Ten Questions for Those Forecasters Who Predict Inevitable Deflation by Gary North

How can you possibly suggest that deflation will prevail when commodity prices are likely to rise further as a result of seemingly endless demand from emerging economies? Won't rising energy prices ensure a healthy dose of inflation, effectively protecting us from the evils of the deflationary spiral?

Good question - counterintuitive answer:

Contrary to common belief, rising commodity prices can in fact be deflationary so long as demand for such commodities is relatively inelastic, which is usually the case for basic necessities such as heating oil, petrol, food, etc. The logic is the following: As commodity prices rise, money earmarked for other items goes towards meeting the higher commodity price and consumers are essentially forced to re-allocate their spending budget. This causes falling demand for discretionary items and can in extreme cases lead to deflation. We only have to go back to 2008 for the latest example of a commodity price induced deflationary cycle.

The entire article here:
http://www.investorsinsight.com/blogs/john_mauldins_outside_...

The most common problem with a total fiat currency system is inflation and the most uncommon problem with a total fiat currency system is deflation. In fact, it is very rare that there is ever a deflationary event under a total fiat economy; usually, any deflationary pressure occurs as the result of the artificially induced business cycles where the inflated bubble burst. However, that portion of the business cycle is the economic system seeking a realistic equilibrium which washes out mal-investments, poor business decisions and the corruption that usually is associated with easy-money policies implemented by the FED. We have seen, over the last 96 years that the value of money has been regulated to disorder, distortions abound and economic probabilities are not longer to be considered reliable, at least not as commonly understood.

As such, the complete system has been impaired by the immense distortions, not only in the time value of money related to interest rates, but in other essential areas such as contracts, and even property rights involving actual allodial title. The powers thus exercised by the State, both in the granting of charters, the issuance of “bills of credit” does, in a very real sense, defy the normal operating principles behind the market economy, causing distortions that cannot be remedied by the expansion of more government or central banking intervention. So, in defiance of all the clear provisions of the Constitution, the State created the central banking system and authorized it to issue bills of credit, primarily on behalf of the government itself, in order to allow a vast expansion of government power and the abuses that closely relate to that power.

There is always, without exception, a huge disadvantage and loss in the quality of credit when a total fiat system is employed within a country. Under such a system there is an eventual check on productive labor through the process of depreciating the real value of wages through fiat money. As Webster stated: "Of all the contrivances for cheating mankind, none has been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man's field with the sweat of the poor man's brow."

Your argument has been made several times before on the DP and several times I have given answer to the fallacy that there has been a destruction of credit that neutralizes the effects of the massive increase in the money base. It seems to make sense and yet, those who propose such formulas for deflation never provide the mechanics of just how that works, since deflation is, by definition, the contraction of both credit and the money base, not just one or the other. Thus far, the argument that proposes a deflationary event has proved to be little more than rhetorical excesses without much through to the actual position that 96 years of massive inflationary policies have created in this economy.

Most, if not all, of those who predict deflation seem to isolate the various monetary and economic phenomena under an umbrella they call deflation without every providing or distinguishing any of the analytical data required to support such predictions.

If we are in deflation then where is it? If what you and others say is true then there should be a broad and discernable spread of deflation throughout all economic sectors, but that is not, nor has it been the case since the panic of 2008. The official CPI numbers, which I don’t place any credence in, have show positive not negative rates. Taking into consideration that the government changed the methods by which they calculated most methods of economic indicators to reflect a positive light on government policy then the rate of inflation has always been much higher than is reflected in the official CPI and other indicators. That being said, what then is the rate of real inflation, or in deference to your argument, real deflation?

The indicators that are perhaps most important are actual pricing across the board, in particular commodities such as food, energy and durable goods. Additionally, another indicator of inflation is the value of the dollar on exchange markets, the value placed on the dollar in those markets always indicates the real rate of inflation. If deflation was taking place, and I mean broad deflation, not narrow, then it would be reflected in the valuation placed on the dollar in exchange markets, they are giving no such indication that the value of the dollar has increased because of deflation, just the opposite.

