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John Taylor's Controversial Outlook On Inflation: "Not Here, Not Now"

Tyler Durden's picture


John Taylor, traditionally one of the most insightful strategists, has released a controversial note looking at the prospect of surging inflation, which he says is not much of an issue, "because the global economy is suffering from excess manufacturing
capacity and a deficit of consumption, history tells us there is little
chance that inflation will be a problem." We wholeheartedly agree with him on this point... to an extent. All the African countries experiencing food riots also have record high unemployment: read massive excess capacity, manufaturing and otherwise. Thus, at least in the developing world, the two are no longer related. Is that the case in the developed world? With enough money thrown at it, the answer is a resounding yes. Should the Chairvillain continue his money printing "third mandate" duty, we are confident we will be proven correct soon. And after all, as many have speculated, the Fed has no other choice to deal with the massive debt load. Additionally, if as the WEF is correct, and world debt stock has to double to over $200 trillion in a decade, the bulk of that debt will have to be acquired by assorted central banks: read - monetization...whose one certain side effect is a surge in excess reserves, and thus, inflationary expectations. Should the ill-defined concept of velocity pick up even a smidge, it is game over for the monetary system, and not just regionally, but globally. Which is why we are in full agreement with Taylor on phase 1 of the reflationary experiment, he is short on the second phase, namely the one in which Bernanke continues to print, print, print, drowning out all incremental deflationary threats from "excess capacity" which always has just one monetary outcome...

Inflation, Not Here, Not Now

January 20, 2011
By John Taylor
Chief Investment Officer, FX Concepts

Commodity prices are flying higher, interest rates are near zero, base money growth is staggeringly high and inflation expectations are going to the moon. It looks like inflation is back, but it isn't the kind of inflation the Germans worry about or the kind that leads to high interest rates followed by a deep recession. If this is not the inflation of post-WWI or the 1970's, then what is it? Although the current bout of food shortages and price increases have helped topple the government in Tunisia and led to food riots in Algeria, these commodity price increases and the excess money being spread around should not have any impact in the G-10 countries, unless some central bank makes a big mistake and hikes interest rates. Why is it so different this time around?

Because the global economy is suffering from excess manufacturing capacity and a deficit of consumption, history tells us there is little chance that inflation will be a problem. If we just look at the second half of the 1930's, the prime example of a consumption shortfall, when interest rates were exceedingly low and base money was growing sharply (because Roosevelt had changed the price of gold), many were worried about inflation but it never arrived. Fed Chairman Bernanke's QE efforts are only a pale shadow of Roosevelt's powerful inflationary stroke, but prices stayed subdued back then and they will now. With still climbing excess manufacturing capacity, and so much of it located in low- wage China, there is little or no wage pressure in the developed world. The situation was exactly the opposite in the 1970's when there was not only a shortage of skilled workers but many contracts were inflation adjusted as well. Now these inflationary adjustments are history except in some public pension plans (which are on their way to insolvency). Labor's pricing power has been declining since the 1970's. In the US the number of hours necessary to buy a car bottomed in 1972 and it now takes about twice as long for the average worker to buy the average car. Although monetary growth is a necessary condition for inflation, without tight labor markets it just cannot find the traction necessary. When the price of oil or food goes up, the weakened worker will drive less or eat less, he/she cannot drive wages up. Final demand stays the same but it is just spread around differently.

If commodity prices climb higher and higher, the American and European worker will tend to spend more for food and fuel, cutting down his purchases of manufactured items and locally produced services. Units of food and fuel purchased will drop as well, as each one is more expensive, cutting final demand and lessening the upward pressure on commodity prices. The raw material producers, generally the emerging markets, should prosper in relation to the manufacturing countries, shifting the balance of global power. This change in relative economic dominance matches the concept of the Kondratieff cycle and fits very well with MIT's capital investment cycle. The current period seems to fit nicely with 1937, and if we use that as a base date, the commodity producers will prosper for another 13 to 15 years as they did back then. Although the western countries will have a growth problem, not an inflation problem, the commodity producers will have plenty of growth and plenty of inflation. Although Australia, a perfect example in the early 1950's, with high growth and high inflation, controlled its overheating problems fairly well, this time around there will be many countries that have not tasted "capitalist" freedom before. As many of these newly wealthy countries have managed currencies with exploding reserves and money supplies, the next decade or so should see dramatic inflationary booms and busts, plus plenty of political turmoil. With the G-10 consumers facing a difficult 2011, global commodity prices should peak soon and inflation fears will melt away in the US and Europe.


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Fri, 01/21/2011 - 09:51 | 892889 Gully Foyle
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2: Inflation

The fact that there’s all that zombie money around (or zombie credit, to be precise) leads many to believe the US witnesses inflation. Not true. First off, inflation is not the same as rising prices. Prices can rise because of different causes: scarcity, speculation and (real) inflation. And it’s important to be able to identify which of these causes is in play. If you call all price rises inflation, you lose the ability to distinguish between the causes, which means you lose a crucial analytical tool. There may be those who would like nothing better than for us to lose that tool, but it’s not smart to give in.

I know the media has force-fed the incorrect definition of inflation to the masses, and I know there are plenty of people who say rising prices is all they care about, not monetary theory. However, a clear view of causation is essential when it comes to defining your reaction to rising or falling prices, and prices that rise because of scarcity demand a totally different set of actions than those that do because of a rise in total supply of money and credit, combined with velocity of money, which is what inflation truly is.

The present, incorrect and force-fed "meaning" of inflation as all price rises no matter what their cause is, is relatively new. Rising prices used to be referred to as "(currency) devaluation". Not perfect, but way better than what we have now, where terms like “monetary inflation", "price inflation", "consumer inflation", "energy inflation" all the way down to "cookie inflation" fill the media.

Why is the distinction between the definitions important? Because today in the US both the money/credit supply and the velocity of money are falling (deflation), while some prices are rising, in particular those of food and energy. And no, you can't have deflation in one sector and inflation in the other. That really turns the whole debate into obscure nonsense. It's important that we can determine that if prices rise in times of deflation, the cause for those price rises must be something other than inflation.

In today's world, that something else is speculation. But not of the ordinary kind. What we have right now is zombie money speculation. The same unrecognized losses in the financial system that our governments cover up with criminally negligent accounting non-standards cause prices of oil and food to rise, since that's where the zombie money -inevitably- ends up. And it's not just the banks that invest zombie money, it's all of us.

If banks would have been forced to reveal their losses, the hammering of home prices would have been huge. Since this did not happen, a lot of people are still sitting pretty in their homes, which are way more overvalued -in free market terms- than just about anyone is ready to recognize. Also, if banks had revealed their losses, unemployment rates would have been far higher than they are today.

I know what many are thinking: maybe it's not such a bad idea to cover up those losses. But you're not seeing the whole picture. First, the cover-up has enabled the banks to access your money in order to pay down their debts. And second, zombie money is not the same as real money, as something that has been earned by adding real value. Zombie money is not real.

I read a piece at Zero Hedge the other day by a group that calls themselves the NIA, for National Inflation Association. But they don’t even know what inflation means. Hence their slogan: "Preparing Americans for Hyperinflation". Hey, if you can't define inflation, chances are you’ll miss the truth on hyperinflation too. Look, the US depends for its money and credit supply on international bond markets. Whenever Bernanke turns on his so-called "printing press", which in actual fact is an "additional credit" press, it's not as if free money is created. There‘s interest to be paid on all of it. And while interest rates may be low right now, it's not Bernanke who sets those rates, try as he might to make you think so.

If and when the bond markets decide that the risk on US debt rises enough -or too much-, they will decide what the interest rate is, not Bernanke, and not Geithner. Obviously, with every dollar printed, risk assessments will rise, and the outcome is inevitable: less appetite for US debt (don’t forget that there's plenty zombie money in the bond markets too), and higher rates. And only if and when the US no longer has access to international markets does the option of hyperinflation come into play. Now, I may be quite negative on the prospects for the US economy, but a full separation from global debt markets is a while away yet, and that means the prospect of hyperinflation is as well.

Preparing for hyperinflation is not just useless at this point in time, it's also damaging in that it makes people blind to the real problem: deflation. And before we get to hyperinflation, if we ever do, deflation will cause so much pain and grief and unrest and death, that the very thought of hyperinflation will come to be seen as a highly delusional non-issue.

So how long will the zombie money last? Can it last as long as Bernanke and Geithner and Obama and Dimon want it to? No, in fact, they're fighting a lost battle against time itself.

