Monday, April 11, 2011

The Inflation- Deflation Debate.

I am not the brightest bulb in the room nor an I connected up the ying yang via 'expert networks' as so many sabbaticalled parking lot valets (re: hedge funders like Rajaratnam) are on Wall St. One thing I am is aware of the obvious and as such have not minced words about stating what I believe is occurring around us.

Regular readers know full well what I think about master of the universe David Tepper and his 'investing is easy' school of thought. Yes economy gets better stocks go up, economy sours Fed steps in and pulls its levers (QE 1,2,3,4...) and presto stocks go up. Yes the laws of physics, not to mention the capital markets, cease to exist when you either have an Ivy league MBA or run massive amounts of other's money and keep all the crumbs.

One of my overall concerns has been what a bond market blowup (re:failed auction or worse default) would entail. The other concern I have harbored has been one that my friend Charles Hugh Smith highlights today. The U.S. dollar.

Full disclosure Charles blog Of Two Minds is a daily must read of mine. For those that have not done so you should pick up a copy of his book Survival + Structuring Prosperity for Yourself and the Nation, as it is well worth the effort. Well today Charles has an interesting piece out The Fed's Most Dangerous Game: Checkmate.

Charles, like others that I really enjoy reading like Mike Panzner of Financial Armageddon and his 2 hugely successful books Financial Armageddon and When Giants Fall, doesn't try to baffle you with bullsh#$. I realize this is obviously what many want but tragically what so few on Wall St., and Washington for that matter offer up.

Having said all this Charles treatise regarding the dollar is;

"The Fed can only choose the least-worst option now: either destroy the real economy by sinking the dollar below support and unleashing the Inflation Monster, or abandon the "risk trade" stock market rally."

This idea is something I have been chewing on for some time. You see I am a deflationist. Many cannot comprehend deflation because inflation is all they have known and experienced.
As my grandfather used to say and some other very smart men 'old hands' have shared with me, "those that know and understand deflation are all now dead".

I ask myself, Is deflation bad?


It results in lower prices.
It rewards savers.
It penalizes debtors or borrowers.
It rewards those with the cash last as opposed to inflation which rewards those who have it first.

I ask you to find an example globally where deflation caused a poplar uprising or a revolution.
Don't worry I'll wait for you, think about it for a moment.

Okay.... while you're considering that, I'll ask you to find an example of where inflation cause popular uprising, unrest or a revolution.

Gee, that didn't take long. Now you can go back to thinking about the deflation question. Still no answer yet huh. The reason is deflation doesn't.

0.6% interest rates don't matter so much when the price of the goods you want is dropping 10, 20, or 30%.

Who doesn't like lower prices?

I'll tell you who doesn't. Highly leveraged financiers whose bonus's depend on that rising tide lifting their boat, that's who.

Okay that's my position in a quick nutshell. Now back to the serious thinkers. Charles has asked the very simple question, which I immediately find interesting because simple is elegant:

"My question remains: what course of action will benefit those issuing the whispered orders to their lackeys and toadies on the Fed and in Congress? Will a disorderly and disruptive collapse of the dollar serve the Financial Power Elites' best interests? I don't see how it would. Rather, I see it wreaking great damage on their holdings."

Ahhh yes Charles. Whom does it benefit.

This now takes me to an an excellent inflation(hyper) deflation debate that was sparked last week between Rick Ackerman of Rick's Picks and a cat by the name of Gonzalo Lira.

The spark was a piece Rick penned called 'Big Gap in Logic Weakens Hyperinflationary Argument'. In it Rick concludes we are on a path of deflation to which Lira responded with his own piece 'Talk About a Big Gap in Logic!' countering in favor of the hyerinflationary argument.

Rick then countered back with a second piece called 'Here's Why Hyperinflationist Lira is Wrong!'

Take the time and it will take a little to read the exchange in ideas. While speaking of ideas, I take offence at bloggers bashing other bloggers. I am IN NO WAY suggesting bloggers circle the wagons like so many others do, and give other bloggers a pass simply because we are union brothers. I take offence because we are all trying to vet out the truth amidst all the lies and bullshit fed to us by those in charge and their puppets in Washington and the mainstream media. Memo to Lira, to a lesser extent Rick and all the other bloggers out there save your venom for the ones who really deserve it, the ones who put us in the pickle we are in, are digging us in deeper as we speak while frantically attempting to re-write history trying to save their own asses.Those responsible for this calamity absolutely love it when the bickering and name calling happens amongst us and the spotlight is taken off them.

Just my 2 cents worth. Okay!

Anyway I encourage anyone out there to read the articles hi lighted above. I also suggest you read my friend Charles Hugh Smith's piece The Mechanics of Hyperinflation: Bankers vs Politicos.

Given what I have said here about deflation I still give due consideration to the always insightful Richard Russell's admonition that the government has 2 choices: inflate or die. Sadly to say, the longer I have thought about Richard's idea the less I agree. I hate to do that with the old cat because he is just so damn smart and insightful but alas I must. What about he concept of pushing on a string? What about Japan Richard? If its death then its 20 yrs plus and a 75% lower stock market. Further to this, are so many around us confusing rising commodity prices around us for inflation when it could very well be the temporary uncontrolled, unintended consequence of free, easy, politically aided, speculative money. Simply no control over where the money goes. No different that what the Greenspan quarterbacked free money, no holds barred, money pump to avoid the post dotcom bubble armageddon did with housing.

Or, just in case any of you have forgotten, you cannot cure a debt problem with more debt. Now I realize a Harvard educated, Wall St. trained MBA and senior executive vice president and managing director will tell you it can. He might also enlist the aid of Fed chairman to tell you the earth is flat and unicorns gallop across rainbows to bolster his point. Keep ignoring them.

On a micro level I have personally, over the past 2-3 years, broached the subject of deflation to many of my friends and associates. Many of these people are no novices to business, finance and the economy. Initially when I mentioned the word deflation I got the most curious looks, the strangest of stares. They simply did not know and still do not, not to mention how to navigate the markets during it.

Anyway have a peek at the inflation/deflation articles above. It is what I am thinking about right now, whether it makes my heard hurt or not!

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