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MishTalk Video, What’s the Real Risk Now, Is it Inflation or Deflation?

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42 comments on MishTalk Video, What’s the Real Risk Now, Is it Inflation or Deflation?

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In the following video, Keith Weiner at Monetary Metals and I discuss the latest FOMC decision and the risks of inflation and deflation. 

The video was recorded on Thursday March 23, the day after the latest Fed rate hike decision. 

Key Discussion Clips

Mish: Keith, what’s the real risk here? I mean everyone has loaded up into the inflation is coming meme. It’s here, it’s going to stay. And certainly I can make a case for that. And in fact I have made a case for that. We have deglobalization, decarbonization, crazy regulations coming out of the Biden administration. But if we have a commercial real estate implosion, banks stop lending because even though the Fed is guaranteeing banks [balance sheets at par], the banks know that it’s really not. Is there a risk of deflation because it seems like to me there is. And if we think of deflation as an implosion in credit and an implosion in the value of credit on the books of banks, well, that’s deflation. How do you see this? I’m uncomfortable in the same boat looking at inflation as far as the eye can see along with everyone else. And Keith, I’m not comfortable being in the same boat with everyone else. What’s your take?

Keith: I definitely hear you on wanting to be contrarian. I think there is no reason you cannot have both simultaneously. Consumer prices for all the non-monetary forces that you mentioned, trade war, deglobalization, on-shoring, green energy restrictions, … war in Ukraine etc. Bu at the same time credit absolutely imploding. Commercial real estate is one area there has to be a giant implosion. 

Mish: [After a brief discussion of what prices are rising and what prices are falling] Logically, you can’t have both at the same time unless you have two different definitions. The definition that I have used a lot over the years is deflation is a decline in the supply of credit marked to market. Just because they don’t mark [assets] to market doesn’t mean it’s not happening. This is kind of a unique environment here that the Fed is trying to thread this needle and I don’t think it can be done.

Credit Freezes Are Highly Deflationary

The very first Tweet I saw, just minutes after finishing the video was on deflation. 

Since then, it came again by Danielle.

March 26: Credit Contraction

In writing this post I perused some other Tweets and found this pertinent post by Jesse Felder on March 24.

What About Trucking?

The Setup

OK But Here We Are 

FT: “The Fed shouldn’t have to choose between fighting inflation and a banking crisis.”

Gratke: “OK but here we are.”

That pretty much sums things up nicely.

Historical Perspective on CPI Deflations: How Damaging are They?

I have discussed this many times before but it’s worth repeating again. Consumer price deflation is a benefit.

It’s credit deflation resulting from the bursting of asset bubbles that is very damaging.

In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.

That’s not just my opinion, it’s the opinion of the Bank of International Settlements (BIS). 

Expect asset price deflation to accompany credit deflation. Asset bubble busts are also inherently deflationary. Economists fail to see that asset inflation matters, not just CPI inflation.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

About Keith Weiner

Keith Weiner, PhD, is Founder and CEO, Chairman of the Board of Monetary Metals. Keith also serves as founder and President of the Gold Standard Institute USA. 

Since 2016, Monetary Metals closed over 40 gold and silver investment opportunities, including the first gold bond in the US in 87 years.

This post originated at MishTalk.Com

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Mike Shedlock

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vanderlyn
vanderlyn
1 year ago
FED jacked up balance sheet by hundreds of billions of electric money(inflationary) to combat the deflationary underwater bonds they are taking in at par. most likely stagflationary crumbling empire. with russia pegging to gold, the electric money experiment since 1971 is gonna end in rubble. i’d suggest it’s inflation for 80% of middlebrows in usa as the ruling class(FED are private club) buys up the empire. folks will go broke paying for essentials as their mcmansions crumble in price. crumbling empire 101. you cannot forget that over arching theme. most amerikans cannot fathom a new country. 1860, 1776………
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Six000mileyear
Six000mileyear
1 year ago
Interest rates will continue in a general uptrend the next 15 years. Mainstream media will at first call it inflation, but rising rates will be due to default risk.
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Directed Energy
Directed Energy
1 year ago
Reply to  Six000mileyear

Impossible. Rising rates won’t be sustainable or affordable.