The zombie money has to disappear, and it will. It all starts and ends with US and European real estate, the one biggest investment of those of us living on Main Street, by far. US home prices have now fallen for 53 consecutive months, despite the fact that Fannie Mae and Freddie Mac buy up and guarantee near 100% of all mortgages, and despite the fact that the Fed has purchased huge swaths of the securities allegedly backed by these mortgages.

All those trillions "worth" of your money haven't been able to prevent that. And no amount of additional trillions will. Foreclosures are setting brand new records across the country, even as banks are ever more nervous about their paperwork, and their balance sheets. It doesn't matter how much money Washington throws at the issue, other than it’ll make you a whole lot poorer, for you’ll never see it back.

A further deterioration in home prices can't be prevented. Fannie and Freddie can’t buy 101% of mortgages; they're buying close to a 100% right now and prices still fall. Wal-Mart greeters, burger flippers and the rest of the great unwashed will not be allowed back into the housing market. There are over 10 million homes on the market, and perhaps twice that if you count all foreclosed properties that banks sit on (and the millions they won’t foreclose on), plus all those that people would like to sell but can't lest they go underwater. And the pool of potential buyers has shrunk with a vengeance since the 2005-6 "heydays". Huge increase in supply, huge decrease in demand; e all know where this will go.

Now, take Fannie and Freddie out of this picture. What do you see? They’ll be taken out in some way, and at some time, and it won’t take years. I know what I see: the housing and mortgage situation in the US has turned into what I've always called the “Bulgaria model”, where you guarantee the mortgage on your neighbor's home, and he guarantees yours; anything goes as long as it's not the free market your politicians and media tell you about. And we know what happened to Bulgaria in the end, don't we?

I’m all for a society, a government, that takes care of the weakest in its midst. I’m all against a government that props up the strongest in its midst, in this case the bankers with bonuses larger in one year than the weaker among us can make in a lifetime, the same bankers who lost more money in bad wagers than the entire country can cough up, and still be economically viable. We’re fast becoming zombie societies.

But first we'll have to live through this:

3: Food prices

Let’s start with the news that the Tunisian president has fled his country, and the military's taken over, according to Al Jazeera. Mass protests are ongoing in Morocco and Algeria. The riots in Tunisia are not all about food prices, but they were certainly a substantial factor. And more, much more, of the same is on the horizon, in many different places. But food prices this time around are not rising because of widespread dramatic shortages, at least not so far. And Lester Brown, much as I like the man, has it completely wrong:

The Great Food Crisis of 2011

[..] whereas in years past, it's been weather that has caused a spike in commodities prices, now it's trends on both sides of the food supply/demand equation that are driving up prices. On the demand side, the culprits are population growth, rising affluence, and the use of grain to fuel cars. On the supply side: soil erosion, aquifer depletion, the loss of cropland to nonfarm uses, the diversion of irrigation water to cities, the plateauing of crop yields in agriculturally advanced countries, and -- due to climate change -- crop-withering heat waves and melting mountain glaciers and ice sheets.

In the same vein, the peak oil crowd fails to see what drives up oil prices today. Yes, long term trends affect prices to some extent. But no, Lester, you can't provide an accurate assessment of what’s happening if you don’t include the very obvious contribution of speculation, especially that which originates with zombie money. Ditto for oil prices.

Food prices are rising partly because, let’s not forget, China, unlike the US, does have inflation, with its money supply going through the roof. But much more than that they're rising because we have elected to kill off the principles of our own western economic systems, which were once supposed to be based on free market ideas, that dictate that success is rewarded and failure punished.

They have since come to resemble some kind of sophomore notion of Darwinianism, where the upper alpha rhino gets all the girls and the rest get none at all. And that in turn is supposed to pose as justice in human societies, whereas in reality it’s nothing but what happened in Bulgaria for decades.

The consequence is that the zombie money is now allowed to drive up food prices to levels which make sure that millions of people around the world will go hungry, and will revolt as a result of that. Blankfein, Dimon et al have long since realized that they can't maintain their velvet “God's work" thrones just by robbing Americans of all they're worth. Their losses are far too great. They need to have access to everyone's wealth all over the world.

And since oil and food are traded on international commodity markets, and they have gotten hold of all the money America is worth, and then some, they can play these markets as much as they want, whether it’s wheat or natural gas or gold. People like to claim that gold will rise as the US dollar becomes worth less, but they forget that it’s zombie money that has been buying gold, and that has thus lifted gold prices. Once daylight comes and the zombies are gone, there's only one way left to go for gold prices too.

So, once again, when will the zombie money see daylight?

This could be caused by any of a myriad of choices. We could force all banks to put foreclosed homes on the market, all at once. Or tell the same banks they have no right to foreclose on homes they have no perfect(ly legal) paper trail on. We could force all derivatives contracts out into the open. Or just the mortgage backed securities; that would do it. Provided we fold Fannie and Freddie, and not let the FHA or any of those guys take over.

As I wrote eons ago, even just closing down Fannie and Freddie for business one or two months would probably do the trick. China could wreck the US economy in 5 minutes simply by demanding to know what their purchases of Fannie and Freddie debt are worth (they have a lot of it). Or it could be a small country, maybe not Iceland, but surely Vietnam, or Belgium, or Denmark, insisting on knowing what that paper their banks and pension funds have so heavily invested in is really worth. MBS, or any other species of derivatives, the whole shebang only has a value attached to it by the grace of nobody trying to figure what that value is.

Is US housing debt, and the securities and derivatives based on that debt, a zombie, or a person? It may certainly seem confusing late at night. But then again, you can't have meaningful relationships with zombies, they're sort of one-dimensional. Funny how that resembles the person-rights US companies enjoy,

And frankly, does it really matter? What we know for sure is that the zombie money we elected to have flow through our financial systems is going to kill a lot of people this year. Want to plead innocence? How long do you think that excuse will be accepted?

Cue Tunisia.

Where our zombie money kills real people. Today.

Fri, 01/21/2011 - 09:53 | 892893 Tyler Durden
Tyler Durden's picture

Good analysis. And one which also woefully ignores the Fed's resolve.

Fri, 01/21/2011 - 09:57 | 892899 JW n FL
JW n FL's picture

There is no Print Club.. 1st rule of Print Club!

Fri, 01/21/2011 - 10:06 | 892920 Bob
Bob's picture


Sat, 01/22/2011 - 05:43 | 895454 Hephasteus
Hephasteus's picture

+ 2

Fri, 01/21/2011 - 09:58 | 892903 jdrose1985
jdrose1985's picture


Fri, 01/21/2011 - 10:16 | 892946 JW n FL
JW n FL's picture

anyone that can put together 5,000 words and discuss the economy and not once fucking take into account the FED and the Print Jam that is happening...

lets just say it wasnt Tyler... you figure out who...

Fri, 01/21/2011 - 10:33 | 893020 Beatscape
Beatscape's picture

Correct me if I'm wrong, but I'm pretty sure his euphemism for the Fed is the "zombie" money.  Therefore, the Fed does play a big part in this analysis.


Fri, 01/21/2011 - 10:37 | 893030 snowball777
snowball777's picture

While the discount window is its likely origin, the "zombies" in this scenario are BofA, Wells, Citi, etc

Fri, 01/21/2011 - 10:51 | 893084 Beatscape
Beatscape's picture

Right, made flush with zombie $$ courtesy of Bennie and the Inkjets, not only from the discount window, but from buying all their toxic MBSs and various derivative instruments as well.

Fri, 01/21/2011 - 11:08 | 893134 JW n FL
JW n FL's picture

The 0%+++++ FED Window uesed by the "Investment Banks" that are now called "Banks"... is the largest issue...

So the FED who orders the Treasury to PRINT...


It doesnt matter... either you know or you dont... and talking to me isnt going to teach you anything you dont want to know or already know.

Fri, 01/21/2011 - 11:04 | 893124 Terminus C
Terminus C's picture

That was my assumption as well.

It was a good analysis.  Tyler's point was that Gully is not taking into account the determination of the Fed to create "zombie money".  This indeed could extend the charade significantly further than Gully was alluding to.

We have two choices

Hyper-inflate, which will lead to deflation post annihilation


deflation as soon as "the light shines on the zombie money", as Gully puts it.

Either way it's not going to be pretty.


