The Deflation vs Hyperinflation Debate On Steroids, Or Mish vs Gonzalo Lira In The Octagon

Tyler Durden's picture

A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed's market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world's reserve currency. One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, "so it is unlikely." Of course, the very premise of this statement argues that even in a monetary collapse the Fed will retain control over the flow of money, which of course is unlikely, and thus makes us very skeptical that such a simplistic and solipsistic argument is enough to resolve the debate. Since one of the items covered in the Mish podcast was Lira's argument, it was only fair that Gonzalo himself should be heard.

So a few days ago Global Edge ran a follow up podcast with just Gonzalo Lira, in which the Chilean was given the opportunity to defend himself and to further validate his argument. In a very lively and heated discussion, which teaches the amateurs at CNBC just how one should run a financial debate, Lira and host Hamtpon agree that hyperinflation may play out differently than
many expect. Among the questions probed are whether property will be a good investment in a
hyperinflation scenario, and what may happen to all other key asset classes once the Fed finally loses control of everything. Still, the best outcome would be to give Lira and Mish a one to one venue in which the two can battle it out: surely it would have no actual impact as the deflationists and hyperinflationists of the world tend to be among some of the most dogmatic individuals in the world, but it sure makes for much more entertaining theater than watching those idiots in Congress pretend they are in control of the financial destruction currently going on in America.

45 minutes of excellent financial debate follow after the jump (and the original Mish interview can be found here).

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JackES's picture

ZH 9/11 guest post is deleted?


tom's picture

I can understand why a lot of people are interested in the prospects of hyperinflation, and surely we are heading towards some kind of fiscal/monetary crisis, and I don't rule out hyperinflation. But this Gonzalo guy makes the weakest possible case. Despite his own country's experience with hyperinflation, he failed to understand the common driver of all hyperinflationary episodes, including Chile's: large-scale money-supply expansion. Instead, he thinks US hyperinflation will be triggered by sudden, gargantuan financial buying of oil futures. He doesn't understand the limited influence of futures on real prices.

Michael Victory's picture

I would like to chat with Gonzalo.
This month I was able to interview Austrian and former Economic Advisor to Carter and Reagan, Paul Prentice. He spoke to the end game.

link to the interveiew:


Popo's picture

Gonzalo is a pretty smart cat, but he's not all that experienced in markets. For one, he tends to base his predictions onexperiences and historical references with which he is familiar. (and gets quite far with this methodology). But his lack of real world market experience leads him to make a few mistakes. In Gonzalo's view, there is some scenario on the horizon In which foreign nations stop buying US debt, and the US (for some as yet, unclarified reason) witnesses this happening and does nothing. This makes no sense. Why wouldn't the US just raise rates? This is a fundamental problem with the inflationist point of view. The bond market is what sets US rates - not policy, contrary to propaganda. In many cases, policy follows markets and does not lead. Yes, the US will try to inflate. But at the Shazam moment, the US will raise in order to keep borrowing. Higher rates will curtail inflation. This is what Michael Pento was trying to say when they booted him. The powers that be know that deflation is possible ...but they don't want you knowing that.

Teaser's picture

But at the Shazam moment, the US will raise in order to keep borrowing. Higher rates will curtail inflation.


Ok, so the US raises rates to keep borrowing...  Now take your argument, which is valid, one step further, what happens?  The first sentence is correct, the second is incorrect when you step back and recognize why the first statement is correct.

You just reinforced the hyperinflation argument without knowing it!  thanks.

EQ's picture

Mish does suffer from solipsism and is wildly uninformed and is an ideologue with huge blind spots in his thinking but so is the author of this article. His primary premise of what will cause hyperinflation is absolutely ridiculous and shows his ignorance. It simply is not possible as he describes it. His lengthy bloviating is akin to the Johnny Cochran defense of OJ. Pull shit out of your ass if it sounds good. Unfortunately, the courts were not supposed to allow such a defense. And in this case, it is no different. The zombie banks are all primary dealers of the Federal Reserve of the United States of America. They MUST eat the garbage the Fed offers to the market. It is law. That is why they were not nationalized. So the Fed could continue to ease and be guaranteed a buyer. All of the other hogwash following his thesis that they will tilt the balance unknowingly one day is asinine. He doesn't even understand basic concepts of central banking.