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Jack
Jack
1 year ago
Reply to  Directed Energy
Would not eliminate this as a possibility. One year ago most people said impossible for rates to be in 5% range today.
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StukiMoi
StukiMoi
1 year ago
As long as some crazy insists that “inflation” has something to do with strange women in ponds handing out entirely arbitrary baskets; “inflation” vs “deflation” has no non-arbitrary meaning; and can be whatever PondWoman wants it to be.
If one is, instead, interested in some economically relevant measure of inflation; such that inflation of “the” money supply is what the question is about: It looks more deflationary now, than at any time for a long time:
There are no longer any broader measure of credit which can be backhandedly turned into “high powered” money by de facto bailout guarantees: Even loan sharks are now considered “too big to fail” and will inevitably get bailed out to “save the loanshark system.” A lot of the inflation in demand-driving money since 1971; have come about by this sort of creep outward of what is effectively cash-equivalent as far as permanence goes (with the usual dimwits claiming, probably even believing…., that it is something highfalutin sounding like “financial “innovation””. Since, like Musk is like, “innovation” is, like, cool. You know….) And now, The Fed is largely at the end of that road….
Ditto the ability to keep the credit-expansion-dependent leeching-classes flush and flusher, without obviously; and increasingly immediately; hitting the purchasing power of people who are by now literally starving, with every new dollar printed into thin air.
So, other than complete Hail Mary’s of the “debt jubilee” kind which may extend the Age of The Leeches for another few years; The Fed and Junta no longer have nearly the same freedom to steal by way of debasement; that they have had over the past five decades. So they just about may have to accept, no doubt while fighting tooth and nail against, at a minimum a slower growth rate in total outstanding credit (and total outstanding credit is now effectively the most relevant money supply.)
On top of that, comes rapidly increasing demand for fundamental basics; which are hard to BS about “substitutes” for; from more productive countries and people. I’m not much for empirical anything wrt economics (because it’s just simpleminded, illogical and stupid..); but Chinese enterprise can overwhelmingly thrive with plenty higher oil prices than what’s left of their US competitors. And they’re growing fast enough that Chinese buyers will be near the only ones competing for the marginal barrel in not too long. Heck, they are already bidding away almost all the supposed “discount” they are currently getting from the world’s largest oil exporter…. With “us” moving to just being price takers, while trying to figure out how we’re even getting to our place of work (or more realistically makework….) in our pickup trucks; at $350/barrel….
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FromBrussels2
FromBrussels2
1 year ago
In the year 2000, debt/GDP was 30% !!!! ….. Now tell me you’ re better off at 120%….LOL! ….you need a ( hopefully not TOO destructive ) WW, to solve the problem , don t you ?? …Well, the US of A is working on it anyway, innit?
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Perplexed Pete
Perplexed Pete
1 year ago
Swiss economist Peter Bernholz studied every hyperinflation in the 20th century (I think there were 26, but I can’t remember for sure). He found that they all had one thing in common: The cost of debt servicing by government surpassing 40% of revenues for an extended period of time. This means if government is spending 40 cents or more of every tax dollar on interest payments on the national debt for a long period of time, a hyperinflation is almost a certainty. (The USA debt expenditure has crossed this 40% threshold twice -in 1943 and 2010- but only briefly.) Because high interest rates are necessary for this to happen, rising rates will someday be the harbinger before a hyperinflation happens (IF a hyperinflation happens, that is).
These observations by Bernholz also give clues to help find the true cause of inflation. While fast, sudden spurts of inflation can certainly be caused by increases in the money supply, long term inflation is caused by ever-growing costs of debt servicing built into all prices.
For example, when you hire a plumber to fix your toilet, you are helping to pay the interest on his home mortgage, business loan, and truck payment. And you are also helping to pay his taxes, a large part of which is interest on government debt. The plumber MUST pass these costs onto his customers to avoid loan default and tax default. And the same goes for the toilet manufacturer: a large part of his cost is also interest. And also the truck manufacturer, and so on.