Fri, 01/21/2011 - 11:49 | 893313 CU1981
CU1981's picture

++ good summary

Fri, 01/21/2011 - 14:08 | 893847 JW n FL
JW n FL's picture

The would be intellectuals... educated, as dictated here (broadly)... would like to realize change... all of them following a different dream... none with the horse power to feed and army... result, 1/2 the nations police fired... community cohesion disrupted... if, big if... services, needs.. like food and / or other... become disrupted... they will all have change... but none of their dreams will be fulfilled, the resulting chaos will of course kill.. Fairly... the good and bad equally... and in the end, there will be an effort to consolidate.

Un-like anywhere else in the world there are 5 maybe 10 guns per person... our standing military forces will return to their home towns to fire on their own families?


this can get really bad for everyone... and as evil as the FED is.. it is truly the lesser of two evils...

and for those that doubt, imagine shinning my toe nails for me before I get out of bed every morning... and dont have a cute wife or daughter... because I have needs...

and if that doesnt help you see... imagine that I am the nicer verity of evil lurking.


Fri, 01/21/2011 - 23:54 | 895241 Return2Sanity
Return2Sanity's picture

Zombie money can bid up commodity futures to the moon, and that will get US farmers planting from fencepost to fencepost in 2011. But zombie money isn't going to consume a million tons of potatoes, so once the trucks start rolling off the farm and down to the supermarket, only the real spud eaters have the power to set market prices. So, unless Bernanke starts mailing cash out to every Joe 6-pack, zombie money is likely to be eating a big loss by mid-summer.

Fri, 01/21/2011 - 11:14 | 893157 Monday1929
Monday1929's picture

some confusion here- Tyler, Taylor, Foyle.

Fri, 01/21/2011 - 10:01 | 892912 Mike2756
Mike2756's picture

Assuming the Fed survives in current form.

Fri, 01/21/2011 - 10:06 | 892921 Ilargi
Ilargi's picture

Well, Tyler,

I'll stand by what I wrote. I think you perhaps woefully overestimate the Fed's powers more than I ignore its resolve. Which I don't. I just don't see how it would rule the day. It doesn't operate in a vacuum.




The Automatic Earth

Fri, 01/21/2011 - 10:17 | 892936 idea_hamster
idea_hamster's picture


Whenever Bernanke turns on his so-called "printing press", which in actual fact is an "additional credit" press, it's not as if free money is created. There‘s interest to be paid on all of it.

...confuses Fed and Treasury.  The Fed doesn't pay interest on "Federal Reserve Notes."  It's true that the money created is not "free" -- it's a tax on those who hold cash balances, generally the poorest and least politically connected strata of the population.

The post is good to the extent that it focuses on the difference between inflation and changes in relative prices.

But any interest is owed by the Treasury.

Fri, 01/21/2011 - 10:22 | 892963 pton09
pton09's picture

You are pretty naive.  Yes, interest rates will rise but will real rates rise?  How can we have positive real interest rates with a 15 trillion debt? 

Ignore inflation at your own risk, I do find it comical you fancy yourself so much more enlightened the inflationists. 

Good luck hoarding your US dollars,

Fri, 01/21/2011 - 11:55 | 893339 centerline
centerline's picture

Great work over at AE Ilargi.  I stop by daily along with a few other good sites.  Regardless of any disagreements, what I am enjoying reading here today is shift of focus from the microeconomic filth (LOL) to things more meaningful to those of us who are not trading for a living.    

Fri, 01/21/2011 - 10:12 | 892929 I need more cowbell
I need more cowbell's picture

Chris Martenson, who would basically agree with Ilargi, also came to the conclusion that AE writers continue to ignore the bad debt stays hidden, under mark to fanatsy, and therefore ( so far ) no debt destruction by default.

The question remains, can this be done indefinitely?

Fri, 01/21/2011 - 11:32 | 893234 centerline
centerline's picture

One step further... what is the mechanism that will drag those debts into the light?  Considering the Fed does not answer to anyone - and it is clear our politicians will do nothing (for at least fear of financial implosion, with a lovely photo of them with thier finger on the big, red, shiny button for all of history to enjoy - right or wrong) - it seems the fantasy can continue until something really meaningful breaks.  The most likely outcome in my humble opinion is an outright currency crisis... the death of the dollar... and likely death of those debts denominated in the dollar.  

Fri, 01/21/2011 - 12:08 | 893382 assumptionblindness
assumptionblindness's picture

...can this be done indefinitely?

As each day continues to get more bizarre then it would appear so to a lot of us. 

If there was one thing that used to give me hope it was the knowledge/belief that the United States derives a tremendous amount of economic power from its status as custodian of the world's reserve currency.  I used to take comfort in the delusion [emphasis ADDED] that the US would not continue to inflate the ponzi-finance economy and thereby piss away its reserve currency position.  I was wrong.  I now know that without ponzi-finance, there is NO ECONOMY.  (See F.I.R.E. economy)  In short, saving the ponzi is of greater importance to our national security than saving our status as custodian of the world's reserve currency.  That being said, I think that TPTB doesn't expect that we will loose our custodial status to any other individual NATION.  Time will tell... 

The one thing that we have all been debating is a 'break' towards the direction of hyperinflation or towards deflationary collapse.  When viewed through the eyes of Madoff or Mr. Ponzi it quickly becomes obvious that either direction is the ruin of a ponzi scheme.  You can't generate too high of returns or your dividend outflows will outstrip your ability to bring in new money.  In a deflationary scenario, redemptions are the ponzi-killer.  In order to maintain a ponzi a 'sweet-spot' must be maintained.  I now believe that there is a coordinated effort in the western world to do what ever it takes to stay in the sweet spot.  

Look at the markets.  We are observing low yields in bonds, steady gains in stocks, and general selling paralysis.  If TPTB succeeds in continuing to prevent that inflation or deflation break from occuring (through use of PPT, PM manipulation, stock market ramps, a myriad of bias-blinding 'official' statements/'leaks', toothless regulatory reform, economic statistic games, and effective 'green shoots' propaganda) then they may succeed in getting the sheeple of the world to accept a "new normal" and eventually drop this debate all together.  It is now rather obvious that the objective among TBTF is to get the speeple to quietly accept their place in the emerging global serfdom economy.

Our only hope now, unfortunatley, is growing geopolitical pushback which thereatens to monkey hammer our bus driver as we are guided towards a "new normal."  Cue the monkeys!!!  Go for the knees!!!

Fri, 01/21/2011 - 12:33 | 893457 Double down
Double down's picture


Bad debts may be recognized when its relative size to excess reserves is minuscule.  Me thinks this is the reason for  issuing more treasury debt than required to fund the deficit.

I am having second thoughts about the treasury to fed reserve power relationship. 

If I were a congressman I would by now have come to the following, unfortunate conclusions:

Deficits no longer matter


There is no perceived inflation impact from QE.

Case closed.

 This is a carte blanch to issue unlimited amounts of debt and these incremental debts will have to be monetized or else the banking system will suffer from higher rates...  The feds third mandate will become "impaired". 

Others have said this but it bears repeating. Emergency measures will become everyday monetary mechanics.  QE will replace the overnight lending rate and therefore POMO will never stop.  The S&P will become/already is an inflation indicator.  


Fri, 01/21/2011 - 10:12 | 892930 NOTW777
NOTW777's picture

"analysis?" how about someone who likes to hear themselves ramble.  no one else except the writer knows inflation but then the author goes on to include definitions of inflation that are common place

Fri, 01/21/2011 - 10:18 | 892945 Misean
Misean's picture

I disagree that it "woefully ignores" at all. The Feral has been loooking for an asset to bubble and is so far having trouble finding one. As you note so well, no one is pouring back into the shlock market. Hot money (or his "zombie" money) is sloshing around, but it is NOT finding great traction to multiply (or lever if you prefer). I've been looking at the same thing and this is quite on point.

Fri, 01/21/2011 - 10:21 | 892960 Blindweb
Blindweb's picture

Yes, like Denninger and Mish,  The Automatic Earth has very linear mental models of a very nonlinear world.

Fri, 01/21/2011 - 10:34 | 893024 Sean7k
Sean7k's picture

Speculation is not the problem. Arbitrage is necessary for price discovery. This is a natural action in all markets. 

This article does a great job of clarifying inflation and fleshing out a better definition. It needs to be more forthright in identifying the real culprit: the creation of credit and the concentration of that credit in the hands of a very few people- the banks. Credit created at artificially low interest rates to be used to re-capialtize their malinvestment. 

