary North

Back in 1973, gold standard advocate John Exter made a phrase famous in hard-money circles: "Pushing on a string." Exter argued that prices of all assets except gold (he ignored silver) would someday collapse because of the pyramiding of debt. Banks would eventually cease to lend, out of fear of default. That would cause the default.

The FED would inflate the monetary base, he said, but this would not reverse the price decline. The commercial banks would not lend. The FED would therefore push on a string. Its attempt to inflate would fail.
Exter had been a central banker (Sri Lanka) and a senior officer at Citibank. He was the first deflation predictor in the hard-money movement. He was soon joined by C. Vern Myers.
His argument remains the central pillar of the deflationist camp – a tiny band of intrepid non-economists who have seen their founder's prediction refuted by the facts in every year since 1973. But economic events since mid-2008 seem to indicate that Exter may have been right, they insist. They continue to predict price deflation. The FED is at long last pushing on a string.
I still predict price inflation, just as I did in 1963, 1973, 1983, 1993, and 2003.

A GRIDLOCKED DEBATE
The debate between those who predict price deflation and those who predict price inflation is gridlocked today. The rate of price increases – both the CPI and the Median CPI – in May 2009 was 0.1% per annum. That is as close to zero as statistical indicators get. The CPI has been showing slight price deflation this year. The Median CPI has been showing slight price inflation. Statistical sampling errors and theoretical conceptual errors can affect the outcome of either indicator. What we have seen is essentially a flatlined price level.
As I have previously written, to decide which is coming – a 2% fall in prices or a 2% increase – flip a coin. Nobody in either the deflationist camp or the inflationist camp is playing Cassandra based on 2% moves. Nobody cares about 2% moves – not Congress, not the FED, not the general public, and not investors.
What matters is the sustained direction of prices, year after year, at rates above 2% per annum. If prices fall, long-term debt contracts favor creditors. These contracts become oppressive. Consider 30-year bonds. Corporations and the U.S. Treasury will be paying appreciating money for old debt. Corporations can recall the debt by borrowing money and paying off old bondholders. This is why corporate bonds are asymmetric. Bondholders get killed during price inflation, with the accompanying rise in long-term rates. They get killed in price deflation because of pre-payment. With U.S. Treasury bonds, pre-payment has never taken place previously. But it could.
If prices increase above 2% per annum, then previous contracts favor borrowers, who pay off in depreciating money. There are more borrowers who vote than creditors who vote. This is why democratic politics always favors long-term price inflation.
Inflationists point to the increase of the balance sheet of the Federal Reserve System, which has shot up faster than at any time in the post-World War II era.
See for yourself.
They conclude: serious price inflation lies ahead.

Deflationists point to the M1 money multiplier, which is headed sharply down. See for yourself.
This is the result of decisions by commercial bankers to lend money to the public (no) vs. pile up excess reserves at the FED (yes). Banks are not lending. Deflationists conclude: serious price deflation lies ahead.

Inflationists respond to the falling M1 money multiplier along these lines. "Bankers must pay depositors a rate of return. The banks are being paid by the FED for excess reserves, but only at the federal funds rate: barely above 0%. If banks do not start lending, they will be bled dry by payments to depositors. The bankers at some point must lend, if only to buy Treasury bonds that pay more than what banks pay depositors."
Deflationists reply along these lines. "Bankers are afraid of losing money. They will not lend until the economy turns up, but it cannot turn up unless borrowers apply for loans and banks respond by lending. Meanwhile, real estate prices continue to fall, foreclosures continue to increase, and banks continue to lose capital, thus lowering their balance sheets. They will not lend. The M1 money multiplier will stay low, offsetting increases in the FED's balance sheet, which serves as the banking system's legal reserves."

Who is right? We don't know yet. Neither does Bernanke. Is the FED impotent? Is it trapped in a corner, frantically pushing on a string? Is price deflation an irreversible force? I don't think so. Here's why. ...

http://www.lewrockwell.com/north/north722.html

[cjppjc]

Re: Inflation is a danger

It really is a facinating debate. For those of us invested in precious metals, we have put our money where our mouths are. If cpi goes up and other asset classes go down wont that be biflation? It does seem right now the pushing on a string analogy is correct. The iTulip U.S. Dollar run will have to happen. I can't see this economy resuming it's previous run. The debt will be unwound.

[hayekvindicated]

Re: Inflation is a danger

Here's another take on the subject.

Gary North blew it big-time for me with his "Y2K Disaster" obsession back in 1999, but he's been slowly redeeming himself over the past few years.

Well anyhow, while the arguments he presents here aren't new to iTulipers, it is worth reading.


Pushing on a String

by Gary Northby Gary North

Back in 1973, gold standard advocate John Exter made a phrase famous in hard-money circles: "Pushing on a string." Exter argued that prices of all assets except gold (he ignored silver) would someday collapse because of the pyramiding of debt. Banks would eventually cease to lend, out of fear of default. That would cause the default.

The FED would inflate the monetary base, he said, but this would not reverse the price decline. The commercial banks would not lend. The FED would therefore push on a string. Its attempt to inflate would fail.
Exter had been a central banker (Sri Lanka) and a senior officer at Citibank. He was the first deflation predictor in the hard-money movement. He was soon joined by C. Vern Myers.
His argument remains the central pillar of the deflationist camp – a tiny band of intrepid non-economists who have seen their founder's prediction refuted by the facts in every year since 1973. But economic events since mid-2008 seem to indicate that Exter may have been right, they insist. They continue to predict price deflation. The FED is at long last pushing on a string.
I still predict price inflation, just as I did in 1963, 1973, 1983, 1993, and 2003.