The late, great scholar Margrit Kennedy estimated that almost half of the prices we pay for everything is accumulated interest. And because all money is created by private banks as unpayable debt (proofs at bankLIESdot0rg), the debt levels and accumulating debt-servicing costs must always rise.
To see the snowballing debt levels in one chart, go to the St Louis FRED website and search “All Sectors; Debt Securities and Loans; Liability, Level” TCMDO.
The only way to stop this endless sucking of resources by parasitic bankers is to abolish the bank-created money system, zero-out all debts (AKA “debt jubilee”), and transition to an interest-free money system.
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TexasTim65
TexasTim65
1 year ago
Reply to  Perplexed Pete
“The only way to stop this endless sucking of resources by parasitic
bankers is to abolish the bank-created money system, zero-out all debts
(AKA “debt jubilee”), and transition to an interest-free money system.”
This could only happen via a civil war and I don’t just mean a minor strife. It would take an absolute reset which would involve something close to the zombie apocalypse when it was all said and done because there would be mass killings everywhere as part of the resource grab during this jubilee. After all a Jubilee is effectively saying possession is 100% of the law so everyone would be grabbing everything.
Even after it was finished, interest-free money would effectively mean there would be next to no progress. After all, why would you ever lend any money to anyone if you didn’t get some kind of interest. Without loans there would be no new businesses etc because almost everything that gets started requires some input capital and trying to save for every last thing (car, home, business startup etc) would take more than a lifetime for 99.99% of the population. In other words you’d start saving now so your grandkids could maybe buy a house or start that business idea.
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Perplexed Pete
Perplexed Pete
1 year ago
Reply to  TexasTim65
No. If my mortgage and car payments were zeroed out, I would be very happy! And with no government debt, taxes would plummet. Also, have you ever asked yourself if there is truly a moral obligation to repay money to a bank that they created out of thin air after you signed the loan contract? I say no.
There would certainly be an adjustment period, just like there was a painful adjustment period after slavery was abolished. But in the long run, does anyone believe we should have kept millions of people enslaved just to avoid the painful economic readjustment caused by freeing them? Of course not!
The existing money supply of $21 trillion would need to be converted into a debt-free, interest-free money system. People would be free to invest in new endeavors, and people would also be free to create and use new competing money, including commodity-based money. Production and investment would continue and would probably expand due to the lack of economic blood being sucked out of market participants by the banking parasites.
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ga7pilot
ga7pilot
1 year ago
Reply to  Perplexed Pete
“No. If my mortgage and car payments were zeroed out, I would be very happy!”
You my friend are a deadbeat!
If your cancelled debt was my asset, I can guarantee you will not be happy.
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Scooot
Scooot
1 year ago
Reply to  Perplexed Pete
“No. If my mortgage and car payments were zeroed out,”
Your pension and savings would be zero’d out as well. 🙂
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Christoball
Christoball
1 year ago
Reply to  TexasTim65
Bankruptcy is a more gentle form of Jubilee. Plenty of that coming right up with credit contraction.
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Maximus_Minimus
Maximus_Minimus
1 year ago
Reply to  TexasTim65
Debt jubilee for those who recklessly borrowed, and had to be saved by ever lowered interest rates and standards, punishing the prudent over-and-over again, in the process. For the children and the banksters.
Yes, that would be great incentive for the next borrowing binge.
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Tony Bennett
Tony Bennett
1 year ago
Vice Chair of Supervision Barr opening remarks to Senate committee had a telling quote:
“In mid-February 2023, staff presented to the Federal Reserve’s Board of Governors on the impact of rising interest rates on some banks’ financial condition and staff’s approach to address issues at banks.”
Yet, even after SVB,. Powell raised rates (and QT on schedule).
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ga7pilot
ga7pilot
1 year ago

