From CoinDesk

Hi Mish,

I am working on an article for CoinDesk about recent fiscal and monetary splurge by governments and central banks across the globe and the impact on gold and bitcoin. As I see, a majority of analysts and economists are calling for hyperinflation and rally in gold.

Could you please share your take?

Thanks

CoinDesk

Matter of Definitions

Before there can be a rational debate on anything, people must agree on definitions.

I believe most people would accept this definition: Hyperinflation is the complete collapse in currency against every other asset.

Pick a currency, say the US dollar. To bet on hyperinflation and be correct, the dollar would have to go nearly worthless vs the Euro, the Pound, the Yen.

Alternatively, 50% in a single month would quality. Professor Hanke defines Hyperinflation as a 50% Currency Collapser in a Month.

Q: How likely is that?

A: Close to zero.

Replay Discussion

Curiously, this is a replay of my 2010 article Williams Calls for “Great Hyperinflationary Great Depression”.

Williams is John Williams of Shadowstats. He was not alone. Here is a snip changing the name Williams to "Hyperinflationsists" in the first word of these four points.

  1. Hyperinflationists focus on money supply, ignoring credit although credit is far more important.
  2. Hyperinflationists ignore numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are.
  3. Hyperinflationists ignore US gold holdings, the largest in the world.
  4. Hyperinflationists ignore the massive influence of consumer attitudes and bank attitudes towards lending.

To expect the US dollar to go to zero vs the Euro, Yen, Food, gold, Yuan, etc., was then and is now pure silliness.

Hyperinflation, a Political Event

Hyperinflation is primarily a political event, not a monetary one. More accurately, the first leads to the second.

Studies

  • Weimar Germany: Demands for war reparations following WWI set in motion finances that could not be repaid. Germany turned to the printing press.
  • Zimbabwe: Prime Minister, Robert Mugabe confiscated land to give to the people. The result was white flight and capital flight. The country collapsed as did the currency.
  • Venezuela: To fight poverty, presidents Hugo Chávez and Nicolás Maduro took over the oil industry and gave cheap gasoline to the people. In US dollar terms, gasoline is now a penny a liter. But you will not find any at that price.

Wake me up when AOC is president and Congress authorizes free money to the tune of $50,000 per year per person, indexed to prices.

US hyperinflation would take an event like that. And it would be a political event leading the way.

Such a setup is not impossible but it is not likely.

Trillions of dollars in Repos as available credit does does not suffice. Moreover, central banks are beholden to the subsidiary banks. Hyperinflation would destroy banks and that is the last thing the Fed wants.

So toss hyperinflation away as nonsensical until a genuine political event sufficient in nature is on the horizon.

What About High Inflation?

Once again definitions come into play and this time the definitions are more important because there are so many of them.

  1. Inflation is an increase in prices or a decrease in the purchasing power of a currency
  2. Inflation is an increase in money supply
  3. Inflation is an increase in money supply and credit
  4. Inflation is an increase in money supply and credit with credit marked to market.

Everyone is correct under their own prefered definition.

But what is really important in the fiat-credit world we have been in since Nixon closed the gold window?

It's Credit that Matters

Definition number 4 is mine. Yet despite my use of that definition I get mocked all the time. "Look at that fool, the prices I pay all the time keep rising," I hear all the time.

Yep prices generally rise. I never said otherwise. And they rise more in places where government touches the most: Education, medical care, and housing are three prime examples.

Housing is not even in the CPI. It should be. And if it was the charlatans at the Fed would have seen that inflation was not below 2% but rather above 5%.

Home Prices vs Wages and CPI

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That chart is proof of massive asset inflation as well as price inflation. Take your pick, but the Fed does not see it.

For the third time in 20 years, loose monetary policy at the Fed blew huge bubbles.

Demand Destruction

One of the most important thing inflationists miss is demand destruction accompanied with or followed by credit destruction.

