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Gary North Goes From Deflation to Inflation Point of view

http://www.lewrockwell.com/north/north678.html
hell, how are supposed to keep up with these people. He tells everyone to sell gold when its 1,030 it tumbles down to 700 shouting deflation then when it jumps up back to 900 he says inflation..




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Speed Kills

Things are happening fast and volatility is high. Opinions can change with the frequency of the volatility in the markets.

North believed, rightly,

North believed, rightly, that commodities had become a bubble last March saying that that bubble had burst and that phase of the gold bull market was over. He was touting deflation because Bernanke had held the Adj. monetary base flat for over 18 months, in effect, actually deflating.

So, in that case when credit is being destroyed the demand for cash would be high and the dollar would rise in order to service the current debt payments. Gold suffers under those circumstances.

Now, since the FED has been inflating the adj. monetary base for 6 months AND have stopped paying interest (zero-bound interest rates) on the excess reserves being held by member banks his argument is that they will have to lend to survive. If that's the case, then yes that is a recipe for inflation.

North never said that Gold would not ultimately win out over the fiat currencies, but in March 2008 was not the time for that to happen. Now, the stage is set. We'll see if he's right.

Me? I'm not betting against him again. He was right in his analysis a year ago and I think he's right this time. If the 30 year bond yield continues to rise, then the last bubble has popped... the dollar bubble and at that point we're Iceland times a million.

Ta,

Every decent man is ashamed of the government he lives under. -- H.L. Mencken

Blog: The Present in Plain Text
Listen to The Myo-Tonics on YouTube

Joechip, what do you think of Mish's analysis...

on deflation (he defines it as a net contraction of money and credit)?

He believes we are currently experiencing deflation because bank credit is being destroyed faster than the new AMB reserves are going thru the fractional-reserve multiplier process.

I haven't seen GN talk too much about the destruction of bank credit. But, I have seen him say that deflation is highly unlikely (in the future)...but what about right now!? Mish is saying that it is occurring NOW.

I wonder if he thinks if that when the new AMB reserves get "rolling" they will vastly outpace any destruction of bank credit?

I'd like to take a stab at this...

I follow Mish's blog and have read his stuff for a couple of years. He knows what he is talking about, but I believe in this case he's wrong. He's too focused on credit expansion as the foundation of his deflation argument; most of the credit he's talking about was internal to the banking system. Yes, that credit destructing is causing merry havoc in the economy, but was never part of the economy to begin with - it was internal to the banking system. He is also a bit too quick to chastise others for looking at prices as "Keynesian fallacy", yet trots out stock and real estate prices as proof of deflation when it suits him.

I challenged him a couple of months ago about his claim to be an Austrian, since he all but ignores money supply growth in his analysis - which is an Austrian basic. He still hasn't responded to me, but he did address the idea recently in one of his blog posts. He claims that the credit destruction vastly overweights the money supply growth, so M0 and M1 are meaningless to the arguement. I'm not sure what economics camp he's in, but he's not an Austrian or a Keynesian. More like some blend of both or some new beast entirely: an economist who thinks only in terms of credit.

Anyway, I know you were asking Joechip, but I wanted to comment that I believe we're in both an inflationary and pseudo-deflationary environment right now. We have explosive money growth and massive credit contraction. We have decreasing real estate, stock and energy prices with increasing food, entertainment (including cable) and drug prices. I see the decreasing value as the result of a bubble in real estate, stocks and engery returing to the mean. I see the increase in prices for food, entertainment and drugs as the beginnings of real inflation (too many dollars chasing too few goods.) I see the growth in the money supply from the Fed, which to say is historic and record-breaking doesn't do the movement justice, as a much more permanent condition than the inter- and intra-bank credit correction. For example: On the one hand, you just had a salary reduction of $5,000 a year and on the other hand, your credit card company just dropped your limit $5,000. Which has a more long term impact? Part of the reason we're not seeing 100% inflation right now is that the newly printed money is currently sitting in banks and improving their balance sheets instead of running around the economy. It'll have to come out into the economy soon, and then we'll really see who was right - the inflationists or the deflationists.