I would welcome deflation, for it would mean that the purchasing power of the dollar has, for the first time since the late 20s, increased under this fiat regime. The fact is that the purchasing power of the dollar is a fantastic indicator of whether actual deflation is taking place or not. Has the purchasing power of the dollar increased? NO, for it to increase there would have to be a complete reversal of 96 years of inflationary debasement of the currency itself. Since the dollar holds the purchasing power of approximately 3 to 5 cents today, that would have to be a massive degree of deflation to achieve the purchasing power of 100 real cents or, in other words, the appreciation of the dollar in real purchasing value. This total fiat monetary system has created massive distortions, not only in the economy, but in the manner in which the economy is measured and seen by everyone.

Deflation, in real terms, is therefore, out of the question. While there may well be various decreases in pricing in sectors of the economy, primarily as a reflection of the bust of the last artificially created bubble, the over all ability of an actual deflationary event under a total fiat regime is nil since the value of the currency has been debased to an extreme degree through decades of monetary inflation. You see, the means by which the FED has debased the currency has been a slow and steady process, it has taken 96 years to bring the purchasing power of the dollar down to levels that if happened overnight would cause an absolute inflationary panic and widespread social unrest. Thus the process of controlled debasement through steady inflation allows the debasement of the currency without the public noticing what is taking place.

The most common misconception about inflation or deflation is one where our point of view is isolated to our present moment in time. The truth is that we are living and have been living under massive inflation for decades. Today it takes approximately $100,000.00 in our inflated, thus debased currency to purchase what $5,000.00 purchased in 1913 under a real 100 cent dollar. I would welcome deflation because it would provide more purchasing power for each and ever dollar in my pocket. In order for us to have broad deflation there would have to be a massive revaluation of the dollar to the positive, increasing the purchasing power of the dollar from its present 3 to 5 cents per $1.00 face value, that would be a good thing, but its not going to happen. Once again, based on government CPI, there has not been a massive increase in the purchasing power of the dollar but only a very, very minor increase. That does not support the claim that we are in or heading toward a deflationary event since we have had such minor increases under the total fiat system in the past 40 years without any real deflationary pressures presenting themselves to the point where broad deflation in the pricing structure of the economy occurred.

The nature of fiat currency, at least in today’s fiat regime, is that all bank notes and reserve deposits are not money in the strictest sense of the word, they are, in fact, only instantaneously redeemable titles to a non-existent property. At one time all bank notes and reserve deposits were actual title receipts to real property and that was gold and silver that those title receipts represented. The banks have essentially issued fictitious title claims with no actual property that corresponds to those titles. The entire purpose of such a massive scheme is the complete redistribution of wealth and income from the productive sector to the non-productive sector which is the government. That fact in and of itself should be enough to cause anyone with half a brain to reconsider supporting anything this government does or believe anything its pundits say.

The result of this type of monetary policy and the monetary mechanics used to support such policies distort the economy by monetary expansion, thus when “new money” is created and injected into the economic stream, no matter the path of that stream, any subsequent contraction in the money supply is not really necessary since the purchasing power of each monetary unit is diluted proportionally to the increase in the money supply. The government and central bankers love this fact. The facilitation of the creation of these non-property titles in the form of Federal Reserve Notes are the ultimate cause of inflationary and also transitional deflationary problems. I use the term transitional because since the fiat economy relies so heavily upon bubble creation for growth, the resulting deflation of the bubble is a transitional stage between the boom, bust and the re-inflation of the subsequent bubble. That is exactly what we have been seeing recently since the Panic of 2008 and it is leading to a far greater bubble that will not only be far more expansive in scope, but highly inflationary in nature. It is important to stress, once again, that the economy today is far different than that of the early 30s because the nature of the monetary system is completely different, resulting in a very different set of conclusions than occurred during the early deflationary periods of the 1930s.

