In the last days I'm seeing a new counterattack from the deflationist camp, probably helped by the USD index showing some uptick. This camp is formed by smart and educated people, so I find quite amazing that they fail to realize an empiric evidence which dismantles the very heart of their arguments.
Those arguments are enclosed in an interview made to Bob Hoye by Jay Taylor.
In this interview Mr. Hoye argues his case for deflation essentially looking at the outcome of the precedent economic and financial bubbles. Every time the bust of those bubbles saw the increase in the value of the senior currency and gold at the same time. Mr. Hoye also refreshes and in fact claims the paternity of the theory of "the debt as a synthetic short position against the dollar", and finally declares the difference between cash and credit as the impediment for the Fed to inflate at its will.
All of those arguments were true; unfortunately they are not valid anymore!
I wish to submit to Mr. Hoye and all the other gentlemen's attention the fact that today we live in a world with a senior FIAT-currency. Those four more words change everything!
It was quite natural in the past that the senior currency and gold surged at the same time in the aftermath of a bubble, because they were substantially the same thing. In the past, the senior currency at last was a certain weight of gold. Therefore, the debt was then really a short position against the currency, because it was something different from the currency, the cash. At that time cash was gold, and it was not possible to inflate it at will. The cash was payment in full, a base which could not be expanded to meet the necessities tied to the debt repayment. It's clear that the collapse of the precedent credit bubbles saw the increase of the value of that base. In a commodity-money regime (with a fractional reserve banking system) the cash is really different from the debt/credit.
Today we live a different story. Today the senior currency is nothing else that a piece of paper representing a promise of payment, and it has nothing to do with gold anymore. And there is no difference at all between money and debt in a fiat-money regime!
In such a regime money is created by the will of the Central Banker (and a bunch of His delegates), and it's born just as debt/credit. With these premises, the theory of the debt as a synthetic short position against the dollar is a colossal misunderstanding.
In the current monetary regime every collapse of a debt conglomerate will translate in the destruction of the currency tied to that debt conglomerate. That's because there's no difference between them, no difference between the debt and the so-called money.
We have seen it already before (Mexico, Russia, South-East Asia, Brazil, Argentina, et cetera), and those are the correct historic precedents to look at. Things are not much different for a senior currency, a reserve currency. It can get helped from its status, but that status means at the same time an enormous offer of that currency impending over the market.
In a fiat-money regime the value of a currency depends just on the trade, current account and budget balance of the Country producing that currency, in order of importance. In other words, it depends just on the quantity of debt tied to it. More the debt, above all the external one, less the value of the currency. All the rest is just tedium, rumors, some kind of governmental intervention and some privileges in the case of a senior currency.
In a fiat-money regime every economic recession or depression is always inflationary. Again, we have historic evidences in this sense. That's simply because in a fiat-money regime deflation is not possible. It's conceivable in theory, but it's impossible in practice. At least, we are still waiting for it to manifest in the real world since money became a different thing that gold.
Deflation is not a thousand points loss in the Dow Jones Industrial index; deflation is not a negative variation in the Consumer Price Index (mis)calculated by government (a real joke!); deflation is not a drop in the Gross Domestic Product (a very misleading way to calculate the wealth of a nation); deflation is not a decrease in the price of mass-produced goods in China or Vietnam.
Neither is correct to call for deflation in the presence of low yields on governmental bond. Opposite to the common opinion, in our age of money-confetti and its corollary of wildcat finance, that testifies rather inflation.
Since the Moloch called Central Banking has been set free, the interest rates level has lost any meaningful relation with the market, and it's now completely untied from the interaction and the choices of the economic forces and agents. It's now nothing else that a marxist overstructure arbitrarily let down on the society.
To understand this, it's enough to think about the way how an ocean of liquidity has been injected in the global financial system in the last years. That is, by means of an enormous jump of the US deficits (private, commercial and public), primed by an incredible cut of the Fed funds, and financed for the most part by the asiatic branch of the Federal Reserve through the purchase of Treasuries all along the middle and the final part of the curve. The carry-trade has financed the rest.
It's enough to think that the almost non-existent yield on Japanese governmental bond has been the only thing to keep solvent a lot of banks in that country.
The ultimate meaning of the deflation is an increase in the purchase power of your money against everything is needed to live and survive. That is, food, energy, house, education, every kind of taxes and tariffs and fees for every type of compulsory service, every type of mandatory insurance, health care and medicines. I'm sure I'm forgetting something. Well, I've never experienced something of similar during my whole life!
Sure, I'm not so old. I was born just four years before the default declaration signed by R. Nixon. But I'm sure nobody have experienced something of similar since the Roosevelt's armed robbery of the Americans' gold. Nobody in the whole planet, neither in Japan!
I agree with Mr. Hoye about one thing anyway: Keynes was a flaming idiot!