This is made worse by moat built around the banks accounting systems, allowing them to forestall the inevitable as they attempt to push the cost of these losses on the taxpaying public, through the transfer of toxic debts to the FED balance sheet and the recording of interest on bad loans.

The monetary system is being made a mockery. The reserve status is being thoroughly abused and used as a weapon of mass economic destruction. The dislocations within the economies of the world are so disturbed, there are no tools to control the destruction.

To assume this is accidental or the work of imbeciles is dangerous. This is purposeful. It is a textbook case of system destruction to pave the way for a "new and improved" system of conducting global trade. 

It is impossible to have money behave in this manner, where no one can predict it's behavior and the options are spread over a spectrum of choices: inflation, deflation, hyperinflation, credit destruction from shadow banking, credit creation, or my favorite- the recent Irish method, dumping 25% of your GDP on to one side of the balance sheet.

Speculation? Bah! Criminal manipulation insured by government and the suspension of law and regulation? Better description.

Fri, 01/21/2011 - 10:39 | 893045 snowball777
snowball777's picture

But if the suspension of law, regulation, and the concept of moral hazard was a direct response to the effects of speculation...

Fri, 01/21/2011 - 11:59 | 893265 centerline
centerline's picture

Speculation is "part" of the problem though.  Another facet is all the obligations that MUST have decent returns in order to avoid insolvency.  Those funds, amounting to significant capital, or forced into speculative and risky positions out of sheer necessity for yield.  A train wreck just waiting to happen.


(edit... forgot say "+1"  right on)

Fri, 01/21/2011 - 11:48 | 893307 SDRII
SDRII's picture

+10 - the idea of exporting inflation to the periphery to create max pain before the herd  storms the mother ship wherabouts the IMF/US/UK alliance launches a solution to quell the crisis. The key to watch for are the ongoping negotiation over what exactly the payoff will be to China/Russia for buyin? Note that the BOJ head was just named VC of BIS. The US/IMF push on the yuan to make it freely floating so it can be included in the SDR is woefully inadequate. When Brad Sester left the CFR to work on flows  for Treasury one can only imagine he joined the Hormats (GS) think tank on ways to stangle the resisters into submission. place your bets black or red?

Fri, 01/21/2011 - 11:54 | 893333 Dental Floss Tycoon
Dental Floss Tycoon's picture

Fewer words but more substance. +100

Fri, 01/21/2011 - 11:10 | 893141 Monday1929
Monday1929's picture

Jamie Dimon's children will find out that their father kills people. That will be a form of justice.

Fri, 01/21/2011 - 11:26 | 893203 Gimp
Gimp's picture

Great piece GF, totally agree that the tidal wave of very cheap money/credit causes speculation in all commodities globally which in turn kills the poor who now cannot afford to eat.

The banksters who are the speculators make themselves feel good by donating a pittance of their ill gotten gains to the local food bank....


Fri, 01/21/2011 - 11:53 | 893332 wisefool
wisefool's picture

Step 1: Store as much water as possible

Step 2: Poison the well (inflation)

Step 3: Become a savior by rationing out water to the people who used to use the well.

Step 4: Feel like you did God's work.

Fri, 01/21/2011 - 09:53 | 892894 johnnymustardseed
johnnymustardseed's picture

"Units of food and fuel purchased will drop as well, as each one is more expensive, cutting final demand and lessening the upward pressure on commodity prices. "

Starvation....the cure for inflation

Fri, 01/21/2011 - 11:09 | 893139 Terminus C
Terminus C's picture

Starvation also handily deals with the other form of inflation that is causing humanity's problems... overpopulation.

really its a win/win...

Fri, 01/21/2011 - 09:53 | 892895 Cognitive Dissonance
Cognitive Dissonance's picture

Yes. And if I cover my eyes I can't see you either.

Fri, 01/21/2011 - 10:13 | 892931 taraxias
taraxias's picture


Fri, 01/21/2011 - 10:31 | 893012 Temporalist
Temporalist's picture

Peek-a-boo!  Awww who's a cute wittle infwation?  You are!  You are a cute wittle infwation.  Yes you are.

Fri, 01/21/2011 - 10:50 | 893062 Cognitive Dissonance
Cognitive Dissonance's picture

McBaby will never know hunger as long as Americans can afford McFood, regardless of how far McFood drifts from being actual food or how expensive it becomes. Screw paying the mortgage, screw paying the utilities. I'm lovin' it.

And don't forget my fracking McToy.



BTW for those who would like the link to this real McDonald's ad used in India.

Fri, 01/21/2011 - 12:36 | 893467 knukles
knukles's picture

Whatta buncha clowns.

Fri, 01/21/2011 - 11:29 | 893220 Monday1929
Monday1929's picture

The failed banker Dimon has soiled his diaper again. He needs another bailout. NOW.

Fri, 01/21/2011 - 09:55 | 892897 USD-25
USD-25's picture

Oh, ri-i-ight. Unlike the waste case on the wrong side of the tracks, I wake up in the morning and function fine. Therefore, last night's fun isn't going to impact my performance at all.

[I hope this guy knows that he's predicting a minor bloodbath due to margin squeezes.]

Fri, 01/21/2011 - 10:00 | 892908 johnnymustardseed
johnnymustardseed's picture

The FED and their right hand JPM will knock down commodities to prevent food riots here. They have shown their skill in that with silver.

Fri, 01/21/2011 - 10:01 | 892909 alexwest
alexwest's picture

typical idiotic, know nothing way of thinking..

#because the global economy is suffering from excess manufacturing capacity #and a deficit of consumption, history tells us there is little chance that #inflation will be a problem

so basically guy says how inflation happens ' PEOPLE MAKE MORE AND MORE MONEY, then bidding up prices for stuff,, manufacturing capacity is not capable to produce stuff ontime, thus sellers hike up prices and on on on '

LOL.. :)))))))))

what a stupid idiot... HEY asshole describe how HYPER INFLATION HAPPENED IN WEIMAR - i will do ' GOVERMENT PRINTED MONEY TO PAY DEBT (WAR DEBT)'



case closed


Fri, 01/21/2011 - 10:09 | 892924 chrisd
chrisd's picture

Actually what happened in Weimar happened because it was a closed system and there was no place for that money to escape. Same as Zimbabwe. We aren't quite there yet so his analysis is correct. Taking steps to prepare for that are smart, but the odds are so small right now that the US becomes completely independent of other countries and their financing, it probably isn't worth your time.

Your analysis is less effective when you call everyone names (and use emoticons)

Fri, 01/21/2011 - 10:15 | 892940 johnnymustardseed
johnnymustardseed's picture

It could happen the day we lose reserve status and that is on the horizon

Fri, 01/21/2011 - 10:29 | 893004 pton09
pton09's picture

For the first time in my adult life I agree with you.  My guess is around 2012-3. 

Fri, 01/21/2011 - 11:01 | 893119 chrisd
chrisd's picture

It could happen if we lose reserve status, I just don't see that happening. Especially with the question of who would gain reserve status? The BRICs are neither transparent enough nor stable or liquid enough. The Euro can't happen unless stability their increases. A floating system would involve the US currency to an enormous degree, so the chance of hyperinflation then is next to nil.

Fri, 01/21/2011 - 15:00 | 894043 Sean7k
Sean7k's picture

The day global products are not automatically priced in dollars (especially oil) and the dollar is reduced to being used to pay for our exports- there will be a tsunami of excess dollars that come awash our shores and we will pay less and less for them as they diminish the value of the dollars held by Americans. 

Then a price equilibrium will be achieved. 

How that will compare to every other fiat currency will be very interesting. What that will do to derivative contracts and bonds will be even more interesting. However, I suspect we will see a number of currencies competing for dominance, much like the late 1800's, and the dollar will be among them.

The US is still the largest economy in the world by half. We still produce more goods for export than anyone. We still have the ability to project power and guarantee access to markets. None of this will disappear.

Of course, huge displacements and revaluations will turn economic classes topsy turvy and temporarily disrupt normal supply channels- globally as well as domestically. 

The last changeover in reserve currency required two world wars and still, it was a managed affair. Reserve status is the least of our problems. The competition for global commodities and the products that will be built and consumed, the power to demand the purchase of said goods through economic influence and the continuing accumulation of power in political structures that progress from state to region to world and the tyranny that will entail seem much more important IMHO.

Fri, 01/21/2011 - 10:22 | 892966 alexwest
alexwest's picture


you'are an american right..??
lack of any education and knowledge (excl burgers and IPads) is astonishing..

