Deflation vs. Inflation: Mish vs. Dr. Doom

There will be hyperinflation.

And there will be deflation... at the same time.

There will be hyperinflation of Federal Reserve Notes as we see their value plummet to nothing.

We will see deflation relative to gold as things become cheaper and cheaper in terms of gold.

Remember, during the Great Depression, we were still on the gold standard - and a key point is that prices got cheaper... there was deflation.

Today, things are much different. In times of depression, goods and services enumerated in real-terms will become cheaper. In nominal terms, goods and services will become more and more expensive.

The Federal Reserve and mainstream economists are confused on this point... apparently so are many DailyPaulers. The fact is, one camp is talking dollars and the other camp is unwittingly talking about gold referring to a history long since gone.

Get debt in US dollars... which will be inflated away.
Own gold...which will become more expensive.

that would be true if we had a prosperous industrial base at full capacity able to equalize our own demand and supply without imports because then demand falls while supply stays the same.. we don't. even if we start to rebuild industries now it still takes a while to increase manufacture capacity and to stock up on capitals. what happens when the economy collapses? well since we don't have manufacturing base here the supply is going to drop astronomically.. what does the law of supply and demand tell you? price is going to go through the roof. those people keep arguing for how there's a black hole in the credit market and it's going to suck everything up.. no. it's just a stale hole sitting there and it only sucks money up when you throw them at it.. so far fed's policy of throwing money at the banks hasn't caused direct inflation because it's money thrown at the black hole. but whenever someone goes to the bank and try to withdraw some money, because all the money thrown at it has been sucked up by the black hole, the banks are actually bankrupt.. whatever it pumps out has to come from government guarantees and that is when the real inflation begins because that is a real injection of true money into the real market.. and as we have already seen.. it doesn't take a lot of injection to cause inflation. take medical industrial complex. take schools and student loans. c'mon if you sum up student loans it's but a few 10s of billions.. that's like a hiccup compared to what the congress is spending, but look what that direct injection of money is doing to students, schools, and the whole educational industry-- it managed to raise tuition even amongst the worst recession where everything else is falling. so government is going to have to do that injection a lot more into many more other industries when the crap hits the fan. from that tuition example i gave it's obvious that if the market is allowed to work, ya, deflation will happen. but it ALSO gives you an example of how government can easily overcome that market deflationary force just by the injection of some measly billions of dollars into an industry. this will be even further exacerbated by the fact that the government will share a greater and greater part in the economic pie.. it would have been fine if the private economy is so very prosperous that even if government injects a lot of money into the market there are still lots of products and goods being spread out to absorb the injection.. those things will become the backing of the currency. look at what we have now.. all the stuff is imported from china and our manufacturing will take another hit when economy really tanks thanks to minimum wage law and all the rest with more rules expected to pile on, so the backing to our currency is sure to tank as well; the supply will drastically decrease while demand stays the same. so that money injected will be chasing fewer products.. further exacerbating the rising of prices. right now china is still exporting to us and we're still borrowing, so the places where government hasn't intervened don't need money yet. wait until they DO need money and watch government start pumping REAL money that begin to chase REAL goods not just phantom paper shares in stock or some derivative; that's when crap really hits the fan. if you think this fantasy deflation is going to happen, go ahead and short gold. see you on the other side of the trade.

Hypreinflation?

There are several measures of money, depending what is included. The narrowest published by the Federal Reserve Bank of St. Louis is M1 which essentially is currency (Federal Reserve Notes) in circulation, coins, and checking account balances; this is the most liquid form of money. M2 is M1 plus smaller savings accounts. M3 is M2 plus large savings instruments. M1 is more liquid than M2, and M2 is somewhat more liquid than M3.

M3 is contracting. M2 is barely growing, and M1 is growing (not excessively) more than M2. What does this tell you? One thing it tells you is that there is fear which is causing people and businesses to hold the most liquid form of money. People are shifting out of savings into checking accounts and cash under their mattresses. So if you look at M1 and say we are experiencing inflation, this is an incorrect conclusion; we are experiencing shifts in the money supply components against the backdrop of contracting overall (M3) money supply.

How does the money supply contract? One way it contracts is by people and businesses repaying their bank loans. You write a check to the bank to pay off the loan and the bank's balance sheet contracts. Its assets go down by the amount you repaid, and its liabilities go down by the same amount. By repaying a bank loan you destroy money (your checking account balance) back into the same thin air from whence it originally came into existence. So we know that people are paying back loans to banks faster than banks are making new loans, otherwise M3 would not be contracting. We know it is individuals and businesses, but not government because government is getting further and further into debt, not repaying debt.

Another way the money supply contracts is for a bank to fail and be put in liquidation. To the extent that the FDIC does not cover checking and saving account balances over the insurance limit, those checking and saving account balances are wiped out and the money supply decreases accordingly. If the FDIC fails and cannot make good or the FDIC insurance, the money supply could collapse as banks are run and close their doors, only later to perhaps make good on a small fraction of the checking and saving account balances. The failure of the FDIC is more that just a mere possibility.

