Has John Williams' Hyperinflation Thesis Been Delayed As Core CPI Comes In Flat?

Tyler Durden's picture

Recently, an extended analysis by Shadow Stats' John Williams evaluated the risk of a hyperinflationary episode as one which has the potential to come as soon as next year. Somewhat in support of this theory yesterday's read of PPI came in above consensus, indicating that inflation may indeed be coming. Yet today's CPI data, whose core read came in at 0.0%, may have just poured a whole lot of cold water over Williams' thesis. Nonetheless, at the end of the day Williams may be right: the question remains - if and when the excess reserves start hitting the broader currency (as the Fed is scared shitless to withdraw liquidity on its own), we may experience a transition from deflation to inflation so rapid, that is has no historic analog. At the end of the day deflation will likely be the name of the game for quite some time, until such point as "Man of the Year" Bernanke finally flips (the turbo print switch on), and any pretence of prudent monetary policy is thrown out of the window. At that point, look for the stock market to promptly go to 36,000 followed by an even faster drop to 0, all the while the dollar gets hyperdeflated (Zimbabwe redux). With the Administration set on not losing the midterm elections by a landslide, don't expect much in terms of economic experimentation at least until 2011. At that point, all bets will be off as the Fed will likely have at most 2 more years of shelf life before both its, and thus Wall Street's, life support are forcefully yanked out. 

As for today's CPI, David Rosenberg does a great job of defending the deflation thesis:

While the headline consumer price index (CPI) for the U.S. came in at +0.4% MoM in November, the big news was it was all energy (+4.1% MoM) and that the core (excluding food and energy) and excluding energy segments of the CPI came in at zero. How do you spell F-L-A-T?

Consider that we have a massive $2.3 trillion Fed balance sheet, near zero rates, the weakening in the U.S. dollar this year, all the massive fiscal stimulus, and the best we can do on the inflation front is ZERO on the core and a three-month trend of 1.5% at an annual rate? There are still too many pockets of deflation to be bearish on the fixed-income market:

  • Apparel prices down 0.3% MoM in November
  • Recreation down 0.2%
  • Rents down 0.1%
  • Household furnishings down 0.3%
  • Hotels rates down 1.5%
  • Grocery stores and restaurants 0%, drugs 0% too
  • Communications -0.3%
  • Computers -0.2%

It’s a good thing we have health services (+0.4%) and education (+0.2%) because without these two non-cyclical sectors, the core CPI would be in deflation right now.

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Printfaster's picture

Deflation is about private debt.  Inflation is about government debt.

You have deflation because the government crowds out private debt, making it impossible to service, so you force liquidation, and prices go down.

The government cannot service its debt because the private sector is broke, so it prints. And prints.  And prints.  Faster.  And faster.


Ripped Chunk's picture

When in doubt, go with the government issued report.


Then put your head between your legs, smack yourself in the back of the head with a hammer and chant: "thank you sir may I have another"

curbyourrisk's picture

rate hike today would skewer the dollar shorts!!!!


lets go rate hike!

truont's picture

Oh, the USGovt Bureau of Labor & Stats say that after taking out food, energy, real estate, and hedonic equivalents, then inflation is flat looking in the rear-view mirror.

Good, all clear!

geopol's picture

You forgot substitution..


GoldmanBaggins's picture

Big time inflation is closer than most think. CPI is a mechanism designed to hide inflation, not to report it. Food will ignite the next bout of inflation. This will lead to a dollar collapse and a hyperinflationary spiral. The problem with food price inflation is the only cure is more food. It will take time to produce food in the quantities needed to stem the panic out of most things and into food. By the time agribusiness can ramp up supply the damage will have been done. I go apeshit when I havent eaten in a few hours. Imagine millions of people hungry in the streets.

Ripped Chunk's picture

Yea, so close it has been hammering us for the past 20 years relentlessly.


L_Gobbo's picture

I'm sure this is Austrian Econ 101 for the readers of ZH, but it bears repeating:

Money inflation and price inflation are not the same thing. It's undisputable that we already have money inflation. The question is, where is price inflation taking place. According to Mises, the Cantillon effect dictates that "... the result of an increase in the stock of money will not be uniform across the economy, but rather will cause prices to rise at uneven rates in different sectors, thereby changing relative prices in the process."

