The Inflation/Deflation Debate is Hot

The inflation/deflation debate is hot… It crackles and pops like a
pine fire. But it gives off little helpful light. Abe Lincoln may have
read by the light of an open fire. But when tried it, we singed our
eyebrows. It made us suspicious of Old Abe; maybe he wasn’t quite as
truthful as he pretended to be. Later, we realized he was a mountebank.
But that’s another story…

Today, we light a candle and try to interpret the shadows on the

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the
dollar continue to go down? Or will it prove to be a safe haven
currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says
recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to
ease themselves out of their interventions. But what would the economy
look like after they stopped meddling? Just look at auto sales. People
bought cars when the feds bribed them to do so. When the bribes
stopped, so did car sales. Now, the clunker program has ended and
spiders are busy building their webs in showrooms again. Sales fell 38%
from August to September…to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According
to an estimate we reported yesterday, 350,000 new house sales since
January were assisted by federal intervention – about 80% of the total.
What will happen when this program ends in November? Hey…let’s
guess…uh…housing sales will fall, right?

And speculators are worried about what will happen when the feds stop
their intervention in the financial industry, scheduled for December.
Thanks to taxpayer money, the bankers were spared the consequences of
their own stupidity. Instead, taxpayers will pay for their mistakes. No
one is particularly upset about it. The taxpayers don’t know what is
going on. And bankers are happy to continue living in the style to
which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the
world’s largest bank.

“Jiang, chairman of Industrial and Commercial Bank of China, made just
$234,700 in 2008. That’s less than 2 percent of the $19.6 million
awarded to Jamie Dimon, chief executive of the world’s fourth-largest
bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs
of the world’s top banks. The compensation of the CEOs of the largest
US banks towers above what’s paid to banking chiefs in other parts of
the world, according to a Reuters analysis of pay at the 18 biggest
banks by market value.

“The United States is home to four of the nine largest banks in the
world – JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup
Inc. It is also home to four of the six most handsomely rewarded bank

“China, for example, boasts three of the world’s four biggest banks,
yet the leaders of those banks – Industrial and Commercial Bank of
China, China Construction Bank Corp and Bank of China – are among the
lowest paid of those surveyed by Reuters. The chairman and the
president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant
wages, that’s their business. A pox on all of them. But in come the
feds…and now we’re all paying the price. And if the program ends in
December, as scheduled, we’ll get to see how far the economy without
taxpayers’ money in the gas tank. Let’s see…it comes to a complete

But no matter how malign and imbecilic the feds are, the public is
rooting for them. People think Bernanke has avoided a ‘Second Great
Depression,’ and that the government has rescued the economy. Now they
see nothing but clear highway ahead…perhaps with a little bump from
time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no
precedent. Never before has a major central bank reacted so recklessly
to a market correction. Never before has the monetary based exploded so
violently. Never before have so many people with so many bills to pay
had to face such a downturn.

But amid all the confusion, uncertainty and noise…your editor is
calmly, cheerfully and confidently awaiting a depression. Yes, dear
reader, we don’t know what markets will do. We don’t know how much gold
will sell for next year…or what the actual GDP will be. But when we
look at the shadows…we have a strong hunch that we are entering a
depression…and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people
selling apples on the street corners. This is a depression a la 21st
century. A depression with iPhones and Twitter. This is NOT your
grandfather’s depression. Keep reading…

It’s not your grandfather’s depression, but it has many elements that
your grandfather would recognize. This from David Rosenberg:

“Frugality theme is secular, not just cyclical.”

With so much noise…and so many distortions…it’s hard to tell what
is really going on…and impossible to know how the markets will react.
Still, there are some patterns that make sense. After a long period of
credit growth, credit is now shrinking. At least in the private sector.
And that is not likely to change. Well, it’s not likely to change
unless the Fed goes nuclear. If they push the hyperinflation button,
the whole picture changes radically and immediately. But that’s not
likely to happen any time soon…so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is
cutting back. Despite the odd shadow shapes on the wall, that means a
slowdown in hiring, business revenues and real prices…and tax

New York says its budget deficit will grow to $3 billion. And over on
the sunny West Coast, California is selling $8.8 billion in notes to
try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit
a new record. And The Wall Street Journal says that holiday jobs in the
retail sector are likely to be scarce.

Not to mention the wave of mortgage loan defaults that is headed our
way – and is already in progress.

Another thing you’d expect is a decline in America’s relative economic
power and political influence. Richard Duncan, along with your editor,
has been following the story. Bloomberg reports:

“US budget deficits will continue to pile up in the next decade,
eventually reaching an unsustainable level that may result in an
economic collapse, according to Richard Duncan, author of The Dollar

“The US has little chance of resolving its deteriorating financial
position because the manufacturing industry continues to shrink,
leaving the nation with few goods to export, said Duncan, now at
Singapore-based Blackhorse Asset Management.

“In The Dollar Crisis, first published in 2003, Duncan argued that
persistent current account deficits by the US were creating an
unsustainable boom in global credit that was destined to break down,
resulting in a worldwide recession.

“‘The bad news is at the end of a 10-year period we’re still not going
to have fixed the problem,’ Duncan said in an interview in Hong Kong
yesterday. ‘Eventually it will lead to high rates of inflation well
down the line and really destabilize things to the point where there
may be irreparable damage. A kind of ‘Fall of Rome’ scenario.'”

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while
combined shortfalls are forecast to total $9.05 trillion in the next 10
years, according to projections from the nonpartisan Congressional
Budget Office.

“The US has run a current account deficit every year since 1982 except
one, with a peak of $788 billion in 2006. Foreign purchases of US debt
has propped up the dollar and allowed a credit-fueled spending boom by
the nation’s consumers, according to Duncan.