For the most part, those who predict deflation use a Keynesian modality to make such predictions, at least everyone that I have read has been very close to the Keynesian definition of deflation which basically is determined by negative CPI and economic contraction. There are however, several forms of deflation including cash-building deflation, growth deflation, confiscatory deflation and, of course, bank credit deflation. Everyone that I have encountered who predict deflation do so from a Keynesian “liquidity trap” point of view, in other words there has been some form of “liquidity trap” that will not allow or will nullify the effects of monetary base expansion. Some say credit destruction however, they have yet to describe how credit is being destroyed or how such destruction is in fact deflationary. It appears that even several commentators here on the DP, who predict deflation, do so from the same Keynesian point of view and I find that rather odd. Many, in fact, sound more like Krugman than Mises or Rothbard or Ron Paul when both describing and thus predicting deflation.

Here is an example of Krugman’s liquidity trap: “…a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero, injecting monetary base into the economy has no effect because base and bonds are viewed by the private sector as perfect substitutes.” I would say that is almost corresponding to the very message we are being given by those, even here on the DP, for the reasons that an increase of the monetary base or supply will not have any effect since there has been an overwhelming destruction of credit during this latest crisis. The fact is that, like Krugman, those who predict deflation cannot show any correlation between the two.

While there is a direct correlation between the excessive issuance of fiat money with inflation and the contraction of that money with deflation there are also numerous other factors involved with each of those monetary phenomena. The primarily cause of the issuance of excessive fiat money is budget deficit spending. It is important therefore, to understand the degree to which such spending has taken place over the last few decades and the cumulative effects such spending has on and how it influences possible inflationary pressures. Of course, most people are not aware of these effects and therefore tend to ignore them when speaking about either inflation or deflation. Government spending, even if it is not deficit spending has a direct effect on the economic machinery of the country however, when there is deficit spending the effects are almost incalculable because of the degree of distortion that is created within the entire economic structure.

It is also necessary to understand that part of the purpose behind fiat money is that it allows governments to spend without any real regard to deficits. As we have seen, this fiat mentality promotes a massive degree of wasteful spending, this too creates vast distortions within the economic system and foundational structures. In most cases the government always taxes the most productive sectors within the economy diverting that productive capital into unproductive sectors thereby creating what amounts to a vampire economy. This type of economy will always, without exception, have harmful effects, which are all cumulative in nature, on production. It prevents capital creation to the point that there must be even more real productivity in order to attempt to nullify the effects of monetary policies of the government.

Eventually, of course, the entire economic system becomes infected with this distortion that comes from wasteful and even non-wasteful government spending because of the pressure of both additional taxation and the increase in the deficit which requires a greater base of the money supply to cover the deficit spending.

Can you tell me one instance where a total fiat regime has suffered a massive bout with deflation? Is there any instance in history where deflation has take place when a central bank, like the FED, has had the unlimited power to print money, create credit and extend monetary policy on a global scale? Of course, the common answer is the 1930s however, that is not a proper comparison since the dollar was not total fiat but still tied to gold. I have yet to find anyone who can provide me with one instance where deflation has taken place under a total fiat regime; I can however, show a multitude of inflationary and hyperinflationary events that have taken place under total fiat regimes.

The question must arise within any debate on the subject of both inflation and deflation as to the nature of credit; how it is created and the effects of credit on the economy in conjunction with the increase in the money base. The convergence of several factors are therefore, necessary to effect inflationary pressures being reflected in pricing, it is not instantaneous normally and can take several years for the actual pricing to be effected in the economy. The idea of “debt deflation” is one that is commonly quoted by those who advocate a deflationary event or depression, yet they superimpose the idea that since there is debt deflation or credit destruction that it is indicative of a deflationary event in broad economic terms.

