Free Markets, Free People

No hyperinflation yet

One of the key worries about the Federal Reserve’s policy of Quantitative Easing has been the fear that it would result in hyperinflation at some point. But, Mike Shedlock, writing at Business Insider, asserts that inflation is not what we should be fearing: deflation is. Despite his rather self-centered, Ooh-look-what-a-cool-boy-I-am writing style, he makes an excellent point, and provides some valuable insight.

Shedlock actually has a rather different definition of inflation and deflation than most do, as he doesn’t concentrate primarily on the money supply or price levels, but rather the state of credit markets.

Inflation is a net increase in money supply and credit, with credit marked-to-market.

Deflation is a net decrease in money supply and credit, with credit marked-to-market.

Complete loss of faith in currency.

The first two definitions have nothing to do with prices per se, the third does (by implication of currency becoming worthless).

To determine whether we are currently experiencing inflation or deflation, he uses the following criterion:

Symptoms of Deflation

  1. Falling Credit Marked-to-Market
  2. Falling Treasury Yields
  3. Falling Home Prices
  4. Rising Corporate Bond Yields
  5. Rising Dollar
  6. Falling Commodity Prices
  7. Falling Consumer Prices
  8. Rising Unemployment
  9. Negative GDP
  10. Falling Stock Market
  11. Spiking Base Money Supply
  12. Banks Hoarding Cash
  13. Rising Savings Rate
  14. Purchasing Power of Gold Rises
  15. Rising Number of Bank Failures

He then goes through all 15 criteria and shows fairly persuasively that—according to his definition, at least—we are in the middle of a credit-led deflation, despite the fact that consumer prices are rising. certainly, asset prices are declining.

Which, I think just means we’re having stagflation, if today’s CPI numbers are to be beleived.

In any event, as I’ve been saying since 2008, the danger of our policy mix is not inflation in the short-term, but rather a recreation of the Japanese response to the currency crisis/deflation of 1992 that brought about the "Lost Decade". We’ve actually doubled down on the Japanese policy, and are experiencing the same economic result.

So, businesses and consumers are holding tight to their wallets, adjusting their balance sheets…and waiting.  Yes, there’s tons of cash sitting in banks right now that isn’t going anywhere, and as long as banks have a shortage of credit-worthy customers seeking loans, all of that cash is gonna keep sitting there are excess reserves.

Meanwhile, the one thing that has kept the dollar buoyed as the world’s reserve currency is that there’s really nowhere else to go. As attractive as the Euro might have seemed a couple of years ago, there’s a real chance that the Euro is on it’s way out, except perhaps as the joint currency of France and Germany.

What I would point out, though, is that Shedlock’s definition of hyperinflation is a state that exists as a result of a psychological event, not the result of something one can forecast via some predictive empirical  measurement. That’s unsettling, because you can never quite predict when a psychological breaking point in public trust is reached. No matter how deflationary credit might be at the moment, if we begin seeing a serious, sustained rise in price levels for consumer goods, I’d be a little worried. A steep fall of the dollar’s price in the FOREX market would be worrisome, too. If hyperinflation is the result of a psychological shock disconnected with any sort of statistical measurement, then I’d be careful finding too much comfort in statistics.

The numbers say that deflation is our biggest problem right now, though, and I’d say that’s generally right. If the economy picks up and those excess reserves begin to flow into the hands of consumers though, I’d be looking very hard at the Fed as the velocity of money picks up, to see how they plan to sterilize the excessive growth in the monetary base they’ve created.

Dale Franks
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7 Responses to No hyperinflation yet

  • We’ve had stagflation, a stagnate economy with inflation.  So why can’t there be staghyperinflation, basically a stagnate economy that runs into a currency crisis?  Monetary inflation is on hold for now but if QE3 shows up then I’ll wager it will be in some form of monetizing government debt.  Monetizing government debt is a good way to bring about a currency crisis as creditors don’t want to be paid back in increasingly worthless dollars.
    So a deflating economy fails to be propped up by a loose monetary policy that leads to a currency crisis.  The result is a contracting economy with high inflation.  It seems plausible to me.
    More plausible seems to be Japan’s lost decade where stimulus after stimulus fails to re-inflate the economy but no currency crisis results.

  • That’s more the universe revolves around wallstreet thinking which I believe we have too much of. 

    Inflation/deflation metrics are about helping to determine my personal purchasing power as a measure of my standard of living.  Whether banks are hoarding cash or not, the price is the price and it is what matters to what my standard of living is today (combined with net income). 

    He’s trying to expand it into something more comprehensive of the whole economy and a better forcaster/root cause identifier of that which is fine.  But don’t hijack terms meant for a different purpose. 

  • But…

    Another report from the Labor Department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June. That was above economists’ expectations for a 0.2 percent gain.
    Gasoline, which rose 4.7 percent after falling 6.8 percent the prior month, accounted for about half of the rise in CPI last month.

  • It seems to me, on just a quick look, that points 5 and 14 clash. In the real world, if the dollar rises the purchasing power of gold falls.

  • Over at Wizbang, they have a piece that notes that from 2007 to 2009, the number of 200k+ earners has shrunk 13 % (29% less taxes collected), $1 million+ shrunk by 39%, and $10 million+ have shrunk by 55%.
    These folks haven’t stolen their way to the top.  They are merely the survivors.

  • Why would treasury bond yields go down while corporate bond yields go up?
    I guess that to find the answers to these and other questions I will have to read the linked article when I get some time.

  • Inflation may be coming, but the data don’t say it’s here. Check this:
    <a target=”_blank_” href=”″>Scott Sumner’s blog</a>