The problem with listening to Mike Mish Shedlock make his deflation argument isn't that he doesn't know what he's talking about, it's that you don't. You don't that is unless you know what he means by inflation/deflation. To most of us Joe six packs--Kind you drink--inflation means a six pack costs more and deflation means it costs less, we don't care why. But smart guys speak of it as a monetary event i.e. it is an increase in the amount of money in the economy. But it can get a lot more complicated than that Mish says so himself.Inflation has at least 8 distinctly different definitions that I can readily find, and probably a whole lot more that I have not yet found.Whew, see what problems smart guys have just trying to figure out which way prices for a six pack are going. That's no knock, it's just the kinda thing that naturally happens when you think a lot about what to say, before you say it, an unshared characteristic between Mish and me. But Mish does tell you and tell you very clearly what hell inflation is to him. And unlike Krugman who parses parts without saying so Mish sticks to his guns.
Commonly Used Definitions
- Decline in purchasing power of the currency held
Rising prices in general (essentially the same as #1 although some might disagree)- Rising consumer prices (CPI)
- Rising producer prices (PPI)
- Rising prices due to expansion of money supply
- Rising prices due to expansion of money supply and credit
- Expansion of money supply
- Expansion of money supply and credit
Four of those definitions refer to money supply. That brings up another issue. When one refers to "money supply" are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation? Definitions 5 and 6 refer to "rising prices" yet fail to distinguish between consumer prices, producer prices, or simply prices in general. It seems we could easily add a lot more definitions.
That leaves us with a choice between the following:
- Inflation is best described as a net expansion of money supply and credit.expansion of money supply
Obviously there's nothing about the price of commodies in there, but lets run with it a ways.
Now there is a difference between inflation and inflationary pressure, one can exist without the other, but only for so long or to a degree. It's like a bath tub, with water flowing in the top being inflationary pressure, a drain open at the bottom being Mishes deflation. Water can flow in from the top without overflowing for a while, that's inflationary pressure without inflation, but when the tub overflows that's inflation. Mish gives us an example.
Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years.
Japan was rapidly printing money is filling the tub, but the overall contraction of credit is emptied the tub faster than the money printing filled the tub.
Let me say it, I like Mish, he's usually right and unlike Krugman he is always honest, but if you listen to Mish you just might go hungry. Why's that? It's not so much that Mish is wrong, he's not, but here is where Mish misses it, critically.
In the meantime I am sticking with my story right now. The Fed is clearly not printing, and marked to market destruction of capital and credit is happening at a stunning rate. That combination equals deflation regardless of what the price of commodities is.
That combination equals deflation, Mish's deflation, regardless of what the price of commodities is because you defined it that way, Mish. But that door swings both ways and $68 per barrel oil is $68 no matter what the credit markets say and today oil is $68.00. It doesn't sound like it, but that's deflation, Mish's deflation, and our hell, deflation with prices going up. It's the worst of both worlds and just what I'd expect from this credit crunch.
And what about that marked to market destruction of capital and credit, suppose that he could possibly be right about overall contraction of credit outpacing the Fed's torrid pace of money printing. Then that would be deflationary as Mish defined it, but what does it mean to Joe and Jane 6 pack? Mish can wax poetic or debate academically all he wants, but for us the real fear is of $500.00 per cup of coffee, and while Mish keeps his blind eyes turned toward the credit markets our greater threat comes from the commodities markets, bond vigilantes, and hitmen.
It would prove broadly dollar positive and commodity and equity negative. I wrote a couple of weeks ago that the Fed might be forced into a premature rate hike to defend its credibility, and the bond vigilantes are demanding a clear exit strategy from the emergency actions taken last Autumn. Bond markets globally are following suit; even German 10 years are above 3.7% and 2 years above 1.7%.
Rate hikes, does that sound like their afraid of deflation? Those angry grumblings from down in the bond pits will not politely go away. Clearly banks aren't lending, and according to Mish that'd be deflation, but if you think "lower prices" are coming think again.
When future chroniclers describe the late 20th century and early 21st century global inflation now about to renew, the rise of Asia will be an even bigger causation than the massive money expansion set in motion over a quarter of a century by the U.S. Federal Reserve. And this will be true even though Chairman Ben Bernanke has been pouring trillions of dollars into the bail-out of a reckless and metastasized U.S. financial system.
In a nutshell, the rise of Asia - approaching 60% of the earth's population and on the cusp of a plurality of world wealth- is realigning global economics and political power. The history of such great realignments is inflationary.
In a nutshell the true threat of inflation has nothing to do with bank lending or even the Feds fictional printing press. As the box above from Kevin Phillips says the real threat lies outside of Mish's box.
It's not that Mish tries to keep you in the between the lines, it's just that for Mish those lines don't exist. Mish doesn't believe in the Plunger Protection Team, nor did he believe that the crushing of gold last year was a big player manipulation to defraud the shorts delivery of physical gold which they did not have. Because I have so much respect for him I might believe Mish were it not for the Deutsch Bank defaulte, and obvious ECB bailout and coverup. The problem with both is that they were as plain as a daylight robbery, making it kinda hard to believe the thing Mish calls a natural market move on the COMEX was really just that.
Well it has happened, there has been a major gold default by a short seller on the COMEX! The event is undeniable to all but the flattest earth theorists. The default was by Deutsch Bank on delivery of850,000 ounces of physical gold, but was covered up by the ECB which bailed out DB disguised as a sale of 35.5 tons of the yellow flaky stuff. Bailout in drag, that's a well worn ploy that just don't play like it used to. The elites, the shafters of the universe, are out of tricks and outed, but lets see how it plays.
Again for all he has going on, if he doesn't see pushers and plungers, then you can bet he doesn't see Hitmen.
A short list of banks facing the firing squad is already known, details for Hat Trick Letter members. Some detailed speculation will be devoted to the June HTL reports, since too controversial. This will be an evolving story, with new chapters soon written. The executions will be sudden. The missing US-UK levers will be immediate. Since last autumn, the global powers have aligned against Wall Street, even if the central bankers have supported it. If one wants to destroy a building, then weaken its pillars, cut a few support beams, then rush in a crowd of people, and wait for a turbulent storm. In the case of the COMEX, the wicked players will crowd the corrupted building.
I see the Hitmen with bankers in their sights and anyone not wearing an inflation flack jacket ready to be sprayed in the drive by.
I see this too, inflation and the government ever eager to make the crisis worse with pointless meddling, rush in with price controls, which will no doubt squeeze the food producers profits to the point they don't produce food. Then there is none at any price and Mish will most certainly be vindicated, there will be no bank lending and credit will contract to zero.
It's not that Mish is wrong, he just misses it.
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