Many suppose that credit is virtual money and acts, essentially, as the money supply, but does it? As the scenario goes, since there has been a massive degree of both credit destruction and restriction then the amount of money “printed” by the FED does not matter and will not cause inflation. If we consider credit an actual part of the money supply, acting exactly as physical money does when placed into circulation then there may well be an issue upon which those who see a deflationary event may stand however, credit does not act in the same way nor is it extended in the same manner as money is under the fractional reserve system. Credit acts very differently than physical money because the nature of credit allows for the over-extension of means, physical money does not. So, what is the effect of the extension of credit within the economic system? It is similar, but not the same, as the expansion of the money supply. Will there be a deflationary event brought about by credit contraction? To a degree, but since it operates differently than money and is based on time value instead of present value there is a substantial different with very different effects on the economic system. It is essential to understand that they are both parts of the fiat system, both fiat credit and money are part of the same inflationary system that has been created and manipulated by the FED and its ancillary “agencies”.

There are some similarities between the two, but they are different animals which operate on different economic principles with different economic results. There must the consideration of what we call “cash-holdings” and “credit availability”, both allow for economic exchange, but do so in a manner that produces differing results, one being direct, the other indirect. Cash holdings involve direct exchange while credit, of course, indirect with the inclusion of a debt obligation on top of the exchange. However, it must be considered, and understood, that the indirect exchange involved with credit also involves a later direct exchange when the debt is settled through payment.

Everything changed in 1971, there was basically a complete transformation of economic processes globally. Additionally, at the behest of the U.S. government, the IMF was given the privilege of issuing Special Drawing Rights which would allow every country to inflate without endangering their domestic currencies. The called SDRs paper gold because it was suppose to act as gold would as a reserve. The system that was once based on asset value, at least to a degree, was completely transformed into a debt-based system of valuation with each fiat note representing a legal notification of a debt obligation. It is impossible to detail the amount of distortion created by such a transformation, but it was nothing short of revolutionary and it completely changed the manner by which the economy normally functioned, replacing the natural functions with artificial functions which seek, by government mandate, to operate the system without the usual parameters commonly associated with economic processes. Essentially, the economy was no longer allowed to self-regulate as it usually would to clear out distortions, malinvestments and disruptions.

Now, your supposition is that there has been approximately $14 Trillion in credit destruction and only $2 Trillion in credit creation by the FED over the last year, yet you and others neglect the fact that there are also Trillions of dollars in both the money supply and credit, not to mention in “Euro-Dollars” in circulation. The U.S. Debt, comprised primarily of U.S. Treasuries and other obligations represent a massive amount of monetary instruments. All of these factors, including the most recent inflationary policies of the FED all stack up toward an inflationary bubble. Additionally, as you said, we simply don’t know exactly what the FED is doing because they don’t reveal very much information about their monetary operations. It was also revealed that the FED has, particularly recently, provided U.S. Dollar reserves to other countries apparently as a carrot to keep them from abandoning the dollar. There is a cumulative effect to all these factors and yet, from what I have read, most who predict deflation always, without exception ignore those cumulative factors when making such predictions.

Under normal circumstances, broadly speaking, prices will eventually reflect the quantity of money being created. The percentage of that reflection can range from a direct correlation between the amount of the increase or decrease, to a far greater percentage based on how the money is forced into or out of the economy. There are many who advance The Quantity Theory of Money, particularly most of those who predict deflation however, I have found that the theory is set on some very oversimplified assumptions regarding fiat money, the manner in which it is created and how it is filtered through the economic system. In fact, if you look carefully into the manner in which money is both created and entered into circulation you will quickly find that there are numerous fallacies regarding what is commonly known as the “velocity of money” and its supposed effects on either inflation or deflation. Since money does not really circulate, but is exchanged for and against goods and services there is a corresponding cycle between the exchange of money and the turnover of goods and services within the economy. The pertinent fact is not that money exchanges hand or circulates a certain number of times during a given period of time, but that the result of exchange is commerce that is independent of the number of times money changes hands in circulation. When we boil the facts down what is left is the fact that there is actually no really reliable statistics on the velocity of money in circulation, the closest thing to actual figures regarding something resembling velocity is the cycling of demand bank deposits, but that cannot determine actual circulation in economic exchange.

