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July 10, 2008

i Inflationista
by Gary Tanashian

Michael Panzner has just written a piece highlighting Mike Shedlock's blog post which itself centered around a letter received by Mish from a 'former member of the hyperinflation is coming crowd'. I have received emails recently from readers about Mish's views on deflation. I guess he could be described as a 'deflationist' as could Michael Panzner - whose work we value and regularly publish at biiwii.com - and of course Robert Prechter, a man who I have noted many times was a strong influence on me; especially after I read Conquer the Crash in 2002. These are all very smart and thoughtful men.

So with all that said, I do not take Michael Panzner's 'Inflationistas Coming Around' lightly. I have permission from Mr. Panzner to publish anything of his that I find of value and in this piece I find lots of value because it gets to the heart of the matter; it gets to the definitions of inflation and deflation. If you believe inflation is rising prices than of course you believe deflation is declining prices. Here is a three year old email I sent to Rick Ackerman - reprinted on his site - in response to a provocative article Rick wrote on deflation. It gets to the heart of why I am one of the 'Inflationistas'. Especially these lines:

"In my view, the inflation game is played against the deflationary impulse or need to correct. It is the Fed and other forces pushing on a string, and one day they will find the string simply goes limp and all the inflated chickens will then come home to roost...

"deflation (at least in capital flowing to the US manufacturing sector) has been a good thing, driving progress and productivity; but it has been perverted in recent years/decades to the point where it is cast as bad, while inflationary policy is cast as good...

Deflation is a wellspring of progress and resulting lower prices that has been poisoned by the easy money crowd."

The national (and global) front porch is loaded with chickens. Clucking, confused birds with nowhere else to go. The Fed is 'pushing on a string' and talk of deflation is growing by the week. In a genuine deflation 'scare', this needs to happen. But when you define inflation as increasing money supply - similar to that which Mr. Greenspan promoted earlier this decade, then that 'pushing on a string' can only be inflation, regardless of what prices on most goods and services do. The Fed is inflating and global policy makers stand ready to fight the dreaded forces of deflation (in prices) as well, although many developing regions are still dealing with the effects of the last inflation - booming prices.

Recall that Greenspan's inflation regime took some time to take hold (credit and housing bubbles) and it is far from a sure thing that today's policy makers will be successful in keeping the bubble economy alive. But that does not change the fact that we are in for a whopper of an inflation cycle. It's all in how you define inflation. If the Fed is successful, gold will pick up on it before positively correlated (to the economy) commodities and then under-perform as it did in the middle of this decade. If the policy does not succeed, the collapse predicted by the 'deflationistas' will indeed visit us, in which case there will be a continued mad scramble for liquidity, which means cash and gold. And one of those two will actually have intrinsic value in such a scenario. But the point is that there will be massive inflation (by policy) even as the collapse in credit and general liquidity continues.

I am not a gold bug. I would much rather be a sound US Economy bug. In fact there are productive segments of the US economy that are fairing relatively well and benefiting from inflationary policy even as the US financial sector, arguably the former beneficiary of the greatest bubble (in confidence) of all time, continues its collapse. This is a confusing time. This is not a drill. It is time to get this right.

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2009 Gary Tanashian

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