WEAIMAR WAS A GERMANY in 1920x.. EUROPE was open,, you can travel around, built factories around etc etc... US was open in 20xx too,, so
you might know US shipped guns for WW1..

everybody could take reichmarks of 20x, go to Belgim/GB/Holland and exchange for local currencies.. point is nobody in right mind would take them.. there were too much of... trillinos actually...

closed system...


Fri, 01/21/2011 - 10:58 | 893113 chrisd
chrisd's picture

I am American, thanks for letting me know about my education.

As the previous commenter mentioned (the one about losing reserve status), closed system implies we are cut off from outside funding and exchange of our money, not that we are on an island. As long as the US is the most transparent (it is), the most liquid (it is) and the safest (it is), it is hard to envision us becoming closed. So Weimar (note the correct spelling) was a closed system because people refused to exchange their money or accept their money for goods and services. Same with Zimbabwe. Changes can happen overnight, but in reference to the three points I made above, there isn't anyone close right now and we aren't about to lose all three anytime soon.


Fri, 01/21/2011 - 11:03 | 893122 Beam Me Up Scotty
Beam Me Up Scotty's picture

Well, we ARE in a closed system.  Last time I checked, we are all on one planet, there isn't anyone on Mars to export our inflation to.  As soon as other countries decide they dont want our dollars its over.

Fri, 01/21/2011 - 12:43 | 893485 Double down
Double down's picture

I like what you said, but I think the US is closer to be independent on external financing than we think.  In effect that is what QE accomplishes.  The fed can buy everything as long as the dollar remains the reserve currency. 

Fri, 01/21/2011 - 10:23 | 892970 Max Hunter
Max Hunter's picture

Good points... It seems to me every argument against inflation or hyper inflation is based on strict economic data and definitions.

When the SHTF it will not be because of soaring demand it will be due to a confidence loss in our system, plain and simple.. 

America is still the predator, not the prey. But we are weakening every day.  The very moment we transition and become vulnerable the wolves will descend and eat us alive..

Fri, 01/21/2011 - 10:39 | 893038 Temporalist
Temporalist's picture

"The very moment we transition and become vulnerable"

To me that happened when the U.S. became the biggest debtor nation in the history of the world.  It actually happened before the debt as evidenced by the U.S. kowtowing to the Chinese and giving them "favored nation" status while they were committing human rights violations.  Now the U.S. just does it themselves.  The Chinese learned how to borrow from the own credit card from the U.S. and the U.S. learned how repressing their own people no longer matters.  Nice trade off.

Fri, 01/21/2011 - 11:08 | 893135 Max Hunter
Max Hunter's picture

Possibly... I will wait for confirmation from the Bond Market.. It's coming...

Fri, 01/21/2011 - 13:28 | 893668 creviceCaress
creviceCaress's picture

lotsa certainties about what this means if that happens and hyperinflation only happens when deflation couples with the titanium alloy recievers on the third node from pinkelton.....after what we've seen happen in global finace and economies over the last 3 years alone.....maybe these models won't work in forecasting what's down the pipe?....a special breed of black swan genetically engineered by
the overlords of the spectacle to make happen--whatever it is that's gonna happen--happen. it all comes down to how much control do they REALLY have in steering this it really this out of control....or....running on schedule? hhhmmmmmmm? if you can keepyour head whilst those about you are losing thiers

Fri, 01/21/2011 - 10:04 | 892915 mophead
mophead's picture


Please post some articles on state-sponsored stealth devaluation. Money printing is not the only thing causing food prices to rise. TPTB are busy creating artificial shortages:

Fri, 01/21/2011 - 10:41 | 893051 snowball777
snowball777's picture

Sure, the government is responsible for the lack of rainfall and for idiots in the central valley attempting to farm in a goddamn desert.

Fri, 01/21/2011 - 12:23 | 893430 mophead
mophead's picture

Besides watching the video, trying listening to it too, then post your comments.

Fri, 01/21/2011 - 10:05 | 892917 jdrose1985
jdrose1985's picture is going up, doesn't that mean we have inflation?


Fri, 01/21/2011 - 10:06 | 892919 chrisd
chrisd's picture

Price inflation in commodities is not the same type of inflation that occurs from increasing wages. Inflation, from a bottom line perspective, is the marginal utility of a dollar against the marginal utility of a good.

Until there are more people chasing after a limited number of goods because they are making more and more money, on a greater scale we won't have true inflation. What is occuring today is neither persistent nor totally inflationary.

Circumstances today are more similar to 2007/8 with the price of oil than to total inflation seen in the 1970s.

The fed can continue to print money and it will leak into the system, until it doesn't and things at BAC worsen and they have to hold onto that money to plug holes in their balance sheets. Inflation today is not persistent and will subside with the first great crack in the system.

Fri, 01/21/2011 - 10:49 | 893078 snowball777
snowball777's picture

Yup, none of the people pulling these avg hourly earnings are 'chasing' anything...

Some other 'food' for thought...

Fri, 01/21/2011 - 10:10 | 892926 Hughe Crapper
Hughe Crapper's picture

The difference is: Mark-to-Market

Conclusion: a postponed massive deflationary cycle coming up... poofff. #1930-1937

Unless we uncover some alien technology, like anti-gravity or zero point energy source, that spurs the new psychological spurt into a new frontier of civilization...


Fri, 01/21/2011 - 10:23 | 892927 Oh regional Indian
Oh regional Indian's picture

I'll give one good reason deflation in both price and value will take a long time or a big shock coming to India. India's property bubble is huge. It has been supported almost entirely by the boom in IT outsourced jobs over the past 10 years (when RE was at a relative bottom). It is also completely controlled in the main by white-collar criminals and black collar politicians (both being eminently inter-changeable).

The rule makers and the judiciary and the bureaucracy and the criminal element are all hand in glove keeping wage inflation matching aspirational inflation.

Like I said, war or other 9 sigma event, maybe, else, it's sheeple shearing through inflation here.


Fri, 01/21/2011 - 10:47 | 893074 Fred Hayek
Fred Hayek's picture

Interesting.  I didn't know India also had a property bubble.  I think that makes Canada, Australia, China and India that have property bubbles yet to burst unlike the other developed countries.

Fri, 01/21/2011 - 10:14 | 892933 buzzsaw99
buzzsaw99's picture

I made a similar case recently and people hated it. Listen up people, you are not drowning, the proper term is "waterboarding". Every time the bernank tries to trick me into spending more I cut back even further. God damn the pusher man.

Fri, 01/21/2011 - 11:45 | 893292 Monday1929
Monday1929's picture

Like Timmy said- "Why pay taxes?"


Boycott the banks. Boycott the economy.

Fri, 01/21/2011 - 10:15 | 892938 RobotTrader
RobotTrader's picture

Gold and silver getting blowtorched again.

Looks like Taylor is right, no inflation in 2011.

And as I predicted, PIIGS banks like BBVA and STD will be the biggest percentage gainers in 2011.  Both are up 4% in Europe today, up a stunning 8 days in a row.

Fri, 01/21/2011 - 10:19 | 892953 JW n FL
JW n FL's picture

LMFAO! shhhhhhh.... dont tell them the truth again!


Fri, 01/21/2011 - 10:26 | 892982 lieutenantjohnchard
lieutenantjohnchard's picture

hey catfish mouth. i thought you were a gold bull. in your words:

"Now is the time to buy PM stocks, not then.

Nice candle on the XAU today."

y RobotTrader
on Thu, 01/20/2011 - 18:14

so i guess you were a gold bull before you weren't. still waiting for you to tell us the next 5% directional move in a security of your choosing.

Fri, 01/21/2011 - 11:05 | 893126 Orly
Orly's picture

There's a big difference between metals and gold mining stocks.  While gold has ramped, miners have done ought.

Try to expand your horizons, leftenant.

Fri, 01/21/2011 - 11:15 | 893165 lieutenantjohnchard
lieutenantjohnchard's picture

just using his words. and btw if by metals you mean a broad etf such as gdx then it has outperformed goog (the topic of the moment when the catfish mouth brayed) by double in the past few years.

Fri, 01/21/2011 - 10:15 | 892939 fearsomepirate
fearsomepirate's picture

1)  How are rising commodity prices supposed to not affect food prices here?  Does Wonder not have to buy the same wheat that everyone else competes for?  Do I put a different kind of gasoline in my car that doesn't come from petroleum?  In fact, prices on the grocery shelf are already rising.  Some stuff is already up as much as 20% (I noticed yesterday that the 99-cent can of peas is $1.19 at Save-a-Lot, there are websites devoted to this stuff).