Credit deflation and
consumer inflation can both occur simultaneously under a de-globalization
scenario. We could very well see asset price deflation, while consumer prices
remain stubbornly sticky.

The many decades long
embrace of globalization has caused our workforce to become more and more
services-oriented and less production-oriented. So, on-shoring clearly will
reverse that trend. If we are lucky and get an influx of immigrants to take the
newly created jobs, then we might be able to hold down labor costs. Otherwise,
to produce those consumer goods at home, we must necessarily transition from a
salary-based workforce, back to an hourly-based workforce. The hourly job opening glut will continue
until service workers can be enticed to take those jobs. Until then, there will
be a decline in wages, an increase in labor costs, and a lid on unemployment.

At the same time,
moving production onshore means we are no longer able to import investment. This
will force domestic savings to increase, which means we must consume far less than we currently are. The bottom line is, we must produce less at
the same time that labor costs are increasing. This by definition is a loss in
productivity. Declining productivity means a decline in our standard of living.

I hope all you
nationalists and protections are happy. You got what you wished for.

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iceberg-ahoy
iceberg-ahoy
1 year ago
Reply to  ga7pilot
“are no longer able to import investment. This
will force domestic savings to increase, which means we must consume far less than we currently are”
please clarify.
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ga7pilot
ga7pilot
1 year ago
Reply to  iceberg-ahoy
Sorry yes. In the basic balance of trade accounting, investment flow is the flip side of goods/services trade flow. The capital account must equal the current account (goods and services). Currently we have a trade deficit (goods and services), and so we have a capital surplus (investment) of equal magnitude. Investopedia, does a decent job of explaining the basics, but let me expound.
Take our favorite whipping boy, China. We buy more goods/services than we export, and China ends up with dollars. Since dollars can’t buy anything in China, those dollars must come back to the U.S. in some other form. The Chinese are savers, and would rather buy U.S. securities with those dollars than U.S. goods, for whatever reason. The U.S. is historically a better place to invest, especially since state-owned enterprises in China are off limits. They have to invest somewhere, so is that what drives a trade deficit, or is it the other way around? That’s the debate.
Anyway, if we eliminate our trade deficit, no more foreign investment. We must make up the difference through increased domestic savings in order to build the capital infrastructure required to produce at home. Very costly. Must consume less in order to save more.
In other words, in order to reduce the foreign invest inflow, we must become a less desirable place to invest.
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ga7pilot
ga7pilot
1 year ago
Reply to  iceberg-ahoy
Well, that is not a short answer. It is basic balance of payments accounting. Investopedia can help but it’s rather technical. The current account (goods and services) must be equally offset by the capital account (investment flow), so that the balance of payments sum to zero. Yada, yada. Let’s see if I can do better.
Take our favorite whipping boy, China. The typical explanation for the trade deficit is: we import more goods/services from China than we export, so they end up with our dollars. A Chinese person can’t spend those dollars in China, so those dollars must come back to the U.S. in some other form; if not to buy goods, then as investment.
Looking at it the other way around, we have a capital surplus with China. The Chinese save more than they can invest domestically, and choose the U.S. for whatever reason: state-owned enterprises are off limits, the U.S. is a safe haven, or have better investments, etc. Anyway, the Chinese choose to buy U.S. investments or securities, rather U.S. goods, and that drives the trade deficit. Thus, Americans end up with Yuan which are only good in China. We spend the Yuan on Chines goods rather than Chinese investment.
Bottom line is, if we actually are successful at eliminating the trade deficit, then foreign investment is also eliminated. We must make up the difference by saving more domestically, because investment will be required in order duplicate the Chinese production infrastructure domestically. Saving more requires consuming less. Consuming less means producing less.
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ga7pilot
ga7pilot
1 year ago
Reply to  ga7pilot
This is messed up. My reply disappeared. So, a few hours later, I replied again, and now I have 2 replies. No delete button. Frustrating!
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Tony Bennett
Tony Bennett
1 year ago
“Given the obvious inflationary forces, that may seem like a silly question”
…
Well, “inflationary forces” has a date in the ring with Buster Douglas.
Disinflation / deflation on tap.
M1 / M2 / ODL … all going down.
Federal Reserve just released money stock measures (February) a few minutes ago. Only took a glance but revisions for M1 and M2 were perfect. Since (at least) October both revised lower every month.
ZH has embarrassed itself lately with recent FR balance sheet expansion being “QE” … and rate cuts right around the corner.
Powell knows what he’s doing (for now) … will he have the stomach to see it through??
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Bam_Man
Bam_Man
1 year ago
Hyper-stagflation.
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Sir
Sir
1 year ago
Reply to  Bam_Man
Correct.
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Maximus_Minimus
Maximus_Minimus
1 year ago
Inflation.
Stagflation.
Revolution.
Rhymes like song.
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Doug78
Doug78
1 year ago
Reply to  Maximus_Minimus
I’d Love to Change the World
Ten Years After
*
Everywhere is freaks and hairies
Dykes and fairies, tell me where is sanity
Tax the rich, feed the poor
‘Til there are no rich no more
I’d love to change the world
But I don’t know what to do
So I’ll leave it up to you
Population keeps on breeding
Nation bleeding, still more feeding economy
Life is funny, skies are sunny
Bees make honey, who needs money, No none for me
I’d love to change the world
But I don’t know what to do
So I’ll leave it up to you
Oh yeah!
World pollution, there’s no solution
Institution, electrocution
Just black and white, rich or poor
Senators stop the war
I’d love to change the world
But I don’t know what to do
So I’ll leave it up to you
Songwriters: Alvin Lee
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Lisa_Hooker
Lisa_Hooker
1 year ago
Reply to  Doug78
Good tune.
I hung out with the Lees and Chick Churchill one summer in the 70’s.
Leo too.
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Doug78
Doug78
1 year ago
Reply to  Lisa_Hooker
Really? Great. I saw them in Cincinnati around 1970 or 1971. Good group.
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Zardoz
Zardoz
1 year ago

Deflation, panic, then inflation. It’s ka-poom time.