EQ's picture

That's it? That is your defense of what I point out? You have no defense? I appreciate free speech but you are now publicly supposing a position and now that means you need to defend it. It's called peer review. Address the point I made. And when you do that I have a dozen more.

snowball777's picture

#6 works too, Gonzalo. ;)

Thanks for the articles.

Gonzalo Lira's picture

In this case, you're right: Aphorism #6 applies very nicely. 


Thank you for your kind words. 

GL's picture

























on me.

EQ's picture

By the way, I just finished reading the entire article by Lira. What we have here is a case of ignorance writing what appears to be plausible or intelligent to the uninformed. He compares the U.S. to Greece. That is absurd. The US financial firms caused the Greek crisis. And they most likely did it to scare money out of Greece and into dollar denominated assets. It's called financial terrorism. Or financial warefare. Take your pick. American financial firms rule the world. Literally. That isn't because they are brilliant. It's because that is how the game is set up. Lira understands none of that. A very ridiculous article.

Spitzer's picture

No, fuck that.

Who has the most capital rules the world. That is China. China could easily just start the run on treasuries and make sure the dollar went to ZERO and then just say, Hey USA, we know you owe us allot, cant remeber the exact amount, so why don't you just hand over all of your gold and we will call it good.

EQ's picture

The U.S. has no foreign debt. That is the benefit of a reserve currency. That means China's a servant of the dollar and the Federal Reserve. So you comprehend that dynamic? You might educate yourself on basic principals before you write such a ridiculous response. This is not Wiemar Germany. The U.S. has no foreign debts. The U.S. could write China a check tomorrow for its dollar holdings. You just don't get it.

GoinFawr's picture

The U.S. has no foreign debt. That is the benefit of a reserve currency. That means China's a servant of the dollar and the Federal Reserve

Times is changing, mon frere. The USD has been bleeding its precious world reserve status for some time now, and one of the reasons is the hubris you/your ilk so arrogantly project. China is the US' creditor; the servant in that 'dynamic' is always the debtor, reserve currency or noes, comprends tu?

Speaking of ignorance, "The U.S. could write China a check tomorrow for its dollar holdings" is in a category all its own...




Gonzalo Lira's picture

Goinfawr, I insist you apply Aphorism #3 to this guy EQ. 


If the guy is dumb enough to say that, quote,

The U.S. has no foreign debt. That is the benefit of a reserve currency. That means China's a servant of the dollar and the Federal Reserve. 

then there's really no point in arguing with him. 



GoinFawr's picture

GL: I smell a "The Pragmatic Capitalist" acolyte lighting candles for the USD...

EQ's picture

Ad hominem attacks are used when there is no valid defense of an argument. You cannot argue your thesis because it is full of holes and you honestly don't know what you are talking about. And I'd drive a huge Mack truck right through this ridiculous post as well.

All U.S. debt is dollar denominated. It is all domestic debt. This compares to Chile and other countries which hold debt denominated in a currency other than the domestic currency. Foreign countries or foreign individuals may own domestic debt but the U.S. has zero foreign debt.

Talking to you is like a cat toying with a mouse. You have no idea what you don't know. And that is why your entire thesis is completely wrong.

If you are so sure, in your arrogance, of your thesis, answer my questions in a public forum. We shall let the world decide who is citing fact and who is citing ignorance. I wish you no ill will but you speak so arrogantly of how things will be yet you argue from a hollow position. It's like trying to defend math from someone who refuses to acknowledge 2+2=4.

chrisina's picture


DD : Domestic debt = debt owed to residents

FD : Foreign debt = debt owed to non residents

Both DD and FD can be denominated in domestic currencies or foreign currencies

In the case of the US Govt, both DD and FD are denominated in domestic currency only ($), unlike for instance those of some Latin American countries' governments.