"...New money is created by the government or by banks to be spent on specific goods and services. The demand for these specific goods rises, thereby raising their prices first. (The el­ements of this in a Misesian economy should now be clear: as money holdings in­crease, the marginal utility of money declines so that certain goods are revalued ahead of money on subjective preference scales, pushing the prices of these goods upward.) Gradually the new money ripples through the economy, raising demand and prices as it goes. Income and wealth are thereby redistributed to those who receive the new money early in the process, at the expense of those who receive the new money later, or those who live on fixed incomes and receive none of the new money."

So what have the government and banks spent this new money on first? Equities have undergone price inflation recently, haven't they? As the banksters cash out, where will the new money go? Uruguayan estancias and private security forces might be the next items to see price inflation.

If we are seeing deflation, it is only temporary, and only in certain market sectors. It might take a while for the new money to work its way into the broader economy of J6P, but it will look like a tidal wave when it does.

Daedal's picture

Hyperinflation is a monetary phenomenon, where people do not trust the currency in circulation. As long as currency is trusted (I don't see people exchanging dollars for jewelry, and in fact, I see just the opposite -- Cash for Gold anyone?) then hyperinflation cannot exists.  You certainly can have inflation, concentrated in some assets perhaps, or deflation, whatever. But hyperinflation does not come into existence by the virtue of having a high CPI -- although I would assume there is likely a high correlation with hyperinflation and a high CPI. Bottom line is that hyperinflation can only manifest itself when there is a sudden distrust in the currency. While there are certainly signs of more distrust (Gold prices for instance), I don't see many people exchanging their FDIC insured accounts for hard assets just yet... but who knows when that wil change.

Anonymous's picture

Cash for jewelry crowd trust currency. They trust it for about 30 seconds until they spend it for essentials.

The USD may continue to be used (as most hyperinflative currencies) for simple, immediate transactions, but no one will sleep with it...or let it overnight.

It is to be gotten in and out of quickly, unless one is to partake of the exponential curve commersurate with the time held. In extremis, this could bankrupt one overnight.

delacroix's picture

the fdic is broke, and raising their budget, and hiring lots of new people to help close an increased number of banks, next year.  money market accts are no longer insured. who will buy the bad assets? thats right, we will get stuck with the worst. loss of confidence= panic

delacroix's picture

the fdic is broke, and raising their budget, and hiring lots of new people to help close an increased number of banks, next year.  money market accts are no longer insured. who will buy the bad assets? thats right, we will get stuck with the worst. loss of confidence= panic  fed audit=panic, they are BK  all of the big banks, have been BK before, but now they're really really BK

harry tuttle's picture

Thank you for reminding everyone of this fundamental fact.  Follow the money....it flows and pools where ever a real return might be achieved.  If it doesn't flow to household income, it's not likely to result in higher prices for consumer goods produced on the basis of low margins at high volume.  And, it's not likely to flow to households when you've got 17% unemployment.  Anything in the household sector will continue to deflate, especially leveraged assets.

Follow the money.   

L_Gobbo's picture

"We're all in this together."

10044's picture

CPI is flat and I believe in the tooth fairy. Give me a break wii ya?

Stevm30's picture

With the establishment of fiat money by a State or by a World State, it would seem that all limitations on credit expansion, or on any inflation, are eliminated... and if... gold and silver money were outlawed, could not the World State then expand the money supply at will with no foreign exchange or foreign trade difficulties, permanently redistributing wealth from the market's choice to its own favorites, from voluntary producers to the ruling castes?

Many economists and most other people assume that the State could accomplish this goal.  Actually it could not, for there is an ultimate limit on inflation, a very wide one, to be sure, but a terrible limit that will in the end conquer any inflation.  Paradoxically, this is the phenomenon of runaway inflation or hyperinflation.

When the government and the banking system begin inflating, the public will usually aid them unwittingly in this task... Eventually, the public begins to realize what is taking place.  It seems that the government is attempting to use inflation as a permanent form of taxation.  Once people realize that the government will continue to inflate... they will step up their purchases of goods... The devastation and havoc that the runaway boom causes... is enormous... the economy in effect breaks down... the market is virtually ended, and society reverts to a state of virtual barter and complete impoverishment... Commodities are then slowly built up as a media of exchange.

The public has rid itself of the inflation burden by its ultimate weapon: lowering the demand for money to such an extent that the government's money has become worthless.  When all other limits and forms of persuasion fail, this is the only way - through chaos and economic breakdown - for the people to FORCE a return to the "hard" commodity money of the FREE MARKET.