Thus those who use the theory of the velocity of money to support their predictions of deflation, or for that matter inflation, do so with a massive blind spot. There are so many variables involved in these economic processes that the use of the velocity theory contains a major flaw in terms of a predictive quality. It is important to remember that with every sale, thus exchange of money, there is a corresponding purchase. Both sides of the equation are of the same nature. Since that is true then it should be obvious that the velocity of money within the economy is an effect of extremely complex factors other than simply the number of times money changes hands in a given time, it is not the cause of anything but the result of something.

Also, when thinking of the velocity of money there is a tendency to believe that prices either rise or fall based on what is called a price level. During inflationary periods, prices do not rise uniformly, nor during a deflationary period do they fall uniformly however, in order to have actual inflation or deflation of a monetary nature, prices eventually become broadly indicative of either inflation or deflation. Narrow inflation or deflation episodes are not necessarily indicative of either inflationary or deflationary events, but may be the result of certain distortions created by artificial or natural causes.

Now remember, this government put a global policy decision in place in the late 60s and that decision was to allow for a rather uniform rate of inflation within the nations of the world. The outcome of that policy decision was the granting of Special Drawing Rights to the IMF with the intent that countries would be more app to inflate if their own currencies were not completely isolated by that inflation. The primary purpose of this was to actually allow the U.S. to inflate without becoming an economic outcast.

Additionally, from what I have read, including the writings of the numerous deflation pundits, they don’t appear to be inclined nor actually equipped to disentangle the various separate economic processes which they claim to be deflationary and render an account that is coherent enough to explain the various processes which, whether deflationary or not, would present a danger to economic efficiency and the welfare of the economy to the point that economic productivity would be impaired to such a degree that this economy, already distorted by decades of inflationary monetary policy and calculation, could suffer under a deflationary bout leading to a deflationary depression.

There are natural economic inflations and deflations that take place in the economy all the time, most are not recognized, but those are very different that the artificially induced forms manufactured by the monetary policies of central banks, those are the problems. Now, since 1933 we have not seen a single instance of central bank deflationary policy, there have been contractions in the money and credit supply, as witnessed during the Paul Volcker era at the FED, but even that drastic contraction in monetary policy didn’t produce anything resembling malign deflation.

While most who predict deflation see unemployment as a sign of a deflationary trend, the fact is that we have been reached the equilibrium level where the wage-price spiral has been preceded by an increase in the money supply. While there have been a decrease in some prices, particularly real estate, that also does not necessarily mean that a deflationary trend has developed, in fact you can have an increase in prices with a decrease in both credit and money with the effect of a fall in business sales and profit. Normally however, an increase in both wages and prices are indicative of the amount of force used to increase the money supply. What we are witnessing today is little more then the continuing effects of a massive bubble exhaustion, not a deflationary event. The FED and our dear ole government are in the process of re-inflating the bubble, only much larger than at anytime in our history.

I’m not sure where you are banking at, but last week averaged rates for a 30 year fixed were at 5.36%, this week they hover around the 5.30% mark, that is substantially higher than around 0%. Now, you tell me that the banks are essentially not making any money on mortgage interest and have replaced that income with basis point fees…hmmm! Think about that for one minute. So, they replace their monthly interest income with a one-time origination fee that is regulated and limited by government legislation to a small percentage of the loan amount, even the yield spread they can charge is limited by regulatory decree and yet you want us to believe that they have actually replaced interest income with origination fees. Federally Charted Banks are restrained to around 1 to 2 percent on the front end and usually 1 percent on the back end. Title I of the Residential Mortgage Loan Origination Standards governs the origination of all mortgage loan products in this country and the last time I checked they have not changed. Yet, you say that the banks now get their income from one-time origination fees associated with a loan and that income is enough to replace the untold billions of dollars in monthly income, whether the bank “shelves” the loan or they “bundle” the loans into “pools” to sell as MBS, which, as we know, is a rather discredited market at the moment.