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Lisa_Hooker
Lisa_Hooker
1 year ago
Stagflation, with a touch here and there of collapse.
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Matt3
Matt3
1 year ago
We are restricting supply through policy choices. Sanctions, paying people to not work, energy development restriction and endless red tape for projects. Along with the demographics in the labor force, we have have inflationary pressures.
Credit tightening will be restrictive on both supply and demand. I still think we are more likely to see inflation than deflation. I’m in the stagflation camp.
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Salmo Trutta
Salmo Trutta
1 year ago
It’s called stagflation, business stagnation accompanied by inflation.
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Directed Energy
Directed Energy
1 year ago
There’s one trait for success that I have found is even more important than being in any one particular field, and that’s staying mobile. You have to move to where the work is. Period.
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TexasTim65
TexasTim65
1 year ago
Reply to  Directed Energy
The obvious corollary to this is that your money also has to stay mobile.
You need to move your investments to where the growth opportunities are and you need to do this much more often than you physically move for jobs.
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Zardoz
Zardoz
1 year ago
Reply to  Directed Energy
Moving doesn’t matter anymore, for most jobs that pay well, you can do them remotely. It’s all about skills that chat GPT can’t usurp.
A lot of average people are about to have a Very Big Problem..
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Directed Energy
Directed Energy
1 year ago
Reply to  Zardoz
Remote work is about to crash in flames. No reason not to be in an office with others and under supervision.
In regards to work being replaced, if a person physically works on hardware that can’t leave a building, they don’t have to worry about being replaced, they just have to worry about where to find the work.
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Lisa_Hooker
Lisa_Hooker
1 year ago
Reply to  Directed Energy
Which reminds me, if you do software/hardware –
Vacation in India and visit your old job.
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Tony Bennett
Tony Bennett
1 year ago
Reply to  Zardoz
Wait till corporations realize WFH can morph into WFA (anywhere) … and how little they can pay people to operate from home countries … and no need for H1-B visas.
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ga7pilot
ga7pilot
1 year ago
Reply to  Directed Energy
Or let people be mobile.
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KyleW
KyleW
1 year ago
I love your insights Mish. Nobody else I know of talks about how credit defaults and write-downs are deflationary. We’re really in the same spot we’ve always been. A lot of our “assets” are actually bad debt.
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Jack
Jack
1 year ago
Reply to  KyleW
…and the remaining assets are just debt.
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hmk
hmk
1 year ago
Assest price inflation or deflation isn’t as far as I know is not included in the CPI. Housing doesn’t seem to be deflating and that is also not included in CPI. Cost push inflation will persist as labor is tight, and wages are high. Input costs are still high. I don’t see how inflation will come down to the arbitary 2% level.
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Carl_R
Carl_R
1 year ago
Reply to  hmk
High input problems can cause a price increase, it can’t cause inflation. What causes inflation is rising input prices. It’s a minor, but important distinction. The market can adjust to high input prices, but unless the input prices continue to rise, the effect will be minor. The real problem we face now is de-globalization. For the last thirty years, globalization has kept inflation down. While prices of things that couldn’t benefit from globalization have risen, many goods have seen declining prices in real terms. For example, I bought a steel, American made vacuum twenty years ago $780. (It was well made, and it will run for many more years.) In today’s dollars, that would be $1300. Today I could buy an equivalent vacuum for about $400 (plastic, made in China or Malaysia), a 70% price reduction. The net effect was a composite inflation of 2%, but with some things falling while others rose.
Covid started the process of de-globalization due to shortages. The Russian invasion of Ukraine has accelerated it. The result of de-globalization has to be for the price of things which benefited from globalization to rise at faster than other items. I agree with you – I don’t see how inflation can come down to 2% in the near future, short of a massive depression.
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Jack
Jack
1 year ago
Reply to  Carl_R
Nailed it. We exported inflation for the last 30 years with globalization. What was not exported was outsourced to the end-user (e.g., you now have the job of being a travel agent, bank teller, book keeper, etc..).
Now with de-globalization, disruption of supply chains, and poor demographics we will see inflation coming home as well. Decreased availability of credit will make the situation worse.
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