Outstanding $ denominated Govt debt owed to Chinese residents (Foreign Debt owed to China) = $ 843.7 billion

(ie the outstanding amount of those actual current liabilities that require payment(s) of principal and/or interest by the US treasury at some point(s) in the future to Chinese creditors, institutional or not, is $ 843.7 billion).

EQ's picture

I'm not here to argue opinions or semantics. Any debts owed under the framework of a domestic currency is a domestic debt. You can call it whatever you want to call it.

chrisina's picture

It's a foreign debt, denominated in domestic currency.

Correct me if I'm wrong : the fact that the US is a sovereign nation and is the issuer of said currency and therefore can always pay the principal outstanding of said foreign debt by issuing more of said currency, is correct. But if it did that, pay chinese holders with a check ($843 billion freshly printed $), the $ would loose value when exchanged for other commodities (foreign currencies and other commodities) and interest rates on outstanding treasuries would rise, which could be sufficient to cause a run on treasuries and the dollar...

Barbarossa's picture

Semantics is precisely what you are arguing. A foreign debt is a foreign debt is a foreign debt, regardless of whether that debt is denominated in foreign or domestic currency. If the United States destroys its currency and/or racks up an unsustainable debt load, eventually foreign creditors (under your framework there are no "foreign" creditors since there is no "foreign" debt) will refuse to buy anymore debt, which would have a major negative impact on the American economy. Either no more foreign debt could be accumulated or any further debt would have to be denominated in a foreign currency. Right now we can import goods with IOUs. Once no one accepts the IOUS, imports will have to be paid with exports and/or with foreign currency. And all the dollars the Chinese have are claims on American goods and assets, and should the United States "write a check tomorrow" for all its debts, it would cause hyperinflation as all those dollars came flooding back. You have too much EQ and not enough IQ. 

FoodTiger's picture

Not sure how this looks in IE, but formatting is terrible in FireFox...

snowball777's picture

What other countries won't buy of our sov debt, the Fed could, but that would accelerate destruction of our fiat; another match for the hyperinflation conflagration.

snowball777's picture froth up and down about this 'defense' or that, and then crawl into an, "I'm not here to argue..." sea-cucumber with its entrails out pose?!


GoinFawr's picture

Ad hominem attacks are used when there is no valid defense of an argument

Sometimes, but not necessarily. Eg. In this case they are being employed alongside a perfectly cogent line of reasoning contrary to yours. I suggest that the point of the insults in this particular thread are there to mock your apparent oblivion to the irony inherent in some (not all) of your suppositions.

Oh, and misnoming 'black' 'white' can hardly be viewed as an argument of semantics.


BostonTettierOwner's picture

EQ is right U.S. doesnt have FOREIGN DEBT !! all its obligations are denominated in local currency which is US Dollar , that is the guy's point .IN theory U.S. can write a check for all the trillions of its debt , putting aside geopolitical , economic implications of such a move. Dont call the guy a fool . cause he's got the point!!!

EQ's picture

These people want to argue their ideology and won't let go of it because their belief system on how the world works and all of the lies they fed themselves on what the outcomes of this environment are, is jeopardized when someone points out an obvious truth. So, instead, we'll get a string of ridiculous opinions so they don't lose face rather than just acknowledgement of the facts. They are ideologically-driven just like the status quo. I'm done posting on here. I have made my point. That is, Lira has no idea what he is talking about and his suppositions embraced by tens of thousands of people who have no idea what they are talking about, is wrong. Enjoy the chatter as they try to rationalize their positions rather than just admit they are wrong. The ego is a wonderful thing.

Spitzer's picture

I'm done posting on here.


Good, so you run away before I can prove to you that your an idiot.

I have heard this stuff before, you live in a world where there is no gold. The only reason the dollar became the world reserve currency was because it was backed by gold. Not because the US rulez the world. Gold rules the world.

So you believe that Vladimir Putin is a puppet of the Federal Reserve ? the x KGB agent ? with nukes ? Trust me, he wants to get paid.

