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
- Falling Credit Marked-to-Market
- Falling Treasury Yields
- Falling Home Prices
- Rising Corporate Bond Yields
- Rising Dollar
- Falling Commodity Prices
- Falling Consumer Prices
- Rising Unemployment
- Negative GDP
- Falling Stock Market
- Spiking Base Money Supply
- Banks Hoarding Cash
- Rising Savings Rate
- Purchasing Power of Gold Rises
- 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.