Borrowers defaulting on what they borrowed from banks does not have a direct effect on money supply. When you go to a bank to borrow money they create a checking account balance for you out of thin air in an amount equal to the note payable to them that you signed; their balance sheet expands. Until you write a check back to the bank to repay the loan, that checking account balance stays in existence; it may be in someone else's name because you wrote a check to that someone else; it may be on a different bank's books if you wrote a check to someone who banks at a different bank, but the checking account balance remains in existence. If you fail to repay the bank by defaulting on the loan, the bank's solvency may be affected, but the money supply is not affected. Defaults on loans by bank customers is neither immediately inflationary or deflationary, nor does is have an immediate effect on bank reserves. All an increased rate of default on bank loans does is make the bank tighten lending standards, because excessive defaults threaten solvency. An insolvent bank has more liabilities than assets, and your default on a loan reduces their assets, but does not affect their liabilities.

Contracting economic activity causes people to hold onto money as long as they can because they are afraid that they won't be able to get more. Look at all the "financial experts" who are telling people to get out of debt and stay liquid, Richard Russell being the most recent to sound the alarm. Is getting out of debt and staying liquid inflationary or deflationary? It is deflationary. (Ironically, some of the same gurus who tell you to take deflationary actions also, in contradiction, tell you hyper-inflation is coming.)

Of course the federal government is happy to have new checking account balances created and loaned to them so that they can continue their irresponsible deficit spending. But that has not yet been inflationary because banks are reluctant to lend to businesses and individuals and creating new checking account balances and lending them out is the principal way the money supply is expanded. The decrease in business and individual loans has offset the increase in government borrowing. As business contracts as a result, so do jobs and profits, creating a downward spiral leading to further contraction and further unemployment.

In reality most all banks are currently insolvent; their liabilities (the money supply) exceed their assets. The only thing that keeps this from being public knowledge is the accounting profession agreed to participate in fraud by allowing banks to list the value of their assets, not at market value, but at whatever the banks need to list them as to look like they are solvent. The banks, the accountants who certify their financial statements, and the federal and state governments that regulate the banks are hoping this will all blow over and that somehow the collapse in asset values will reverse, returning banks to solvency.

But the collapse in real estate values is hardly over. Now the sovereign debt issue is rearing its ugly head as the impossibility of governments paying these huge amounts becomes obvious; Greece is just the beginning and when the debt of the US federal government finally comes into question, which it will, the banking collapse will accelerate. I am not sure anyone can peg the exact unfolding and the exact timing of this spiral, but we are moving toward bank runs and bank collapse. It is also highly likely that we are moving toward the end of the US federal government just as the USSR ended in financial collapse.

Money is hugely important to economic activity. The founding fathers understood the value of dependable money, which is why they gave to Congress the power to coin money and regulate the value thereof, and prohibited states from coining their own money, emitting bills of credit, or making anything but gold and silver coins legal tender. The unconstitutional Federal Reserve Act (1913) unwound this sound money system and gradually removed gold and silver coins from circulation, substituting debt (unredeemable Federal Reserve Notes, checking account balances, and savings account balances). In 1933, after the last banking collapse, the M2 money supply was $32 billion; today it is $8,600 billion. Almost all of this increase was created out of thin air and loaned to individuals, businesses, and government at interest. The banks, with their government granted privilege of doing this, have turned us into indentured servants, with the notes we sign to get this newly created money being our indenture contract. Of course this is collusion between banks and the government to create and perpetuate this unconstitutional, unstable, unsustainable, debt money system that has enslaved the majority.

The beginning of the end will be a deflationary spiral. When large segment of the people are unemployed / underemployed (>17% right now with Government stats) business must lower prices to bid for the shrinking amount dollars.

I see it all around in my personal life. Two weekends ago purchased 5 pairs of name brand tennis shoes form national chain for $113. (Sale price one pair and BOGO for the other four). This past week end my two daughters and I went to a chain for haircuts, three haircuts total $34 (tip of $12). .
This is deflation. Food and energy is not seeing the deflation pressure as high, yet.

Now Europe is in the print game – for 1 trillion. One million, millions, is a trillion.

All the austerity measures that we hear so much about will absolutely cause a deflationary cycle. Wages and job loss in significant numbers will cause deflation.

They will attempt to break the deflationary cycle by printing and like here it will not work the currency will be destroyed. One (deflation) will drive the behavior (printing) that will lead to the other.

Currency destruction is hyper inflation.

The only way to stop this cycle is to actually allow default, bankruptcy and liquidation of all these investments that cannot possibly be paid. We still experience a lot of economic pain but however the we do not destroy the currency and we cleanse the economy of the burden of trying to carry this waste.

In liberty,
rn