Rothbard "Man, Economy, and State" pgs 1018-1021

Anonymous's picture

Volcanic events build over the course of time, but erupt over the course of days; Newton should have included the law of critical mass to his equations.

Anonymous's picture

We've all studied Japan, don't you think the FED has? They have plans 1-100 on how to backdoor inflation in ways the public won't get outraged.

Anonymous's picture

If the real economy were contracting at 50% a month you could have 50% a month increase in prices and still have a 0 CPI. I think both sides are right but confusing themselves by mixing the different definitions of inflation/deflation in the same argument.

Based on the severity of the bursting bubble and lack of real savings to support economic activity prices should have fallen far more than they have.

Hondo's picture

No, I don't think so.  Due to the shelter (represents 33.2% of total CPI)component (which owners equivalent rent represents 73.4%) the overall CPI only rose 0.4%.  Without the shelter component the CPI for the month rose 0.7% and for the 12 months at 2.6%.  The Fed is making the same mistake as that got us in this mess in the first place when they were looking at the rent component instead of the price component during the boom years.  During the boom years the BLS was watching rents which were falling or not rising as everyone was buying homes witch the BLS does not count.  Housing and the convoluted way its price is calculated a long with is large weight in the index has destroyed any rational analysis of using the CPI as a measure of inflation or purchasing power.

Gordon_Gekko's picture

The very concept of "core" inflation is utter and total nonsense, not to mention that you have to be really, really naive to accept the bullshit government numbers as fact.

Anonymous's picture

Seems to be deflation for main street and inflation for the stock market and the Banks.
This could go on for a long time. At least until some of that excess money would hit main street. Then Bernanke would change policy and withdraw the money.

Trickle up policy.

Anonymous's picture

"the big news was it was all energy (+4.1% MoM) and that the core (excluding food and energy) and excluding energy segments of the CPI came in at zero."

because consumers don't use food or energy.

Ben Graham Redux's picture

I think most of your are missing the point.  The Fed hasn't "inflated" yet.  The $1.25 trillion in reserves is what paid for the MBS securities - the shit just changed ownership.  The QE of $300 billion has been the only real devaluation - kind of a test to see how they can do it.  The real inflation or hyperinflation is in front of us when deflationary forces make it impossible to maintain the status quo.  At that point, I fully expect the Fed to create $20 trillion to deposit in the Treasuries account to meet obligations and to pay off debts.  It will have to be big and a one shot event that will get chosen when there is no other viable option.

Anonymous's picture

If it were to be a deflationary future, the US Gov't wouldn't have pulled off the gold standard; they would merely have revalued. But revaluing still puts a restriction upon the amount of fiat one may issue.

No, they have been preparing for this default jubilee for some time, and its core is unfettered printing of a deluge of bits/bytes and paper confetti.

mblackman's picture

A surprising comment from you. Anyone who understands William's data knows that is heavily discounts BLS data as being effectively unreliable. CPI, GDP etc are not used to educate the markets, they are election platforms designed to ignore the bad and highlight the good. Anyone interested in a more reliable take should read Ken Rogoff and Carmen Reinhart's new book, "This Time is Different," in which the authors make a solid case for the fact that the history of fiat paper money and correlations between sovereign debt defaults and commodity prices versus real inflation data (as opposed to BLS fairy tales) strongly supports a hyperinflation scenario down the road....

Ben Graham Redux's picture

Fiat currency is backed by debt.  Once you reach the point of diminishing marginal utility of debt - the point where one more dollar of debt leads to capital losses(deflation) then fiat ultimately breaks down and you get Minsky's world.  We've reached that point which is why fiat in the form of new debt can't work.

Anonymous's picture

Hyperinflation = currency revulsion by foreigners.

Hence we are already in the early stages of hyperinflation. When the Gulf States craft their own currency they mean to say they no longer want to hold USD, period.

One need only remember the Kuwaiti withdrawal of $$$$$$$$$$ from Citi in recent days.

All of this is tied to Ben being extended by pretending.

Double plus ungood was the Pelosist debt volcano.

$1,800,000,000,000 into One Global Market will not go.

