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SyndicateCan Inflation and Deflation Coexist?, Part I
By Robert Ringer - Monday, December 15, 2008
Another one of those dimwitted financial experts recently popped up on CNN and said that she believed the economy would start “turning around” by the end of the first quarter of 2009. She offered four reasons:
- Banks are now lending to each other. (So?)
- Government programs are working. (They are?)
- Consumer confidence will rise. (It will?)
- The housing market is ready to revive. (It is?)
I’ve gotten so used to this kind of gibberish from TV-created experts that her inane opinion did little more than cause me to shake my head and smile condescendingly. It was right up there with O’Reilly saying that the media is hurting the economy by scaring people. Sure, Bill. Maybe we should put a cap on scare mongering right along with gas prices.
Sorry, Ms. CNN Financial Expert, but the end to our financial woes is nowhere in sight. What we do not know with certainty, however, is when and how the end will come — and whether it will be a result of inflation or deflation.
The primary cause of today’s economic firestorm is government’s ever-increasing appetite not just for becoming involved in things that are none of its business (e.g., the economy), but for trying to control them — and you.
The groundwork for today’s financial mess was laid clear back in 1913 (some would argue in 1789). Things deteriorated rapidly as a result of FDR’s “New Deal” and then LBJ’s “Great Society” — and every president since has been more than willing to throw more gasoline on the fire.
Now, with whole industries collapsing before our very eyes, and with the upcoming Obamastration promising to give us ever more socialism in the form of bailouts, increased unemployment benefits, and the creation of millions of “green jobs,” it’s hard to imagine how the piper can be held off much longer.
Remember, government has only three ways to pay for its unconstitutional expenditures: It can print fiat currency; it can borrow; it can tax. Printing dollars leads to an increase in prices, which lowers everyone’s standard of living. Higher taxes lead to more unemployment, less money saved and invested, and a slowdown in the economy. Borrowing leads to … well, I guess it ultimately leads to having to learn Chinese.
Though I have believed, for at least the past thirty years, that the weapon U.S. politicians ultimately would use to commit national suicide would be hyperinflation, the government’s audaciousness has humbled me. These guys and gals are capable of coming up with anti-business and anti-liberty schemes you and I could never even dream of.
While no one has yet to sell me on the possibility of a massive deflation of the economy, I do try to remain open-minded. (I should add that when I refer to deflation, I’m talking about a financial scenario where all Americans are forced to live within their means, as opposed to the false prosperity that tens of millions have enjoyed for so many decades.)
Now, along comes my friend, Leo the Centimillionaire. (Many readers may recall that I interviewed him for my Mastermind Discussion Group series.) Because of his remarkable ability to keep his finger on the pulse of the financial markets, when Leo talks, I listen.
I recently received an e-mail from him in which he said, “The deflationary cycle is already well underway, and the defaults, unemployment, bankruptcies, etc. are going to sweep over us like a tidal wave. There is zero chance of inflation for years. I spend all day, every day, studying the markets, reading the Financial Times, WSJ, etc., and talking to investment advisors in Europe and New York. From what I can see, deflation is the best bet by far.”
In a subsequent e-mail, Leo went on to say:
“The facts today are clear: We’re in a major deflation. How long it will last before The Monetary Machine floods the world with sufficient paper to humble deflation is another issue and a patent unknown. (A case can be made that the amount of inflation will not be sufficient to offset the losses via deflation, and, therefore, inflation may not be felt again for many years.)
“The consensus now seems to be for one to three years of serious deflation, as unemployment inexorably escalates and incomes decline. Then, all that new money should begin to catch up, but to what degree? For now, in any event, we are forced to bet on today’s reality: Deflation.”
Could Leo be right? We’ll take a look at that possibility in Part II of this article.
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Copyright © 2012 Robert Ringer
ROBERT RINGER is a New York Times #1 bestselling author and host of the highly acclaimed Liberty Education Interview Series, which features interviews with top political, economic, and social leaders. He has appeared on Fox News, Fox Business, The Tonight Show, Today, The Dennis Miller Show, Good Morning America, The Lars Larson Show, ABC Nightline, and The Charlie Rose Show, and has been the subject of feature articles in such major publications as Time, People, The Wall Street Journal, Fortune, Barron's, and The New York Times.
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8 Responses to “Can Inflation and Deflation Coexist?, Part I”
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Very nice column.
I graduated from the University of New Hampshire in 1992 with a BA Degree in Political Science and a minor in Economics. I ran for United States Senate from New Hampshire in 2002.
Article 1, Section 8 of the Constitution says Congress has the power
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”
Congress should eliminate the Federal Reserve or veto many of its decisions. If the Federal Reserve continues to exist, two members of the House of Representatives and 2 United States Senators should sit on the board of the Federal Reserve. If 3 of these members of Congress wants a Federal Reserve decision to be vetoed it should be vetoed. If the majority of the United States House of Representatives wants a decision to be vetoed, it should be vetoed. If the majority of the United States Senate wants a decision to be vetoed, it should be vetoed.
Congress should consider backing our currency with gold, silver, and other commodities.