  • Corporations will allow more people to work from home on a continual basis. That means reduced need for gasoline and fewer people eating out for lunch.
  • Corporate travel will give way to more teleconferencing. That also means less travel, fewer hotels, less dining out.
  • Due to loss in wages, demand for cars will plummet.
  • Mortgages are harder to get and more boomers will seek to downsize their homes. That means more supply and falling prices.
  • States will raise property taxes to meet revenue needs. That will further reduce demand for houses.
  • Some people cutting their own hair will keep doing so.
  • The same lifestyles of eating out, buying expensive coffee, etc, etc. will pressure prices at restaurants, bars and coffee houses.

Credit Destruction

  • Many small businesses will go bankrupt as a result of the above demand destruction.
  • $15 minimum wages will be icing in on the bankruptcy cake given falling demand.
  • Some people will lose their houses in default.
  • Malls were already in trouble but now even more people are tuned into buying things online. Those people will not go back to mall shopping. Expect more store closures and more bankruptcies as well.

Only economic illiterates believe the Fed's balance sheet expansion outweighs those things. This is why I stress: pay attention to what matters.

Nothing is Working Now: What's Next for America?

For more along the above lines, please see Nothing is Working Now: What's Next for America?

I discuss 20 things. At the top of the list is a change in attitudes.

Very Deflationary Outcome Has Begun: Blame the Fed

On March 5, I wrote a Very Deflationary Outcome Has Begun: Blame the Fed

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

Those expecting a massive surge of inflation missed the boat. We HAD a massive surge of inflation primarily reflected in asset prices, not consumer prices.

Bubbles are inherently deflationary.

It’s asset asset bubble deflation that is damaging, not routine price deflation.

When asset bubbles burst, debt deflation results. People cannot pay back the loans they have taken out. Bank loans go sour and banks are reluctant to lend. Credit dries up.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Definition Review

  • Inflation is best thought of as an increase in money supply and credit with credit marked to market.
  • Deflation is best thought of as a decrease in money supply and credit with credit marked to market.

My definitions reflect what is important. And debt deflation following asset bubble bursts is at the top of the list.

In 2009, we had deflation as measured by my definition and even by the CPI. Deflation was massive if one properly included housing prices.

In 2007 I made this call: "Expect the US to go in and out of deflation a number of times."

People thought I was nuts, and they still do because they do not read what I am saying, nor do most remotely understand the role of credit and debt deflation in these bubbles. Instead they hear the word "deflation" and react to the word.

In 2009, regulators suspended mark-to-mark accounting effectively masking a portion of my definition.

Mark-to-mark accounting is still best thought of as mark-to-fantasy. Mark-to-market rules never returned.

Junk Bond Bubble in Pictures

On July 17, 2019 I wrote Junk Bond Bubble in Pictures: Deflation Up Next

What happened?

There Are No Temporary Measures, Just Permanent Lies

On April 9 I noted There Are No Temporary Measures, Just Permanent Lies

Under guise of virus support, the Fed Will Buy Junk Bonds, Lend to States to the tune of an additional $2.3 trillion in additional aid.

Here we go again. Another deflationary credit bust is upon us. Lower prices will follow, especially in assets.

The Fed brought this upon themselves, fighting inflation when they should have been worried about asset bubbles.

These scars will last a generation. A huge change in attitudes is underway.

The Fed can offer cheap money, but it cannot forces businesses to expand or hire. Due to demand destruction there will not be a quick rebound.

What About Gold?

Gold does well in deflation and in times of severe credit stress but not when there is slowly falling price inflation.

Gold fell from $850 to $250 between 1980 and 2000 with inflation every step of the way.

If you believe as I do, that central banks are struggling with credit stress on multiple fronts, then buy gold. But don't expect high price inflation anytime soon. And write off as totally nonsensical any notions of hyperinflation.

Here's the deal:

Gold's recent action is not a hyperinflation signal or even a high inflation signal. Rather, gold is signaling debt deflation and the Fed's panic to contain it.

Mike "Mish" Shedlock

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