Thurifer's picture

As a Theology major I have to say that I don't fully understand a lot of the more technical analyses on ZH, but I find them fascinating.    This particular argument  (inflation vs.  deflation)  reminds me of freewill vs. predestination, and probably has the same answer: both and neither.

Assetman's picture

As a non-theologian, I can only offer you one piece of advice that will trump any confusion regarding the arguments between inflation and deflation:


BG_rulez's picture

If there is fiat monetary system there is room for abuse, deficits, inflation, fractional reserve lending…

Help dismantle the abomination of today`s governments and gain our freedom back!

Hondo's picture

The dollar is still almost 8% higher than it was in June of 2008. 

Greyzone's picture

I find the deflation then hyperinflation thesis the most compelling. The key arguments against immediate hyperinflation are (a) that the printing that has been done thus far is targeted and not widespread in order to support insolvent banks thus not escaping into the wider economy, and (b) Bernanke and friends have been trying to print "just enough" to get us out of this hole because they are also custodians of the global reserve currency. The power expressed in being the global reserve currency has reverse corollaries that mean the owner of it cannot recklessly debase it without losing the very power that it grants.

Thus the process has been slow enough to basically cushion deflationary pressures. Unfortunately even this "controlled" amount of printing has sent the rest of the world into a panic when coupled with the reckless budget of the US government. The rest of the world is therefore trying to slowly inch away from the ticking time bomb known as the US dollar. This is evident in all the discussions about a new global reserve currency and the parallel discussions about regional reserve currencies such as in the Middle East and in Asia.

If the Middle East and Asia both pull away from the dollar as their global reserve, Russia won't be far behind. When Russia goes, Europe will be faced with supporting the dying dollar or moving in the direction that their own self-interest and their own trading patterns dictate - into accommodating Russia, the Middle East, and Asia. As we slide over that particular event horizon then is when I expect the inflationary explosion, both because of the need to print more to support a federal budget out of control and because of the repatriation of increasingly worthless US dollars that are now overseas.


Ben Graham Redux's picture

Thank you - you've nailed it imo.  The only thing left to add is that the rest of the world will be so badly beaten up by our actions that they'll be forced to hyperinflate as well.  If we've got a bad deflationary environment, just think about the Chinese when WalMart sees a massive drop in sales.  Think about the Japanese when we drive that car another four years.  Think about the Brazilians who won't be able to sell anything to the Chinese!  US hyperinflation is only one chapter of this mess.  The domino effect could still leave the dollar as the preferred currency.

Anonymous's picture

Umm, isn't there a Fourth Currency, Like Umm Gold?

Wouldn't THAT be the preferred currency?

saturno_v's picture

A lot of good points...keep them coming.


To sum it up and maybe add some more.


- B(L)S statistics are so manipulated that it's impossible to rely on them....inflation rate not considering energy, not considering food...basically not considering anything people really need....ok got it...the slack in productive capacity data (the way it's calculated) is particularly suspect.

How many factories are really left in the US?


- When we talk about inflation we have to include asset inflation, we have that in spades in the stock/bond market....I would say it is through the roof (compared to the economic fundamentals), all of these funny money courtesy of Zimbabwe Ben "parked" in banks are not exactly sitting idle....they are used to speculate everywhere and to allow Uncle Sam to borrow at will.  


- Hyperinflation is not a consequence of high inflation...actually it's more related to deflation (often the latter comes first, look at Argentina in 2001). Essentially it is loss of confidence in the currency, the famous "crack up boom". It will start with a bond market collapse for US Sovereign debt when our external debtor will say "no mas" then we will print furiously with abandon....someone at some point will have enough of the "Three Card Monte" being currently played (Fed get the trash from banks giving them new money and the banks buy treasuries from Uncle Sam, QE, ficticious offshore entities related the FED propping up the market, Plunge Protection Team, etc...)., domestic consumers will follow shortly.

Eventually China and others will prefer to take their losses and move on with their life rather than keep the game going.


- Another thing to remember...our debt is increasingly becoming short term, offering more opportunities for a quick exist. 


- Many people mention Japan......actually deflation was not that bad in the land of the rising sun (CPI actually never went negative but there was serious asset deflation) and Japan is not a net foreign debtor and it runs a healthy trade surplus...a fundamental difference very few recognize.  


- Someone says: "hyperinflation cannot happen with high unemployment and tight access to credit...." Zimbabwe had 80% unemployment rate and non-existent credit......still they got the 100 Trillion Dollar note over there (I own few of them myself and they are a source of quite interesting conversations with my friends and colleagues)....remember printing doesn't replace lost productivity.


