Deflation vs. Inflation
Gary North reports that one of the leading deflationists has defected to our side. (“Us” meaning North and me.) It reminded me that I meant to blog an email exchange I had recently (with permission of the correspondent). Craig had emailed me to say I was still missing the point in my critique of Mish. I wrote back:
Thanks for the email. I have to be brief. Do you know that since December, the unadjusted CPI is up 3.7%? And I’m sure you know that gold is hitting (nominal record highs.
At what point is this credit deflation going to result in falling prices? There was a brief spell of falling prices in 4q 2008, but prices have steadily risen in the eight months since then.
I thought (like Darth Vader), “All too easy.” But then Craig fired back:
I’m looking at the unadjusted CPI and it is up 2.7% since December, but DOWN 1.9% since its peak in July 2008. Moreover, the CPI understates deflation due to the owners-equivalent rent number. If actual housing prices were used (substitute Case-Shiller) you would already see price deflation. Just like the CPI understated inflation on the way up in housing it is understating deflation on the day down. So despite the absolute greatest amount of monetary and fiscal stimulus human civilization has seen over the past year (there is a reason there are so many hyperinflationists), the CPI is still down (even with bogus housing measures) and gold is right back to where it was in March 2008, i.e. flat since Bear Stearns failed and unprecedented stimulus was unleashed (and not much above where it peaked in 1980 for that matter). Moreover, T-bills are barely yielding above 0% and TIPS certainly don’t look very scary. Stocks and housing are down over 30% and oil down over 50% from their peaks.
I see bargains everytime I walk into any store—EVERYTHING is on sale—cars, shoes, you name it. The official CPI index will plummet once credit really begins to disappear. So far, it has basically just stagnated. The Fed’s Flow of Funds report released yesterday demonstrated the 1st decline in total debt in the U.S. since the data began in 1952—from $52.87 trillion to $52.81 trillion, oh wow (that’s sarcasm). Government borrowing has helped to offset the destruction of private credit so far. In a year’s time, I’m sure it will be much different after this bear market rebound ends. Nothing has changed from a year ago, in fact everything is much worse thanks to the government’s actions. Last fall will look like child’s play for what’s upcoming soon. No matter what, 2010 will settle the inflation/deflation debate either way. Unfortunately, we are losers either way.
So anyway, I think that was the best, succinct statement of the deflationist camp that I’ve seen. And I really like how Craig concludes, “No matter what, 2010 will settle the inflation/deflation debate either way.” However, I think Craig is overlooking the fact that we could both be proven wrong–CPI could stay roughly flat over 2010, in which case Scott Sumner and Paul Krugman end up looking good.