2)  Modern economists seem doomed to not learn the lessons of history.  You don't have to have lived through the 1970s to know that it was a period of high inflation and low central bank interest rates.  Not until the Fed *hiked* interest rates did inflation get under control.

3)  Now, it may very well be that the Fed's QE won't offset the collapsing credit market in the USA.  That's why Mises carefully defined inflation as "creation of money for which there is no corresponding demand," not Keynes' immature "rise in the general price level."  If prices dont' fall as fast as they ought in an era of crashing wages, the effect on the average American is exactly the same as if prices were rising faster than wages.  The problem per se isn't whether or not the nominal price of that can of peas went up, it's whether or not I can afford it. Of course, the price of a can of peas *is* going up, so it's a moot point.

Fri, 01/21/2011 - 10:20 | 892956 buzzsaw99
buzzsaw99's picture

If the price of wonder goes up you buy generic, or cut back on eating out. Margins get depressed, small businesses die, more people lose jobs, the economy contracts. If gasoline prices go up then you stop going to the movies. The concept isn't that difficult.

Fri, 01/21/2011 - 10:37 | 893029 pton09
pton09's picture

But the monetary base grows while the economy contracts.  That is the recipe for wicked inflation. 

Fri, 01/21/2011 - 10:41 | 893050 buzzsaw99
buzzsaw99's picture

wicked inflation in yachts. higher prices for lumpen goods can only stick if people pay more. Did food stamps or SS suddenly go up? People are getting laid off still, states are cutting back spending. There will be spikes but unless more money gets into the economy asap then it will wither.

Fri, 01/21/2011 - 12:22 | 893423 fearsomepirate
fearsomepirate's picture

I am interested in your theory that as prices rise, people stop buying food so they can buy yachts.  Is this what happened in the 70s?

Fri, 01/21/2011 - 12:20 | 893421 fearsomepirate
fearsomepirate's picture

Yes, those are some of the effects of inflation.  What's your point?

Fri, 01/21/2011 - 11:31 | 893230 Lndmvr
Lndmvr's picture

Shopping. Crest toothpaste regularly $2.30 on sale today 99 cents Limit 2. Charmin, regularly $7.99, on sale at $5.79, no limit. Deflation on sales days only??

Fri, 01/21/2011 - 12:55 | 893522 Double down
Double down's picture

OK, pick one of these for  firm with no pricing power:

Decrease margins or increasing sales prices while living up to FIFO and the matching principle.   

Fri, 01/21/2011 - 10:16 | 892944 taraxias
taraxias's picture

You mean my household expenses going up nearly 20% last year was an illusion?

Who would've thunk......

Fri, 01/21/2011 - 10:21 | 892959 buzzsaw99
buzzsaw99's picture

Thank you for supporting the Bernanke agenda comrade. Most people don't have an extra 20%. Borrowed out and broke most of them.

Fri, 01/21/2011 - 10:17 | 892947 LePetomane
LePetomane's picture

Have housing prices rebounded?

Has gov't raised taxes to make up for the shortfall in property tax revenue?

Have they laid off anyone?

No. No. And, No.


so, print on.

Fri, 01/21/2011 - 13:33 | 893694 creviceCaress
creviceCaress's picture




i didn't get a harumph out of this guy......







Fri, 01/21/2011 - 10:18 | 892951 MarkS
MarkS's picture

Using 1937 as your base date doesn't fit well at all...

You can't use 1937 as a point for commodity price growth because we were entering a World War that chewed up resources and a rebuilding phase that required even more.

Commodities prices are inversely correlated to the $US.  They aren't just being purchased by producers, they are being purchased buy hedge funds, pensions, and other investment managers as a play against a falling $US and inflation...if we have the global overcapacity that he is talking about (we do, and it is growing) wouldn't that mean that all of the 'new' buyers are just expanding the bubble?

Fri, 01/21/2011 - 10:20 | 892957 Beatscape
Beatscape's picture

Biflation, comrades.

+ Life necessities are up: Food, energy, water, education, healthcare; up. (Bonus: flat screen TVs; down!)

+ Ability to pay is down: Wages, pensions, home "ATM", employment opportunities; down. (Bonus: Equities; up!)

Welcome to the vise-grip economy.



Fri, 01/21/2011 - 10:21 | 892961 ak_khanna
ak_khanna's picture

The main reason why we have inflation is that commodity prices are being driven up by speculator­s armed with cheap money and super fast computers. This is causing a havoc in the lives of rest of the population and pushing them towards poverty as they can no longer afford the basic necessitie­s of life.

Regulators are too slow to react and take ages to identify and take measures to solve the problems.

Total ban on speculatio­n is strictly required all over the world to bring relief to the common man.

The basic mechanism of price discovery (based on demand and supply for actual use) of anything traded on an exchange has been terminally infected by speculator­s having access to unlimited funds and super fast computers for trading leading to volatile price swings. This has been made worse by the launch of ETFs for anything and everything under the sun by the financial community.


Fri, 01/21/2011 - 10:26 | 892985 alexwest
alexwest's picture


##ain reason why we have inflation is that commodity prices are being #driven up

no. REAL CAUSE OF INFLATION IS PRINTING MONEY BY FED to balance federal budget... otherwise GOV would have forced to DOUBLE ALL TAXES AND/OR CUT

INFLATION IN COMMODITIES IS GOOD CAUSE SOME SMART PEOPLE PUT MONEY into something that you cant print by stroke of the pen...


Fri, 01/21/2011 - 10:22 | 892965 goldmiddelfinger
goldmiddelfinger's picture

Gold. Gold will be crushed

Sat, 01/22/2011 - 05:46 | 895459 Hephasteus
Hephasteus's picture

We'll rain on Blythe more than she'll rain on us.

Fri, 01/21/2011 - 10:28 | 892999 gold mining ceo...
gold mining ceos are idiots's picture

People really need to stop the bitching on inflation/deflation. The problem is fraud. Balance sheet fraud at the Federal/State/Corporate level.


Everything else is irrelevant. 

Fri, 01/21/2011 - 11:37 | 893257 anony
anony's picture

What is being bitched about, violent rioting over, and otherwise causing an upheaval in the behavior and emotions of a great many who use the words "inflation" and "deflation", is done so in the wrong context. There is a far more insidious force than what is now accepted in economics as the definition of, "inflation" (deflation). 

We have an educational problem (duh) and an intention by our government to deceive, with the usage of these words. 

Fraud is certainly part of the equation but when the folk (as opposed to thebenbernank and treasury) talk or write about "inflation" or the Cost of Living, what they really mean is RISING PRICES for essentials to survive which they naturally use to define INFLATION.  And those are going up dramatically if not out of sight.

There needs to be another word created to describe the far more important condition of RISING PRICES----against a background of lower or stagnant Wages and salaries---- and that word needs to be woven into the fabric of economics and government speak.   

The government has gotten away with it for far too long to allow it to continue.


Fri, 01/21/2011 - 11:17 | 893039 TruthInSunshine
TruthInSunshine's picture

1st, GF makes some excellent points above, some here have been saying the same thing about the inability of Bernanke to reflate RE/housing prices, as RE/housing is the one asset class with massive carrying costs. You lose, Bernanke, no matter what else you do, and the 'what else you do' is only creating dislocations, distortions, mini-bubbles and more malinvestment in the economy and asset classes.

Now, the one truth this article hammers on is that 'the ultimate cure for higher prices is higher prices.'

Even with the most inflexible of goods & services, nothing solves the mathematical certainty that without enough dollars, euros, yuan, increasing units of goods and services will not be purchased or consumed at specific prices, by increasingly larger segments of the population.

Demand destruction will kick in, even regarding gasoline, food and prescription medication.

I don't pretend to know what the ultimate outcome will look like, but I do know that Americans drove fewer miles and cut back on driving the most in their history (14 billion miles on a per annum basis) when oil was $147/barrel (and this at a time when the economy was 'ggod' and unemployment was low!), I do know that senior citizens (even with Medicare) and other segments of the population are cutting prescription tablets in half or skipping doses all together, I do know that Americans that still have somewhere they need to be are car pooling, taking mass transit or 'strategically planning' motor vehicle trips, and I do know that many people are turning their thermostats waaay down and putting on the triple layer clothing inside their homes this winter.