“US workers are now likely to face declining wages and that may create
a political backlash against free-trade policies, he said. The nation’s
jobless rate jumped to a 26-year high of 9.7 percent in August, while
wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable
future, it won’t be long before Americans start voting for
protectionism,” Duncan said. “That’s going to be bad because
protectionism will mean world trade will diminish and will overall
reduce global prosperity.”

Once the US debt burden becomes too large and the government can no
longer sell debt to the public the Federal Reserve will likely step in
and monetize it, resulting in high levels of inflation, he concluded.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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12 Comments on "The Inflation/Deflation Debate is Hot"

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Charles  Norville
Dedicated to the 1 Million dollar man, our wonderful World’s Statesman Mr “Rude” (aka Mr Rudd): Capital grows with inflated assets, the suggestion here is, what about deflation when assets stall, cash stops flowing and there is no jobs growth in the manufacturing things of worth?……can we manufacture things with more information and intelligence within via increasing the skills of our work force? If the ratio of manufacturing to service is 1:5 (SUSTAINABLE GROWTH)can be increased to say 1:250 (SUSTAINABLE GROWTH)with new technology and informative workforce, we still need land to feed everyone or maybe we develop vertical farming in… Read more »
Charles, If I could understand your English and your eventual point, I’d consider recommending your post. Markets rule ? Maybe a worthwhile motto but unfortunately they are run by and on behalf of humans. It is human nature that causes bubbles, and corrections. Donwturns are worse because of human activities that are nothing to do with the actual business cycle but everything to do with greed, carelessness, and fear. So yes, maybe markets do rule, but unfortunately human nature believes it can rule the markets, quite frequently mistakenly. For investing success surely it equates to understanding more of human nature… Read more »
Charles  Norville
Agreed Joe, and greed is not good, the point that should be stated is that markets are just a social invention and have been screwed up, I think we all know that its greed that drove the markets – Govts at their peril are not trying to influence the markets in a positive way, say direct more environmental processes….we should have steered well away from petrol driven vehicles long ago but its the petro-money that control Govts. I’m sorry about my nomenclature: I could just use some straight forward egs: If you have 6 people on a farm and 1… Read more »
F Bastiat

Joe, bubbles are caused by government intervention, not by free-markets. I’m afraid you are in the wrong website.

And yes greed is not good. And you know what ? Greed is the main force that drives politicians and all the other parasites who ‘work’ for the government.


There is nothing wrong with greed, as long as it is balanced by fear.

Almost every day the system cash position of the AFI’s is negative, that is the banks cannot meet their liabilities.

But why worry when the RBA will provide the necessary liquidity? Where does the RBA get its liquidity? Why, it draws cheques on the AUD accounts of the people. Suckers.


I wonder if your statement “There is nothing wrong with greed, as long as it is balanced by fear.” is accurate.

For instance, in a speculative bubble you could say that the greed for more profits may actually be accelerated by the fear of missing out (eg, property bubble).

Perhaps a better idea is greed coupled with non-emotive risk management.

Lachlan Scanlan
Fear is the real culprit. Two types of fear are manifesting at simultaneously. Traders begin to experience anxiety as they imagine how they’ll feel left out of the winners circle. They are also fearful about how they’ll feel losing money. Regardless of its root, all fear clouds judgment and disrupts thought processes which leads to the trader making a snap decision absent the analyses of risk etc (like you say above Pete). Over a period of time and often quickly this always results in losses. Sometimes the trader learns from this and becomes a success. For the private citizen as… Read more »

The ‘fear of missing out’ on the property bubble is actually greed Pete. I meant the fear of losing your money.

Only the fear of losing your money will balance the greed of ‘missing out’ on making money.

Ned S
Fiat currency is of no real value except as a transitory item to exchange for goods and services at whatever value those who print it decide it is worth today. (Which is to say it is NOT a store of wealth.) But commodities and useable land are. Which is why the likes of Buffet reckon Cash is not a good long term investment of course – Got me tricked how government EVER encourages any dill to put any money into their banks to prop up the fractional reserve banking system – But there you have it; There is “one” born… Read more »
Biker Pete, Vancouver, B.C., Canada
Biker Pete, Vancouver, B.C., Canada
Greed is not good. Fear is not good. But if you choose to come into the playground, you’d better be damned sure that these two human traits dominate all forms of money games. And, as we’ve all learned lately, there are very few rules. So often we read here that an individual’s choice of a(ny) asset class is the ‘ethical’ choice. There are few such moral precepts at work. All of us can argue at length on that of course: “My investment provides quality accommodation!”; “My shares help build companies!”; “My cash helps banks lend others money!”; “My super is… Read more »
Ned S

As a far, far younger and even more naive man Biker, I remember the thought flicking through my head that stock markets were absolutely appalling because they rejoiced (went up) when people were losing their jobs – Which would have made investing in housing “nice” because that market was at least “moral” enough to reflect people’s misery by going down when they lost their jobs – But I don’t think in those terms anymore.

Biker Pete, Vancouver, B.C., Canada
Biker Pete, Vancouver, B.C., Canada
Ned, I think it’s a _financial_ mistake to ascribe any morality or ethical position to any particular asset _class._ It’s as emotive a position as me buying winery shares because I very much like a particular winery’s products.* Yet, accused of greed, we can all defend our particular favourite asset class! :) It’s laughable for any of us to accuse any other of fear. We know that fear _thrives_ in all asset classes… and these are, indeed, shaky times! * As a far, far younger and more naive man, Ned, I made that very mistake… and it cost me plenty…!… Read more »
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