Now, you make some interesting points however, you have not taken many of the factors I expounded upon in the bulk of my commentary into consideration. Money and Credit, what is the difference between the two? Well, we have come to think of money as credit, but it is not nor are they essentially created in the same way, although obviously some people on the DP seem to think so. The fact is that the money created by the FED or “printed out of thin air” is substantially different than the money that is created through the extension of credit. One is a reserve currency, or monetary reserve base, the other is the result of the monetary base being extruded through the fractional reserve system.

It also becomes apparent that there are those who cannot see or perhaps cannot understand the various differences between credit that is issued by a bank lending its own funds which are also known as “commodity credit” and those which are issued or granted by the issuance of a fiduciary media such as notes, deposits not covered by money or “circulation credit”. These are all factors that I rarely see anyone who predicts deflation mention, the question is why don’t they?

For instance, if a bank issues “circulation credit” it does so by discounting a time valued bill of exchange or a claim that becomes payable in a certain amount of time. The question arises how does the bank issue those discounts? Well, it should be obvious that it does so by creating those discounted funds and issuing them into circulation, but we also much recognize that those funds made up of the fiduciary media will, at the time of the issuance expiration, return to the bank of issue. In a much broader sense therefore, it can be understood that there is both an expansion and contraction of the quantity of money taking place on this scale across the general economy. When we consider that banks, in the course of business operations, usually issue fiduciary media only as loans to those who are usually producers and/or merchants then it should be clear that the majority of lending is not directly for the purpose of actual consumption first and foremost, but in the production and payment of wages. Usually the first prices to rise are those of raw materials and other goods of a higher order, along with semi-manufactured goods such as parts and other supplies that will eventually end up as consumer goods. It is therefore, only later that prices of actual consumer goods see an increase, this could take months in some cases and in others it could take much longer.

The changes therefore, in the purchasing power of each monetary unit follows a different path with variations in the effects on the general economy. It is essential to understand that inflation or deflation is not as cut and dry as many make them out to be. Additionally, it is vital to understand that fiat monetary inflation, or as the case maybe, deflation, differs substantially from that which would be found under a commodity monetary system such as gold and silver.

Another interesting fact that few “deflationists” appear to be either unable or unwilling to explain is that of “forced savings” when the money supply increases and wages lag behind those increases. This is definitely the case in our current set of circumstances and while those who predict deflation point out that people are saving because credit is not available miss some important factors concerning “forced savings” during the beginning of an inflationary event. Credit, if restricted, will naturally cause people to increase their savings, lower their current expenses and look upon economic factors, particularly those issued by the government, with skepticism. Additionally, it appears that there are some forces that have been set into motion during this current dislocation that simply cannot be explained as deflationary and that is capital consumption, which rarely takes place during deflationary periods but is always a trait of inflationary events. This capital consumption has been happening at an alarming rate, how can it be explained? Certainly not because of deflation, but inflation.

In the case of reserve currency creation there is actually no claim to title to that money, it is only when that money is extruded through the fractional reserve system that it claims title, the problem is that it allows several entities, whether corporations or individuals, to essentially claim title on the same money since there is never sufficient quantity within the fractional reserve system to cover all the claims at one time. Since all fiat Federal Reserve Notes are essentially a claim on actual money that does not exist in the fiat monetary system there is obviously something that should be troubling to anyone who can logically come to the conclusion that there are no promises behind the Federal Reserve Note IOU.

Now, since there appears to be a huge misconception between the money base and credit creation lets take a look at exactly how the money base is calculated:

M1 is made up of the following:
1. Including all currency outside the U.S. Treasury, Federal Reserve Banks and all vaults of all depository institutions.
2. All non-bank issued traveler’s checks.
3. All demand deposits at commercial banks
4. All other checkable deposits which consists of negotiable order of withdraws, automatic transfer service accounts at depository institutions, share draft accounts and demand deposits at other thrift institutions.

It is interesting, isn’t it, that credit nor the issuance of credit amounts are not included in M1.

Now, M2 is made up of all of M1, plus all savings deposits, time deposits in amounts less than $100k, IRA and Keogh account balances and also balances in all retail money market mutual funds. Again, you will notice that there is no inclusion of credit nor the issuance of credit in the M2.