Anyone who thinks that dollars aren't completely fungible, and that for every extra dollar spent on taxes, utility bills, gasoline or groceries, all businesses selling clothing, furniture, movie tickets, restaurant meals and new cars or homes won't lose that dollar in future revenue, isn't grounding their outlook in reality.

Many will respond by saying there are some things people can't live without. No doubt. With much higher prices, people engage in adaptive behavior, learning to live with less, and in some cases, far less, of even the things that are truly essential. Many will be surprised at how much less of these things are needed than they thought possible.

And the kicker to all of this is that in developed nations, highly dependent on credit/debt expansion to create economic 'growth,' when consumers engage in the kinds of behaviors I've described above, you are then on track to witness a depression, no matter what the central bank does, because money stops circulating, and more jobs get cut as more wages of those still working fall. That loop current is then in place.

Fri, 01/21/2011 - 10:40 | 893048 edmondantes
edmondantes's picture

I believe the entire premise of this deflationist argument put forward above by Gully Foyle is wrong.  The disappearance of 'zombie' money in the manner outlined above (extreme decline in the value of all financial assets) would result in the default of all financial institutions and of the federal government.  This would entail the destruction of paper money, and of all claims on financial assets. In turn this would raise the value of all real assets immensely; particularly and immediately food, but also assets with the ability to produce food.  

In this scenario gold and silver (outside the banking system) would very quickly become the medium of exchange and the store of wealth.  This is why I think many people (at least on ZH) begin to believe it is sensible to hold some gold and silver, and is also why the price of gold and silver have been rising generally versus all forms of paper money.  Once you use 'zombie' money (printed USD) to buy physical gold and silver you effectively have exchanged an asset from one form into another: you have transformed it.  As the supply of zombie money is effectively limitless whereas the supply of gold and silver is by definition limited you have protected yourself in some measure from the infinite expansion in zombie money.     

Implicit in your argument/the deflationist argument is the idea that cash is the asset of safety.  Yet in your scenario of extreme deflation and universal default paper printed by a defaulting entity (the Federal Reserve) would be worthless.  I fail to understand how cash printed by the very entity that is at the centre of the existing 'zombie' monetary system will be of any value in your scenario.   A cash 'deposit' held at a commercial bank would be equally worthless.  They will not be in a position to honour your paper or your deposit, nor will the FDIC or the federal government.  Or if they do honour it (by printing) it will be worth nothing as no one will accept it as a medium of exchange.  

The idea that rising interest rates will short-circuit the present march towards hyperinflation seems misplaced.  The fact is that the moneyprinters can and do control interest rates because there is no constraint on the amount they can or will print.  The bond market is not a free market.  If they have to buy all bonds issued across the entire curve they will do so; they are almost there already.  This is particularly the case given the huge inverse pyramid of leverage that exists - it is precisely the attempt to avert total destruction of their privileged place in the 'zombie' system that will drive them to greater and greater moneyprinting.  Naturally pursued unilaterally this would usually have some negative impact on the USD (which would be inflationary) though the other moneyprinters in other regions are doing their best to keep up with the destruction of the fiat money - this is another reason why people are flying to gold and silver: they are alternative currencies that cannot be printed and can be held outside the existing monetary system.  

The system is so fragile and overleveraged and the USG is already in a financial death spiral (unable to service the vast amount of debt on and off balance sheet plus the vast balance sheets of the HLFIs at any interest rate other than zero) that they must go on.  If they cease to print  or are forced to cease printing and deflate (somewhat as you describe) the existing financial system will collapse very quickly and then hyperinflation will indeed set in almost immediately. 

Fri, 01/21/2011 - 11:33 | 893227 web bot
web bot's picture

Good points.

The COMEX does not represent the market for PMs. As a result, pricing is nothing more than an accounting fiction. Its starting to become obvious that the market has been manipulated for the last 40 years... in order to ensure that PMs do not become de facto currencies. Interestingly enought, the USD has lost 90% of its value in the last 40 years... due to inflation. When you consider this, it is not so conspiratorial after all.

At some point in time a default is coming... and it will come from the fringe. Who had ever heard of CDOs in the summer of 2007?


Fri, 01/21/2011 - 12:12 | 893396 centerline
centerline's picture

I like to look at it from a social standpoint.  Should the printing presses be silenced for any reason and the pain of deflation kicks into overdrive - there will be a sudden and unstoppable cry by most of society to turn the printing presses back on.  That cry will be through the politicians to the FED, setting the stage for the final shift of this fiat death dance from one that is financial in nature and driven by the FED to one that is political in nature and driven by the people themselves and the politicians in Washington.


Fri, 01/21/2011 - 14:43 | 893996 StychoKiller
StychoKiller's picture

Pain?  Pain for whom?

Fri, 01/21/2011 - 10:42 | 893057 Miramanee
Miramanee's picture

DEFLATION...BUT, rising energy and food costs that slowly hammer a shrinking middle class into submission:

Fri, 01/21/2011 - 10:43 | 893058 Haole
Haole's picture

Isn't most of any "zombie money" chasing paper gold and silver out there?  Does anyone care what the value of paper gold is in zombie money?

Fri, 01/21/2011 - 12:01 | 893090 Temporalist
Temporalist's picture

So the Bernank won't drop money from helicopters as he said he would to fight deflation?  That seems to point to hyperinflation - nobody spending yet the base money supply increasing endlessly.  The divide between the banksters wealth continuing to grow and the majority of the population living on food stamps and welfare is not going to help the economy by allowing the uber-wealthy to purchase Porsche's and Blohm + Voss yachts. 

Maybe some people think the Ben Bernank won't print endlessly or they hope he's out of his chair by then.  And the govt.'s won't raise taxes in an attempt to increase lost revenue?  Ever hear of the phrase squeezing blood from a rock?  Just extend and pretend a bit longer.

Fri, 01/21/2011 - 11:26 | 893204 web bot
web bot's picture

I agree... from a microeconomic point of view, it sounds all nice and sensible.

What his sterile laboratory analysis does not take into account however is that in a few short years, over 50% of every tax dollar is going to pay interest on government issued debt. The majority of government debt turns over every 3 to 4 years... at some point in time, interest rates are going to rise and we'll be approaching that 50% number quickly.

He also fails to consider the fact that the deficit and debt are unsustainable and that at some point in time, we are looking at a default. When this happens, forget the economic thinking of inflation - what you have is hyperinflation with the velocity of money driving global liquidity into PMs and anything that can resemble a storehouse of value.

This can't go on forever. If you think this is rhetoric, go back to 2007 and think about what was being said at the time by these alchemists of finance regarding the US housing market.


Fri, 01/21/2011 - 12:02 | 893369 SDRII
SDRII's picture

Yest'd the repubs touted $2.5T in savings over 10 yrs or $350B or so a yr. Even assuming some incrmeental tax revenue still looking at $500B or so plus deficits with a growing demographic buldge. The only way out for the US is default. What the price of that default will be in terms of mentary regime is far more interesting than arguing semantics about "inflation"

Fri, 01/21/2011 - 13:41 | 893732 DaddyO
DaddyO's picture


If history is any gauge, gov't's don't default, they inflate.


Fri, 01/21/2011 - 11:40 | 893262 DaddyO
DaddyO's picture


There are immutable laws established in the universe that can't be ignored!

When an imbalance occurs, an opposing force tries to fill the void.

When a restriction occurs, pressure builds.

The pressure will build to the point that it overcomes the restriction, either through a controlled release or a catastrophic failure.

Vacuums are temporary!

Currencies are not immune to the forces of nature, they must comply.

It is then, only a question of when.

Equilibrium, bitchez!


Fri, 01/21/2011 - 12:54 | 893520 sandorgb
sandorgb's picture

"Labor's pricing power has been declining since the 1970's. In the US the number of hours necessary to buy a car bottomed in 1972 and it now takes about twice as long for the average worker to buy the average car."

Regardless of the policies pursued, the real standard of living in the USA goes down, and goes up in the strongest emerging nations. The question of whether the overall USD price level will rise or fall, the trader's question, is largely a political calculation. The odds are strongly on the side of a misguided US attempt to inflate/default. Once the rollover costs become too high, you have either drip-feed devaluation (aka permanent slavery) or bankruptcy.  Given the global reaction to QE2, I don't think the Fed will be able to politically pursue further QE. A showdown as to who is driving the bus is imminent. It's quite possible the deflation is resisted for so long that it morphs into a threatened hyperinflation (aka capital flight), which will force a debt for equity swap and a new US dollar series.