Now stop watching those videos made by anarchists on LSD.'s picture

Now stop watching those videos made by anarchists on LSD.

I prefer the anarchists on LRC.

chrisina's picture

Why would China start a run on US treasuries when most of its reserves are in US treasuries (ie potentially worthless pieces of paper)? China only has the most capital in the world as long as US treasuries can be used to buy things, not if they become worthless pieces of paper. 

Also, assuming they would be so stupid as to start a run on US treasuries, why would they demand that the US hand over its Gold? Where did you dream that treasuries, and FRNs, are redeemable in Gold? China would just receive an essentially worthless piece of paper, a newly printed cheque in dollars, with which it could go and buy Gold. It might even be able to get one troy ounce.... Or maybe a hamburger at McDonald's...

Spitzer's picture

They could start the run on treasuries by buying other gold. Remeber, the first one out profits the most. Then while the run happens, make sure that the dollar is at zero.

At that point, the dollar is worthless and the gold is priceless. That is when China says "hand over the Fort Knox gold".

chrisina's picture

"They could start the run on treasuries by buying other gold."

Would China sell all of its $843billion worth of treasuries at once, or one chunk at the time? What amount in $ do they get ? What does the price of Gold in $ do while they are using the $ proceeds of the sale of treasuries to buy Gold?

"Then while the run happens, make sure that the dollar is at zero."

At zero what? China doesn't determine the rate at which the dollar is exchanged against other commodities, the market does.

"That is when China says "hand over the Fort Knox gold"."

And why so? Does China still have treasuries or did it sell them all? And why would the US hand over its Gold, against what, for what reason?


Spitzer's picture

Would China sell all of its $843billion worth of treasuries at once, or one chunk at the time? What amount in $ do they get ? What does the price of Gold in $ do while they are using the $ proceeds of the sale of treasuries to buy Gold?


I don't know, it doesn't matter. They are the first ones out and thats the bottom line.

And why so? Does China still have treasuries or did it sell them all? And why would the US hand over its Gold, against what, for what reason?


I don't know, maybe some but thats all history. They would hand over the gold because Chinese people don't work for free. Who has more balls, the commi Chinese or Obama ? What is Obama going to do if he gets a threatning call to hand over the gold ? Start a war ? I doubt it, Obama is a pussy. He would hand over the FNX gold plus his wedding ring.

chrisina's picture

"They are the first ones out and thats the bottom line."

Not going to happen (not in China's interest) for the next 6 to 10 years. In the meantime they are going to slowly reduce their treasury holdings.

Geoff-UK's picture

Might not take nearly that long--China's not the only sucker holding our paper.  They don't control the price floor unless they're willing to double down on Treasuries.

China's sneaking out the door and buying gold as fast as they can without goosing it to the moon...they'll misrepresent they're holding ga-billions of Treasuries up til the day they sell the last one.

Barbarossa's picture

Because eventually China would realize that it has to cut its losses. Your question is like asking "Why would anyone bail out of a Ponzi scheme?" Because as the scheme approaches collapse, an investor who is considering bailing could potentially lose his entire investment (and anything further that he invests in the hopes of continuing the scheme), so it might dawn on him that his best chance is to recover some of his funds now, rather than risk losing all of them later. And he never said Treasuries or anything else were redeemable in gold, and you know this. Stop making stupid shit up. 

chrisina's picture

But China gains much more by reducing slowly its treasury holdings and instead buying Gold, farmland in Africa, commodties, mining companies etc... than by dumping all its treasuries at once and causing a run on the dollar.


Not only do they get a far larger quantity of hard assets but also they can maintain their #1 zombie customer alive while developing their domestic market (and military arsenal) with the proceeds of such business.

Which doesn't mean that eventually (maybe 6 to 10 years down the road) once they have built sufficient reserves in hard assets, developped their domestic market, increased their military arsenal and that their Zombie customer isn't profitable enough, they just dump what they have left and cause a run on the dollar.