M3, which is no longer being published by the FED is what we should concern ourselves with regarding potential inflationary pressures, particularly when there is such a close correlation between M3 and M2. If you look at the increase in M3, at least to the best available data, you will see that M3 has 4% in 2005 to around 22% in 2009, that is a substantial increase in the monetary supply in this country. Now, if we are to actually count M3, then we must include the TARP, TAF, PDCP, MMIFF, CPFF, FHFA +AIG+Maiden Lane, stimulus checks considered the “helo drop”, SFP, TSLF and everything else that they have thrown into the equation you will quickly see that the FED & Treasury Total Money supply has increased to the extreme of nearly 110% from around 3% in the year 2000. If we are to believe the deflationary prognosticators then none of this will have any effect on potential inflation since there has been debt deflation which, according to them creates a wash, but that is not the way the fiat monetary system works, nor has it worked that way in the past.

Credit is not virtual money, it is not considered in the balance of accounts, nor does it circulate in the balance of accounts as does money. Credit is a money substitute for the most part, and while there is a factor involved with the deflation of debt the adjustments for such a money substitute are not indicative of a major deflationary event, what I see is more of a credit or debt disinflation taking place, not a deflationary period since thus far there has not been a money supply contraction taking place. In order to have true deflation there must be a contraction in the bankable money supply in existence, that has not taken place and I don't see it happening anytime soon. In fact, there are four things that cause deflationary events: A contraction in the money supply or an increase in the supply of goods or decreasing demand for goods or an increase in the demand for money or a mixture of the preceding causes. Thus far, none of those have happened to a notable degree to effect the pricing structure of broad economic indicators across the board. There has been a drop in the demand of goods however, it has not had an actual effect on broad pricing structure, it's just not there, nor do I believe it will happen at this juncture only as the system inches toward collapse, but even then there are several stages to the fiat monetary collapse that we can all anticipate...deflation being the least dangerous I assure you.

I find it very difficult to believe government statistics of any kind and given the reputation this government has for just out-right lying, its CPI figures are more than just a little suspect. If we take all factors into consideration then we can estimate that the real rate of inflation currently is around the 6% mark, perhaps a bit higher. These figures to not take into account the massive influx of base money supply, or any potential multiplier effect that is coming into play or which will come into play at the inflationary pressures begin to present in the general economy.

There are some indications however that inflation is alive and well in the general economy. June retail sales gained due to rising inflation and the recent PPI surge definitely indicates that it is reflecting far more than just a rise in oil prices. Additionally, the U.S. debt is up more than $2 Trillion from a year ago. All of these point to something far different than a deflationary event, quite the contrary, they are indicators of inflationary pressures. Additionally, we should not be surprised to see even more government stimulus money flowing, more bailouts and other subsidies since none of the previous efforts contributed in any substantial way to the so-called “recovery” and the reason for that is that such measures do nothing to facilitate an actual recovery, it only continues to mask the problems created by the last artificially induced “boom”.

Those prognosticators of deflation have yet to show just how there can be a deflationary event when the ability to “print” reserve currencies, along with the ability to issue credit under a fiat system has always, without exception, dissipated deflationary pressures. Of course, they all point to the Great Depression as an example of deflation however, the economic and monetary model of the Great Depression is substantially different. The FED can and will create positive inflation by the very fact that they can inflate the money supply. Inflation being, by definition an expansion in the money supply and deflation, by definition, a contraction in the money supply.

Good money, sound and legitimate, does not lead an economy, money follows an economy and it only comes to individuals and companies as a result of good management and productivity. The opposite is true of fiat money, it is the product of artificial means, it tends to lead a fiat economy and it necessary to maintain that economy at artificial levels, distorted and contrived, leading to periods of booms and busts that cannot be managed nor do they produce actual wealth only the illusion of that wealth. We have all been witness to just such a scenario, some of us have witnessed several turns of business cycles, all of which follow a rather predictable path, this one has been no different, except in scale.

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