Inflation as defined by Milton Friedman is always a monetary event, having nothing to do with prices. Mish and others include an expansion in the credit supply in their definition. Specifically inflation is an increase in the monetary base and credit supply. So, the definition is with respect to a fixed monetary base. An expansion of the base puts upward pressure on prices, because there is new money chasing the same number of goods, but higher prices do not necessarily result. They may be offset by a growing population for instance. When the monetary base is doubled there is by definition hyperinflation. So in regards to the monetary base of 1913, the nation has experienced cardiac hyperinflation, and coffee has gone from a nickel to two bucks for a cup, but when will hyperinflation occur with respect to today’s $200 trillion dollar monetary base, and will higher prices result?
Mish has long argued that higher prices are not a necessary a result of those inflations, and that deflation would exist for years and years to come. When I suggested that I would pay $120.00 for a cup of coffee, he said my head was where the sun didn't shine. Let's shine a light.
When the bubble burst in 2007, after two decades of hyper inflating the money supply and credit, the credit markets were the first to feel the air sucked out of their guts like a vacuum hose down the throat. The housing market collapsed, and the powerful torrent of the corporate paper Ponzi Stream came to a trickle, as the velocity of money chugged to a halt. And the shockwave reverberated down to the little people in the economy, the ones who could not pass on the losses. They lost their incomes and credit life lines forcing business to either bring prices down to a much lower market. Retailers like Wall-mart, Starbucks and those with pricing power lowered their prices to the market, those without it perished. Instantaneous deflation wiped out the prices of everything, but not equally. This was almost your grandfathers Great Depression. There was less money, but it was chasing fewer items, and those items were commodities.
So, at the deflationary zenith, when prices dropped to their lowest, down in the crosscurrents there were swirling whirlpools of basic necessity where velocity and money ramped up. The money that no longer chased greedily after new cars, plasma TVs and Mc.Mansions, went hungrily into food and rent. And unlike your grandfathers Great Depression, which was caused by the Fed choking the money, this Fed has not yet begun to debase its reserve note. At least $2 trillion of taxpayer money have been transferred from the taxpayer to the bank-sters under TARP. That money was borrowed into existence from the Fed, and must be repaid at interest.
Then the creature from Jekyll Island further debased what remained with QE1. And as the Fed continues flooding the world with money from nothing, the dams in the credit markets like the levees in New Orleans are leaking, beginning to break. The chart shows, the floodgates to commodities are already giving way. The price of a cup of Starbucks coffee is back up to two dollars, housing is still going down, they will likely pass each other on the dollars way to oblivion.
All the while the Fed's press burns the money faster than it prints it, Mish maintains that the wall of money remains locked safely behind the door of credit markets slammed shut. The Fed can create the money out of thin air, but it cannot force banks to lend it into the economy and therefore cannot affect prices, the theory goes. The flaw in this reasoning is confusing money withheld with money destroyed, and now that commodity prices are raising their ugly head those preparing for decades of deflation had better change course, or be washed away.
Money delayed is not money destroyed.
When will the creaking dikes turn into a fully fledged dam break? Suddenly.
Remember it's not when but how much. When the current monetary base of $200 trillion, doubles, and it will double exponentially, there will, by definition, be hyperinflation. The chart above accounts for TARP and QE1, which is less than $2 trillion combined. Consider that $60 trillion in government debt rolls over in the next three years. And how will we pay down that debt? Big hint, they will monetize it. So, there's an eyeball projection; in three years the 1% increase will shoot to 31%. See, that's just how this kinda thing adds up, it doubles faster than it doubled the time before. Exponentially. And while Mish keeps two blind eyes turned toward the credit markets coffee skyrockets to $120.00, a cup, I say by 2015.
Deflationists can always point to dead credit and commercial paper markets to say I told you so, but it won’t do an outta workin stiff much good forkin over a Franklin and a twenty for a cup of coffee. Will it, by 2015? I am willing to bet Mish or anyone else a cup a that $120.00 cup of black gold, and just so you know I like mine with cream and sugar.