A GRIDLOCKED DEBATE
The debate between those who predict price deflation and those who predict price inflation is gridlocked today. The rate of price increases – both the CPI and the Median CPI – in May 2009 was 0.1% per annum. That is as close to zero as statistical indicators get. The CPI has been showing slight price deflation this year. The Median CPI has been showing slight price inflation. Statistical sampling errors and theoretical conceptual errors can affect the outcome of either indicator. What we have seen is essentially a flatlined price level.
As I have previously written, to decide which is coming – a 2% fall in prices or a 2% increase – flip a coin. Nobody in either the deflationist camp or the inflationist camp is playing Cassandra based on 2% moves. Nobody cares about 2% moves – not Congress, not the FED, not the general public, and not investors.
What matters is the sustained direction of prices, year after year, at rates above 2% per annum. If prices fall, long-term debt contracts favor creditors. These contracts become oppressive. Consider 30-year bonds. Corporations and the U.S. Treasury will be paying appreciating money for old debt. Corporations can recall the debt by borrowing money and paying off old bondholders. This is why corporate bonds are asymmetric. Bondholders get killed during price inflation, with the accompanying rise in long-term rates. They get killed in price deflation because of pre-payment. With U.S. Treasury bonds, pre-payment has never taken place previously. But it could.
If prices increase above 2% per annum, then previous contracts favor borrowers, who pay off in depreciating money. There are more borrowers who vote than creditors who vote. This is why democratic politics always favors long-term price inflation.
Inflationists point to the increase of the balance sheet of the Federal Reserve System, which has shot up faster than at any time in the post-World War II era.
See for yourself.
They conclude: serious price inflation lies ahead.

Deflationists point to the M1 money multiplier, which is headed sharply down. See for yourself.
This is the result of decisions by commercial bankers to lend money to the public (no) vs. pile up excess reserves at the FED (yes). Banks are not lending. Deflationists conclude: serious price deflation lies ahead.

Inflationists respond to the falling M1 money multiplier along these lines. "Bankers must pay depositors a rate of return. The banks are being paid by the FED for excess reserves, but only at the federal funds rate: barely above 0%. If banks do not start lending, they will be bled dry by payments to depositors. The bankers at some point must lend, if only to buy Treasury bonds that pay more than what banks pay depositors."
Deflationists reply along these lines. "Bankers are afraid of losing money. They will not lend until the economy turns up, but it cannot turn up unless borrowers apply for loans and banks respond by lending. Meanwhile, real estate prices continue to fall, foreclosures continue to increase, and banks continue to lose capital, thus lowering their balance sheets. They will not lend. The M1 money multiplier will stay low, offsetting increases in the FED's balance sheet, which serves as the banking system's legal reserves."

Who is right? We don't know yet. Neither does Bernanke. Is the FED impotent? Is it trapped in a corner, frantically pushing on a string? Is price deflation an irreversible force? I don't think so. Here's why. ...

http://www.lewrockwell.com/north/north722.html

North makes, in substance, an argument similar to EJ's - if the government runs a fiat system it can ALWAYS engineer positive inflation. I don't think this has ever been in doubt - the Japanese example (usually given by deflationists) is ridiculous. The Japanese did not want (at least back then) to utterly debase their currency so they did not produce inflation. Rampant money printing would have put an end to any perceived "deflation" in Japan.

The key question is whether the government intends to produce high inflation (or whether it will choose it as the least evil of all outcomes). I think this is not in doubt. No one has, as yet, demonstrated to me how the US government will fund medicare, medicaid and social security with the demographics that currently confront us. Obama's feeble attempts at reducing medical costs are a step in the right direction but may not amount to much more than a spit in the river.

You add the current deficit with unfunded liabilities and the bailouts and the numbers you get are quite staggering. I'd like someone to deomonstrate to me how these liabilities will be met without rampant money printing and currency debasement.

[kartius919]

Re: Inflation is a danger

You forgot the cost of the military industrial complex.

[hayekvindicated]

Re: Inflation is a danger

You forgot the cost of the military industrial complex.

That's icing on the cake.

[Kadriana]

Re: Inflation is a danger

I don't think you'll see price inflation until production is cut down a lot more. The government can print as much money as they want but no one is willing to spend or lend it.

[metalman]

Re: Inflation is a danger

I don't think you'll see price inflation until production is cut down a lot more. The government can print as much money as they want but no one is willing to spend or lend it.

[Kadriana]

Re: Inflation is a danger

I was reading an article the other day that said to stock up on 3 weeks of food because so many people would be sick or have to take care of someone sick with swine flu that shipments might be delayed. Maybe that will be the catalyst. Right now though, people are cutting back faster than the stores. Heck, you can buy a t-shirt for $4 in Wal-mart and people still aren't buying.

Here's the link to the article about swine flu delaying shipments.
http://www.dailyfreeman.com/articles...0056977456.txt

John Valk Jr., the supervisor of the town of Shawangunk and the president of the Ulster County Supervisors Association, said a worsening pandemic of the H1N1 influenza strain means “our workforce would be slower. Deliveries to stores would slow down, and that is the point of stocking up on 21 days’ worth of supplies. ... As things (get) backlogged, you’d have the things you need at the house.”