A lot depends on the timeline of the race to the bottom. If Europe unravels first, we will have 2008 redux (aka double-dip) and another USD surge, blasting everyone's portfolio, until the remaining creditors sweep their chips off the table and take them to another casino. At which point the American casino chips will be discounted, USD prices rise.

Gold/oil lead the way, technical breakdown imminent points to sharply lower prices in the coming months as the developing world tightens and the developed world cannot sustain credit expansion. Remember that USD casino chips are still money good today and still work to extinguish debt in the global casino, for now.


Fri, 01/21/2011 - 13:07 | 893562 daybyday
daybyday's picture

oh dear but my Goldline broker said i need more gold he also said to me when he was mortgage broker back in 06 that housing could never go stop for yellow stuff on the elevator down 1317.0.

Fri, 01/21/2011 - 14:00 | 893825 TheAkashicRecord
TheAkashicRecord's picture

My opinion is that prices will increase in things that are not reliant upon credit, whereas things that are, prices will decrease.  This isn't good because typically it will cause asset prices to decrease and consumables prices to increase.  

Double whammy, your wealth goes down while the things you consume become more expensive on an absolute and relative basis.  

Fri, 01/21/2011 - 14:13 | 893890 Samuel Morales Jr.
Samuel Morales Jr.'s picture

I agree with the article that tries to make a distinction of different types of inflation. 1970's, you had a better economy that could better asorb the inflation of money, today mixing a economic deflationary environment with inflationary money can be toxic thing, because increasing money doesn't increase values. For example, housing bubble popped, and is destined for even more correction to adjust to it's long term mean, you can have bailouts, government guarantees, etc, but fact is, housing is not the investment mania that is once was short of government intervention. There is a glut of houses, or over production of houses, but to say there is general overproduction is not correct. Sure oversupply of houses, but is there oversupply of everything? Not exactly. Considering the US runs a trade deficit, and the rest of the world runs a surplus. There is always demand with money. You get welfare, food stamps, unemployment, medicaid, etc, and consumption is never a problem with government, because it can redistribute the wealth quite easily, but the question is supply. The lack of supply, and the imbalance of supply, like the article says, consumers will spend more money food, and enery, and less on other things. The same could of been said for housing, which was oversupply, which effected other supplies, so when housing popped, the money invested into it, vanished along with it, which was money could of been used for other types of supply. In a free market, supply creates demand. In barter, you trading directly for other goods, however with government, realistically you can have plenty of demand. Soviet Union was example. Without supply demand is worthless. You can beg for some food in your belly, but without actually growing it, or producing it, it means nothing.

Fri, 01/21/2011 - 23:30 | 895143 EZYJET PILOT
EZYJET PILOT's picture

I don't agree with this article. It's giving the fed carte blanche to continue in the same vein. What is acceptable in exporting inflation to countries least able to withstand the affects? How can it not be inflation when the feds balance sheet has expanded by, what is it, 2 trillion? I find it unbelievable that any american can deny the presence of price rises, sure your house is worth less but most other things are soaring in price, just look at the recent article on Tiffany goods increasing in cost. I believe we are over intellectualizing the issue, we seem to be so keen to invent new categorizations to problems we face, stagflation, biflation, call it what you will but the truth is simple and is staring us in the face. A continual and concerted effort by the fed to print and increase the debt will eventually lead to a default, the Fed is wrong. It annoys me in this day and age how educated people exist in a bubble of denial, and constantly desire to normalize the unthinkable. It isn't cool to be on the side of corruption, it isn't clever, you're not suddenly a loser because you disagree with the herd in that no, things aren't right, things aren't acceptable.…-death

Sat, 01/22/2011 - 07:47 | 895526 HedgeYourself
HedgeYourself's picture

1st, as I can’t post pictures, take a look on the following three graphs from “trusted” source:

M2 -[1][id]=M2&s[1][range]=5yrs

Excess reserves -[1][id]=EXCRESNS&s[1][range]=5yrs

M2 Velocity -[1][id]=M2V&s[1][range]=5yrs


So, while money stock is expanded by fed actions, it gets promptly deposited back to fed, which is indicated by excess reserves graph. If you substract the excess reserves delta (mid 2008-2011) which is 1T$, M2 delta (mid 2008 – 2011), also roughly 1T$, you’ll end up with zero. At the same time, M2 velocity has dropped like a rock. Seems deflationary ? In contrast, if you see excess reserves rapidly dropping close to zero and velocity pick up, then one would expect some real and present danger for inflation… It seems, if you believe the numbers that the money creation has been just enough to patch up the destroyed money due to debt defaults etc. bad asset related destructive effects, and the only new money leaking to real economy is interest on the excess reserves, which is .25% - . This would translate to  mere 2.5B$ on 1T$... even multiplied by 10x, it’s still just 25B$... peanuts on the larger scheme of things. Also, M2 (from 1st graph) growth seems to be exactly spot on with its long term growth rate trend from pre-crisis period (way past the 5 years on above referenced graph) – this doesn’t exactly seem to support great money creation will kill us through inflation theory, as it is just enough to patch over the money that was destroyed (i.e. bad debts that were not paid back).


Maybe something like this is currently happening in semi-real economy:


1.)    Sovereigns are perceived to be creating (a lot more than warranted by underlying economic growth) of new money

2.)    Folks who understand the consequences of the money creation process know that it is, or at least will be very inflationary. Even more so, as for every unit of money created, fractional reserve banking has capability to multiply the created base money by roughly factor of 10. Surely, very inflationary. All this is assuming that the created money actually gets in circulation, and gets multiplied.

3.)    As a result of #2, large amounts of investable money seeks inflation hedge and finds it in commodities (among other things)

4.)    Commodity prices go up, which is “commodity price inflation” – i.e. we now have “inflation”, as expected… while what we have is increase in price

5.)    As commodity prices go up, it translates to real economy input costs going up (irrespective of the demand situation, but effect is amplified when there is at the same time high demand for the given commodity)

6.)    With the industry input costs going up, these will be eventually passed through to output goods/services prices, which causes increase on pricing of nearly everything – again “inflation” !

7.)    Whoever takes a look on prices of commodities and goods observes “high inflation rate” - just as expected


So, mere money creation process, irrespective of the whether new base money stays put with zero velocity (e.g. kept in locked vault or more likely in computers of money controlling body), and whether banks actually leak (=lend) any of it out to real economy causes expectation on “inflation”, which translates to price increases through “inflation expectation” hedging process.


What is working it’s way through the system is the “patch up money” that was created to replace the money that should have been destroyed. If this had not been done, money stock would have actually been decreasing in recent past. That gets into process above in step #3 (as new money), and is one key cause feeding the price increases on nearly everything – replacement money is not tied to original bad dept anymore, so it is free to go find it’s way into something else. This “else” presently includes commodities and apparently stock market, among other things.


If the above is actually true, then we are just experiencing a formation of commodity bubble (and supposedly same in stocks). In the absence of great deal of real demand-driven price increase (or other real-economy based factors), one would expect that these bubbles will also burst - someday.  When that day comes, the question is what the response will be next time – is the money allowed to be destroyed, or will the losses be filled and new replacement bubble formed ? From the recent history, I would not think that the outcome is anything but more of the same.


RFC – what are all the things that I got wrong here ? What am I missing ? Better explanations ?


Sat, 01/22/2011 - 11:39 | 895661 EZYJET PILOT
EZYJET PILOT's picture

You're forgetting one major thing there, speculation. Remember this money was never designed to find it's way into the street, it's gone to the banks, hence job done. Now they are wreaking havoc. I disagree with the M2 thing, see below.

Sat, 01/22/2011 - 11:56 | 895699 HedgeYourself
HedgeYourself's picture

Thanks for comment. I had the same M2 chart (just last 5y) on my top links. I was only saying that the rate of the overall M2 increase is not more than it has been historically, even if it had a temporarily higher rate of increase on mid 2008. Further, about equivalent amount of M2 increase from mid 08 is back in fed custody in excess reserves.

And, I do agree that there is speculation - but I was trying to argue this is driven by the money creation that was used to fill the hole on money stock that would have gotten there had fed not supplied money to cover the back losses.

Overall M2 is not increasing at the rate that is larger than it has historically been, which would be a sign of "greatly excessive" money creation -- in fact, the rate of increase has been decreasing on both broader money stock measures M2 and M3 (if you believe M3 continuation here): 

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