The least that should be done to grow the economy and create jobs is the indexing for inflation of capital gains, interest from savings accounts, and dividends. If the capital gains tax is not indexed for inflation, people may pay the capital gains tax when they have actually lost money because of inflation.
If the federal government is serious about growing the economy and creating jobs, it should stop taxing capital gains, interest from savings accounts, dividends, and estates. People will have an easier time saving for college tuitions and retirements. Middle class people and union members who have mutual funds would benefit from dividends and capital gains not being taxed. Businesses would have an easier time obtaining loans and investments.
If the federal government and state governments do not want unemployment to significantly increase, they should reduce the minimum wage over time and eventually eliminate it. If the minimum wage keeps increasing, the recession may get a lot worse. If the minimum wage is increased, many people will lose their jobs, many people will work fewer hours, many salaried workers will work more hours and harder for the same pay, and prices are likely to increase.
The federal government should sell a lot of the land it owns to raise capital, reduce the national debt, and do other things. Some of the money the federal government obtains from the sale of the lands should go to state governments.
The national debt was less than one trillion dollars on January 20, 1981. It took our country more than 180 years to get to that point. It is now more than 10 trillion dollars. High deficits may bring about very high inflation which is especially harmful to people on fixed incomes and people who have saved money.
Sincerely,
Ken Stremsky
Robert,
Do you see a currency recall in our future? If so, at what stage of the meltdown would it occur?
Reply to Robert Ringer
I don’t think you can expect economic wisdom from the establishment press. How many of them, except John Stossel and a few others, are familiar with the sound economic reasoning of Ludwig von Mises, Murray Rothbard, F.A. Hayek and Henry Hazlitt? I doubt if any of them are carrying around your great book “Restoring the American Dream.”
When Ayn Rand’s masterpiece “Atlas Shrugged” was released she was reviled for her heartless, capitalistic philosophy. Some said her portrayal of villains was “cartoonish” and unrealistic. Isn’t it remarkable that the main players in our passion play of economic catastrophe are characters right out of “Atlas Shrugged?” Where’s John Galt when you need him?
I think that market forces are deflationary. However, our “beloved” political and financial leaders are attempting every measure possible to defeat deflation with the weapon of inflation. All this inflationary money on the marketplace guarantees that the nightmare of a hyperinflationary collapse is unleashed. Many citizens will feel that deflationary forces are squeezing them dry. Then the opposite will happen and they will drown in a deluge of inflationary money.
Response to kd725:
A currency recall is possible. It’s an old trick used by governments to mask a hyperinflation; e.g., every $1 bill might be turned in for a newly created $22 bill. It’s the ultimate in smoke and mirrors.
Besides being a down point in the inflationary cycle, the current housing situation causes a crisis of confidence. No one would lend to anyone else because they couldn’t be sure you were credit worthy. This applies to large banks (with questionable debt on their balance sheets) to working people with declining home values. This loss of confidence caused a large drop in the velocity of money.
If you remember, the measure of the money in the economy isn’t just a static measure of the number of dollars but is the product of the number of dollars times how many times those dollars change hands (the velocity of money). With the current crisis, the velocity dropped since everyone was afraid to lend to anyone. This meant the money supply dropped quickly. To counteract, the Fed has been pouring money into the economy to make up for the lack of velocity. So far velocity has been dropping faster than the Fed is creating money which is giving us the recession. People are holding on to their money and prices are generally falling. Cash is being horded.
If the holders of the dollar start to lose confidence in the dollar (ie, the inflation rate goes way up, taxes rise a lot, etc.) then people will overnight go from hording cash to getting rid of it, since it will buy more today then next month. When this happens, the velocity of money soars and with it the money supply. But an expanding money supply is what causes inflation which makes people want to get rid of the dollar faster so…boom. If the Fed can’t drop the dollar supply as fast as the velocity is boosting it, we will get runaway inflation. When that happens, life and liberty as we know them is over. Runaway inflation brought Napoleon to the French and the Hitler to the Germans.
If the general public never looses confidence in the dollar or the Fed is able to shrink the dollar supply proportionally as velocity rises then we won’t get run away inflation. In this case, the situation will be like previous recessions. It could even be bad enough to become a depression, but it won’t destroy everything. But the lesson won’t be learned, the economy and currency won’t be fixed and we will just go back into another inflationary cycle.
Is either one more preferable (inflation or deflation)?
“Where’s John Galt when you need him?”
If Big Brother keeps going down the path its on, trust me, we’ll have many, many John Galts. I’m already hearing talk about secession on several conservative forums.
Last summer I found it almost comical the contradictory judgments made every night on the national news; how it was: 1) terrible that housing prices were falling and 2) terrible that gas prices were skyrocketing. Why would prices going down on one hand be bad, but prices going up on the other hand also be bad? Money is money. Yes, foreclosures meant that some were losing their homes, but it also meant that some could finally afford to buy those same homes. I live in California, and a nickname for this state is “Can’t-afford-ya.” The falling housing prices here meant affordability at last for a lot of people. Not altogether bad news.
Response to Tom D:
Excellent point … excellent.