Inflation or Deflation?

After a night of heavy drinking in the pub…and pious reflection in our hotel room…we woke up worried. What if our friend Hugh Hendry is right? Heck…what if WE’RE right?

The most critical question an investor faces today is whether he wants to smash up on the rocks of deflation…or run aground on the hard place of inflation. Posed the question – inflation or deflation? – we have always answered ‘yes.’ We will have both. But it is gradually occurring to us that we will have both more abundantly than we realized. As Hugh reminded us: we know of no case where quantitative easing has actually worked. It seems to work only where it is applied to excess – where the results are catastrophic hyperinflation.

The feds are more incompetent than even we suspected. They are trying to cause mild inflation – say, 4%…maybe 6%…even 8%. But they aren’t doing a very good job of it. Their efforts are too hesitant…they’re too worried about what the anti-inflation hawks will say…and about what the bond vigilantes will do. “What if the Chinese dump their Treasuries?” Yikes, that is too awful to contemplate. “Better go easy on that quantitative easing.”

The Chinese…unhampered by bond vigilantes [they are the bond vigilantes] or good sense…are increasing their own money supply three times faster than the United States.

Our Feds are trapped between the same rock and the same hard place as the rest of us. Either they run into the rocks of hyperinflation…or into the hard place of deflation. Just like Japan’s central bankers and finance ministers. They COULD cause inflation…but the price of it is too high. So, they take baby steps…boosting the money supply too little to offset the natural deflation of a major correction.

Of course, this is what makes us fear hyperinflation too. There doesn’t seem to be any safe channel between Sylla and Charybdis. If they are going to cause inflation…they have to really inflate the money supply. Not by 9% a year…but maybe by 900%. We don’t know what it will take; neither do they. All we know is that what they are doing now is not working. Prices are falling, not rising. Bond prices are rising – indicating that the vigilantes don’t think inflation is a problem. And the foreigners – notably, the Chinese – are still ADDING to their supplies of US Treasury debt.

So, dear reader, what should you do? Inflation could take much longer to arrive than most people think. A dull, sinking, dreary economy – like the weather in Ireland today – could be with us for years. The dollar could go up…gold could go down…for many moons.

Are you prepared to wait it out? We will leave you to think about that….


We’re still troubled by Hugh’s comments. The inflation narrative is “too easy to articulate,” he says. Too many people see it coming.

“The market clearly is not worried about inflation right now,” says colleague Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.30% as of last Friday. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.”

Many years ago, we looked at the danger of a “Japan-like slump.” We were early. We’re facing the sushi now. Falling prices. Big output gap. Rising unemployment. On again, off again deflation.

When we considered the risk a few years ago, we came to the conclusion that the United States couldn’t afford to wait it out the way the Japanese have. We have too many people who owe too much money to too many wobbly creditors.

But now we’re in it. The feds are propping up the wobbly creditors just like they did in Japan. The banks have gotten trillions in loans and guarantees.

The feds have been trying to prop up households too. They recently approved 125% mortgage refinancing by Fannie and Freddie. In other words, they now officially condone…and finance…underwater homeowners. If your house is only worth $200,000…and you owe $250,000…the feds will refinance your mortgage in full. No need to sell and take the loss. No need to let the banks
foreclose. No need to face reality. Now…you can just stay underwater – indefinitely.

The feds are preparing to keep the whole economy on life support – with oxygen provided by quantitative easing. Eventually, of course, they’ll run out of gas. But that could be far in the future…

Government deficits are getting worse and worse. Tax receipts are falling. The US deficit for June came to $94 billion…a new record. And the budget deficit has topped $1 trillion for the first time ever. This is also exactly what the Japanese did. They ran the biggest deficits in history. And still the yen went up!

As we keep saying…inflation is no sure thing, at least not in the short-run. But Chris Mayer believes that “the problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913. That’s a pretty darn good job. Other countries have been even more thorough.”

It takes a determined and suicidal central bank to pull off hyperinflation. Like the Central Bank of Zimbabwe, for example.

Until tomorrow,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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13 Comments on "Inflation or Deflation?"

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Hey Bill, why not do some research and find out exactly how the Central Bank of Zimbabwe pulled off hyperinflation? maybe you’ll work it out.

Then share it with us.


This is the best article I’ve read so far that weighs up the likelihood of Deflation or Inflation occurring.