I completely agree with Gonzalo when he says that a run on the dollar (hyperinflation) is likely to happen, as a consequence of a protracted period of debt deflation in the US and Europe, but I just think this will happen much further down the road... not in 2011 but more like 2016 to 2020.'s picture
Self-organized criticality From Wikipedia, the free encyclopedia Jump to: navigation, search

In physics, self-organized criticality (SOC) is a property of (classes of) dynamical systems which have a critical point as an attractor. Their macroscopic behaviour thus displays the spatial and/or temporal scale-invariance characteristic of the critical point of a phase transition, but without the need to tune control parameters to precise values.

The concept was put forward by Per Bak, Chao Tang and Kurt Wiesenfeld ("BTW") in a paper[1] published in 1987 in Physical Review Letters, and is considered to be one of the mechanisms by which complexity [2] arises in nature. Its concepts have been enthusiastically applied across fields as diverse as geophysics, physical cosmology, evolutionary biology and ecology, economics, quantum gravity, sociology, solar physics, plasma physics, neurobiology [3] [4] [5] [6] [7] [8] [9] and others.

SOC is typically observed in slowly-driven non-equilibrium systems with extended degrees of freedom and a high level of nonlinearity. Many individual examples have been identified since BTW's original paper, but to date there is no known set of general characteristics that guarantee a system will display SOC.

hugolp's picture

Mish does suffer from solipsism and is wildly uninformed and is an ideologue with huge blind spots in his thinking...

I really believe that Mish knows what is going on, BUT he has an investment business that operates in the USA and its attractive under a strong dollar, so he keeps up-playing the deflationist camp that makes his investment company more attractive. Mish has said that the end result of all this is inflationary, but he stresses and promotes the deflationary pressures because its in his personal interest. Thats all.

There is no doubt that there are deflationary influences, and that even right now we are going into another deflationary correction. But also there is no doubt that a government with a central bank can prevent prices from falling (it can not solve the crisis, just prevent prices from falling). So stressing so much the deflationary pressures makes no sense... UNLESS your company becomes attractive if people believes that deflation is coming, like Mish company.

Geoff-UK's picture

Good point!  Always look at the motivations of whoever is talking and ask "cui bono?"

When Warren Buffett looks at the camera and recommends something while talking to you like he's your grandfather, he's talking up his own book. 

G-R-U-N-T's picture

Just saw Axelrod on Face the Nation...

The sickness of this administration aptly displayed!!!

True to character as the propaganda machine continues to beat the living shit out of the American people. I am beginning to think that masochism may indeed be the pathology that most Americans suffer from.

New_Meat's picture


"I am beginning to think that masochism may indeed be the pathology that most Americans suffer from."

We'll see after the first Tuesday after the first Monday in November.  I'm hoping that there is a calculating rage component that will exhibit.

- Ned

G-R-U-N-T's picture

I'm hoping that there is a calculating rage component that will exhibit.

I believe the "rage component" is only contingent on the number of American people waking up out of their apathetic mind set and recognizing the one thought that they all should have....What have we done to ourselves?


liberal sodomy's picture

he looks like a villain in a black and white movie.

G-R-U-N-T's picture

Oops wrong program it was "Meet the Press" I was watching not "Face the Nation"....




pslater's picture

Great interview with Dr. Prentice Mike.  He's no lightweight....


Thanks for the post!

Spitzer's picture

No you didnt get it. They froze the prices of goods.

I just think he wanted to avoid the gold bug name so that is why he talked about oil.

tom's picture

I get it fine. Price controls do exacerbate inflation, but they don't initiate it, and they can't by themselves turn ordinary inflation into hyperinflation.

Nominal prices go up for two reasons: goods are becoming scarcer, or money is becoming more plentiful. The only theoretically possible way to have hyperinflation without money supply expansion would be a sudden extreme scarcity of goods, such as in a city under siege.

By capping prices, as inflation was already building, Allende pushed goods into the shadow market, lost tax revenues, and then substituted for those lost tax revenues with increased money supply. If he hadn't done the latter, he would have had fiscal collapse and severe inflation, but not hyperinflation.