Just my buck-fifty.

response

Thx for the reply Mixer,

most of the credit he's talking about was internal to the banking system. Yes, that credit destructing is causing merry havoc in the economy, but was never part of the economy to begin with - it was internal to the banking system.

I don't find this makes sense. It sounds like a real artificial and arbitrary distinction to say that the credit was somehow separate from the rest of the "real economy." Don't you think so?

Part of the reason we're not seeing 100% inflation right now is that the newly printed money is currently sitting in banks and improving their balance sheets instead of running around the economy. It'll have to come out into the economy soon, and then we'll really see who was right - the inflationists or the deflationists.

I agree. GN thinks that because the FED is now paying close to zero (because of the lowering of the Fed Funds rate to zero or .25 or whatever it is...) on excess reserves, the banks will start (if they haven't started already) lending this money (and thus making it go thru the fractional-reserve multiplier process).

My hunch (I might be wrong, just a hunch), is that the once the new reserves get multiplied they will
vastly outweigh the destruction of bank credit. Why? Simply because the AMB has just increased so much.

I don't find this makes

I don't find this makes sense. It sounds like a real artificial and arbitrary distinction to say that the credit was somehow separate from the rest of the "real economy." Don't you think so?

Not if you consider that we have two sources of credit creation in this country: the Fed and individual banks. The Fed creates credit by buying Treasuries - this is their main tool for easing a credit crisis, as the Treasury value is now available for banks to borrow from the Fed. The banks create credit by applying multipliers to deposits factored with fractional reserve banking regulations. The kicker is the definition of "deposits" - this is technically a "liability", and a lot of things are classified as "liabilities" these days. Most of the credit crisis is centered around inter-bank lending; since nobody knows the value of these liabilities, Bank B can't say for certain that Bank A is capable of paying a loan back, so Bank A seizes; that seizing effect is why other industries have had credit issues (if Bank A can't get a loan, it's not going to be doing any loaning). The whole point of the first bailout was to offset the first round of mark-to-market valuation for those questionable liabilities by offloading said liabilities onto the Fed balance sheet; the Fed isn't just too big to fail - it gets to define what "failure" is.

But, I do think perhaps I could have been clearer. The effects are certainly being felt by the rest of the economy even if the initial credit contraction was confined to a single industry, especially when that industry is the lubrication of the overall economic machine. My apologies.

Gary North says what his masters tell him to

prove otherwise

Unify

Asking for me to prove a

Asking for me to prove a straw man argument is facile and non-constructive.

Ta,

Every decent man is ashamed of the government he lives under. -- H.L. Mencken

Blog: The Present in Plain Text
Listen to The Myo-Tonics on YouTube

Is not the fact

That gold bounced back so quickly escaping people? I am impressed by its rebound. Even when the walls are falling all around it gold is holding up.

Facts change

He tells everyone to sell gold when its 1,030 it tumbles down to 700

Why are you complaining about that? ;-) His timing was correct was it not?

hell, how are supposed to keep up with these people.

The fact of whether it's deflation or inflation occurring can change, can it not?

Conditions do change.

Conditions do change. Policy changes. Doing the diligence to look at the situation is your responsibility.

BTW, North said last year that they conditions would change in the future and that he would say so when they do. In his view those conditions are now in place.

His admonition to the hard money crowd last spring was to not accept short term losses in the gold/commodity complex b/c you don't have to. While the macro/long-term argument is still correct, managing the twists and turns of that process is still important. Holding onto ideology won't make you any money when the market is moving counter to you.

The bubble was bursting, he called it and told people to sell.

Now, the bond bubble may be bursting, and if so, he's saying the dollar is doomed. React accordingly.

Ta,

Every decent man is ashamed of the government he lives under. -- H.L. Mencken

Blog: The Present in Plain Text
Listen to The Myo-Tonics on YouTube

More change

Exactly!

Deflationists expect the market to force the tower of debt to telescope back down, which is what's natural. Inflationists expect government to counteract this natural trend, which is another, but less reliable, truism of life.