Tocqueville Asset Management L.P.

[due_indigence]

This is the second time in as many days that I've run across the simultaneity argument for deflation and inflation. As I believe EJ has pointed out before, deflationary and inflationary forces are not monolithic. Every large economy has pockets of deflation and inflation at any given time.

This argument however seems to suggest in the current climate that deflation is the apriori and predominant force against which the powers-that-be attempt to mitigate it by fashioning inflationary responses.

http://www.zerohedge.com/sites/defau...ns_Dilemma.pdf

"As long as deflationary forces prevail, world governments will remain addicted to currency debasement. If currencies are successfully debased through inflation, gold will retain its value. The middle ground between deflation and inflation exists only in the imagination of policy makers and analysts who still believe governments can create wealth."

If I can paraphrase, as long as we have deflation, governments will attempt to countervail it by creating monetary inflation (as a means to getting out from under an increasingly punishing debt burden.) In this context, deflation is like an elemental 'natural' force. Whereas inflation is a policy response. It's almost as if two black holes are arrayed against one another. Can enough money be 'printed' to offset the massive amounts of debt/money destruction that deleveraging wreaks upon the economy?

I have been struggling for some time with the notion of deflation being a somehow more profound force than inflation. Deflation comes from the gods. Man attempts to fight it through the hubris of inflation.

[Jay]

Re: Tocqueville Asset Management L.P.

I have been struggling for some time with the notion of deflation being a somehow more profound force than inflation. Deflation comes from the gods. Man attempts to fight it through the hubris of inflation.

Yes, and in the dénouement he is left knee deep in greenbacks, against a backdrop of dilapidated condos, with no faith in his own government.

[rzero]

Re: Tocqueville Asset Management L.P.

Asset deflation and CPI deflation are two separate things. In my opinion, there are no major CPI deflationary forces pent up in the US, only major CPI inflationary forces. There is a bond/dollar bubble in the US that hasn't popped yet. These are CPI inflationary when they pop. The burden on the Fed will be to stop inflation, not to stop deflation. These "inflationary" actions of the Fed over the last couple years are actually forestalling the inflationary bust that will come when the bond/dollar bubble pops.

If/when we have a period of gold and stocks going down and bonds and the dollar going up, I don't see this as deflation, only as further inflation of a bond and dollar bubble that has been brewing for 30 years or so. But all bubbles eventually pop. We are in the inverse position of Japan in the 1990s or the US in the 1930s. In these cases, there was a long term trade surplus. This tends to be deflationary for the country in question when it unwinds. The US for the past 30 years has been running a trade deficit, funded by bubbles in stocks, real estate, bonds, and the dollar. This is inflationary when it unwinds. Who knows how high the Fed will have to raise rates to prevent this inflation, but it is likely more than the Fed is willing or allowed to do.