Stephen Johnston
What is with you inflation worshipers corny absurb comments about Zimbabwe! Lets get some facts right not delusional thinking, no evidence of inflation and America is nowhere close to Zimbabwe problems. Zimbabwe is a small in land country with no deep harbours for export. Zimbabwe is surrounded by unstable and dangerous neighbours. Rule of law and property rights are not enforce. White productive farmers are kill out of envy. Farm land that is productive has been raped. Zimbabwe currency is not the reserve currency of the world. Zimbabwe does not have a large liquid bond market trade as a major… Read more »
FYI guys, Zimbabwe is referred to as the most recent country that has hyperinflated. There are plenty of other countries who have suffered hyperinflation in the past. Zimbabwe is often a good example because it counters the “those things happened in the past, it couldn’t happen today” argument. Stephen Johnson makes some good points about the differences between Zimbabwe and the US. He also completely misses the point. “Zimbabwe is a small in land country with no deep harbours for export.” – okay, so that makes it ripe for hyperinflation? How about a relatively isolated continental country like the US… Read more »

I agree Pete. Without war the US still have more reasons to print money than any country has ever had. In any case they do have great potential for expenditure on war also. Money printing to service deficit spending was the most potent cause behind Zimbabwean hyperinflation.

The age old saying of “the bigger they are, the harder they fall” comes into effect. Zimbabwe is surrounded by unstable and dangerous neighbours. – The US isnt? sure they may not be direct neighbours, but there are plenty out there. (Zimbabwe)Farm land that is productive has been raped..- not yet, but if unemployement gets worse, revisit this topic. Zimbabwe currency is not the reserve currency of the world.- China, Russia etc are already pushing to change the reserve currency. Zimbabwe does not have a large liquid bond market trade as a major currency.- makes no difference if it isnt… Read more »
Ned S
Three oft cited cases of hyperinflation are Zimbabwe, Russia and the Weimar Republic. Zimbabwe apparently chucked out a lot of its people who had genuine business skills so that country was a sitting shot to see its GDP collapse. And I seem to recall it was even operating under some trade embargoes? Russia had proactively killed off the capitalist mindset of its people and the entrepenurial nature of its business structures over many years – So possibly had similar problems to Zimbabwe in that regard. And had seen its “empire” disintegrate. So had lost a huge proportion of the lands… Read more »
Ned S

Pity I can’t expect similar results from wagging my finger at Mr Rudd – While “mild inflation – say, 4%…maybe 6%…even 8%” – Over a decade perhaps, may very well be good for digging Oz debtors out of the hole, I really can’t see it being at all good for me.


The US is a special case because it has such high living standards and still calls the shots militarily, and the kinds of people who would set up a country to go bust through hyperinflation don’t live outside the US, they live IN it. So, numerical hyperinflation or deflation is no biggie in the short term, because there is room to adapt, and big money still resides in the US, to a large extent. That’s all according to my nose, anyway.

Greg Atkinson
I just wish DR and Bill Bonner would read up a little more about the Japanese economy before making strange comparisons between what the U.S is facing now and what happened in Japan after the bubble burst. The U.S is not facing a Japan style slump and by the way DR also predicted a global financial meltdown, hyper inflation, a depression and a deflationary spiral so pretty much all doom scenarios have been covered. The U.S. is in a recession…a very nasty recession but a recession nonetheless. Recessions tend to be associated with rising unemployment, falling industrial output, a drop… Read more »
So why did the USA have inflation in the late 1970’s that required Volcker to raise interest rates so high that it caused another recession that I understand reverberated around the world – was there any similarities in core economic conditions to USA then and now – massive increase in credit/ money supply, oil price increases etc. So if inflation does go up to 8% what will be the economic forecasts/ commentary be at this time = going to 10 – 15% and what will the the Feds response be expected to be – given I would understand everyone will… Read more »
Ned S

rag – The deficit funding of the Vietnam war and the oil crises of the 1970s seem to get most of the blame for the high US inflation of the time.

So Iraqi, Afganistan – oil at $70 – massive government spending = change that to Vietnam, oil in the $20’s [guessing] and massive government spending …..assume means inflation/ stagflation in the 2010-2012 period – maybe not Japan from 1990, not the 1930’s or 1922, not 1979- 1981, but it will be 2010-2012 and in itself an experience that will be written up in the history books and talked about like the 1930’s etc whatever the outcome it isnt going to be the party we have had for the past 10 years – governments have squandered the opportunity to build infrastructure… Read more »
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