The Wall Street Journal put on a full-court press of inflation blather yesterday, shilling the Fed and a mainstream consensus that higher prices for everything loom in our future. Here’s one of the headlines from Wednesday’s edition: ‘Yes, Central Banks Can Create Inflation. Just Ask Argentina”. And here’s the headline I would offer in response: ‘No, Central Banks Cannot Create Inflation. Just Ask Europe and Japan’. The other headline, atop a column by one Ken Brown, read as follows: ‘No One Believes It, but Inflation Is a Pretty Good Bet’. In response, I offer the chart above. If inflation were coming, the long-term bond would reflect it with a bearish chart (bond yields correlate inversely with price). Does the chart look bearish? Not hardly. Even to someone who knows nothing about charts, T-bond futures look like they are headed to the moon.
Huge Potential for Bond Bulls
I’ve been predicting for years that interest rates on 30-year U.S. Bonds, currently around 2.70%, are headed to 1.64% or lower. If so, the futures contract shown in the chart is bound most immediately for 186^15. This implies that anyone betting on inflation, as Mr. Brown has suggested, is going to get killed. Betting on deflation, on other hand, offers some of the juiciest odds that can be found in the investment world. If interest rates were to fall below 2% as I’ve been predicting, the capital gains potential of T-Bonds is enormous — on the order of 20% or more per year if the drop occurs over the next 18-24 months.
Here’s another headline from yesterday’s Journal: ‘Fed Signals No Rush to Raise Rates’. Now there’s an understatement. The Journal embarrasses itself when it implies that a rate hike is still possible. When the Fed tried to pretend it could walk the walk a couple of months ago, raising administered rates by a token 25 basis points, it set off a panic in global markets that could conceivably have snowballed into a crash like the one in 2007-08. We’re that close. Under the circumstances, talk of a rate hike is about the stupidest thing I’ve ever heard.
Ben, thanks for your thoughts. I have to disagree, however. My understanding is that “inflation is always and everywhere a monetary event.” Since the Western oligarchs became wild inflationists (see John Jay’s thoughts–Johns, I’d love to see a time line of your spreadsheet) they have worked overtime with the propaganda that rising prices is inflation and falling prices is deflation. Everyone has fallen for their line. It’s hogwash. Inflation is monetary, period.
At various times due to asset bubbles bursting–because of, not in spite of or contrary to inflation– we’ve had falling asset prices. (Houses are still down from the peak in most of the country, I think.) Falling prices in one part of the economy does not mean that the money supply isn’t going up. We can have a stock market crash, yet the cost of Wheaties and milk go up. I fail to understand why people don’t admit this. WE ARE LIVING IT.
Another phenomenon occurring is that people “don’t have enough money.” This, again, is a feature of inflation. It’s not because the money supply isn’t going up, but because their incomes are not keeping up with inflation. Wages never do and now rentier income doesn’t, either. Also, velocity has gone down due to the fears of asset price collapses, not due to the fear that the money supply will go down.
I agree with Rick that hyper inflation is rare and that tptb will likely avoid it, but here’s the thing. I’ve read the books about Weimar, too. Fergusson said that the German officials did not set out to cause hyper inflation. They were responding to the calls from the unions and others that the workers DID NOT HAVE ENOUGH MONEY, despite the printing presses running overtime. Do you see something in common with our situation and Weimar? I think that hyper inflation is never a policy choice, as Rick cogently points out. However, it happens. Why? It’s due to tptb thinking that falling asset prices and wages not keeping up with the cost of living is deflation, so they gun the money supply.
In other words, the Western oligarchs are doing the exact same thing as the Weimar officials.
Be that as it may, I cannot understand why people who bemoan the wild expansion of credit keep talking about deflation. ?!? Unless and until the credit bubble bursts, this is obviously inflationary. I know Rick says that tbpb won’t be able to gun the money supply enough to offset a collapse in credit, but we shall see. I make no predictions. They dodged the 2008 bullet by changing the rules, and as desperate people, they’ll do it again. How is a mystery to me. I’m not in their speed dial. 😉
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(Hyper)inflationists never like to discuss the nitty-gritty details, Mary. They seem to think they can win arguments by throwing around by-now meaningless phrases like “gunning the money supply.” But what, really, is “gunning the money supply” supposed to mean? Central bank stimulus to date amounts to perhaps $20-$30 trillion, but the only inflation it has created is in the housing market, stocks and bonds.
Having read Fergusson, you must be aware that the Weimar hyperinflation was propagated with physical cash money. We don’t use much of that any more, and that poses a key problem for the ‘helicopter-drop’ crowd. You could argue that the fraudsters at the Fed would simply have the banks add a zero or two to everyone’s credit line. But just try to play that forward. As I’ve noted here many times in the past, the clearing system that makes plastic money “work” is exquisitely fragile, based as it is on ignorance and egregiously misplaced trust.
Anyone who would argue the case for hyperinflation should be made to explain first of all what will happen to mortgage debt. Will we someday peel a few megabills from our money clips to pay the balance due on our homes? When you’ve finished with that question, Mary, please tell me how a hyper-expansion of credit would interact with such incipiently deflationary black holes as pension funds, Social Security, Medicare and life insurance? They all pay in cash, as you know, and trying to hyperinflate away their obligations — i.e., stiffing beneficiaries — would start riots.
RA