- Even in an hyperinflationary environment, prices in certain sectors can deflate....again, taking the example of Zimbabwe, luxury items, houses and even eating out deflated in real terms.....usually during very high inflation/hyperinflation periods the most everyday needed items are the ones that go in outer space (and it seems very logic to me).


- What about "hidden" inflation? Smaller candy bars, less amount of product in bottles/packages, less quality of services (or no service at all)...signs are everywhere....I eat out very often and I noticed that portions are getting smaller (which is a good thing, but let's not digress...) and menu re-arrangement/food substitutions.....nowdays often you have to pay for a salad when before was included, etc... In the service sector fees are sprouting everywhere.


- Many people apply the simplistic concept that if unemployment persist/get worse and credit remain tight prices will go down indefinitely....actually it doesn't work that way in the real world...at some point businesses will realize that they have to make profits from a smaller customer base so prices will stabilize and even increase and companies will restructure to adapt to the new reality (and you lose productive capacity in the process which exasperate the inflationary pressure when the turbo printing starts)...it's already happening with some importers (some are my clients) and in certain sectors...I haven't noticed any irresistible bargains this year for Black Friday compared to last year at least for the type of products I'm interested.


- In my opinion, a moderate "stealth" inflation is exactly what the Man of the Year wants to keep the game going....however the duo Government/Fed, if cornered, will choose high inflation/hyperinflation over deflation which allow the debt to be deflated away (and yes it will help Main Street too to get a "out of jail free" card but surely that is not their main concern)

In a high and protracted deflation environment money literally "disappear" in the fractional reserve banking ponzi system...never underestimate the man with the printing press and the congress...during his infamous helicopter speech BB was damn serious....

BG_rulez's picture

Thank you for the exellent opinion.

I should like to read more of you and particularly about purchasing power preservation in the long run.

delacroix's picture

I purchased a 900 watt gas powered generator, for $99 yesterday. I don't even see how there could be a profit in that.  how do we compete with that

trav777's picture

ABSOLUTELY correct... this is the critical flaw in the deflationist "priceless dollar" crowd led by Douchinger et al. Businesses CANNOT SELL AT A LOSS. People say oh well, if Toyota wants to sell cars they will have to drop prices. Um...no. They cannot sell below cost. They will drop volume as there are less customers. People will walk. This is easy to demonstrate...go to a nation like Brazil and see how much cars cost. Volumes are MUCH lower because prices are very high compared to average incomes. It's like this most everywhere. We have subsidized our LACK of national income for 3 decades with borrowing.

Lots of people do this in the real world, subsidizing real income with MEW or CCs.  They appear far richer than they are.  When the bill comes due and they cannot grow their credit, they basically collapse quickly.  That is the United States economy and nation.

We either devalue or default, simple as that.  It's what's been done in every case, every single time.  And the fucking world will get over it.  What can they do to us other than not sell? 

The USD may end up dead as a reserve asset but the nation will still be here.  A more priceful dollar will force the government to default/devalue which will be accomplished by CB purchases of sovereign bonds.  There's simply NOT the income to fucking borrow what we do now, not enough income to pay for "defense" plus interest plus any other entitlement.

A day of reckoning approacheth

delacroix's picture

gm sold cars at a loss for years. it can be done, but it's not recommended

no cnbc cretin's picture

It's been quite clear, for sometime now, the train wreck is coming. And based on articles from this site and others, it appears you'll be able to hear the train sometime in 2010, the wreck should be take place in 2011 or 2012, if not before.

OrganicGeorge's picture

Oh you kids!

When will you learn we never get what we expect.  Nobody predicted or heard of stagflation until it was upon us.   What ever is headed our way will not be what you or the experts expect.







OrganicGeorge's picture

Oh you kids!

When will you learn we never get what we expect.  Nobody predicted or heard of stagflation until it was upon us.   What ever is headed our way will not be what you or the experts expect.







Anonymous's picture

I'm convinced US monetary policy is driven primarily to break the Chinese currency peg. As long as the Chinese keep the peg, importing price inflation from China is impossible. Devaluing the US dollar is the only defence the US has against China, much as it was the only weapon they had against Japan in the 70's.

Apocalypse Now's picture

I have had that recurring thought as well.