'The Truth About Deflation' Janszen
Posted: Tue Oct 28, 2008 12:53 am
I thought I would post this as I consider Eric Janszen to have a decent grasp of monetary policy. What I don't hear these people saying though is that inflation is an increase on the monetary aggregates with an expansionary business climate...We have neither today. Please comment and critique.
The truth about deflation
by Eric Janszen
With all of this panicking into dollars we get asked a lot about deflation. "Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100." The reason is that we are 100% certain that dollar appreciation that we call "Ka" as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cost $2,000, although there will be plenty of cheap used cars for sale, and gold will not go to $200. Here's why.
The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.
This ain't deflation
We're not nit picking terminology here. We’ll show you what a real deflation spiral looks like: nothing whatsoever like the deflation we are seeing today that we have long forecast and call disinflation to distinguish it from the run-away deflations that occurred under the gold standard in the pre Bretton Woods era.
Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold to inflate the money supply to stop deflation, especially in times of war.
Note the early 1920s deflation reached -30% in some months and on and off for years at a time. Note also the massive inflations produced as the US government temporarily suspended gold convertibility and printed money to fund wars. Many forget that these huge swings occurred: 80% inflation during WWI and 100% inflation after WWII.
Governments can always produce inflation. Always.
The period of deflation that occurred in the early 1930s is the one that most people think about when they hear the word "deflation." What they really mean is a deflation spiral, with the money supply imploding, credit contacting, large scale bankruptcies, rising unemployment, and falling economic output. Note that there was not a single month of inflation from 1930 to 1933. Prices went down and down and down. For years.
The 1930s deflation spiral ended abruptly in 1934. Why? FDR took the US off the gold standard and devalued the dollar against gold which remained the international currency for trade transactions. And–this is key–there has never been another similar period of deflation since in any country. Ever.
Only one other government made the choice to stay on the gold standard at the time, Germany. Every other government got off the gold standard in the 1930s and inflated. Many, such as the US, resorted to currency depreciation, thus the impetus for Bretton Woods after the war; nations in a global depression that fight each other with competitive currency devaluations are soon fighting each other with guns.
There is a reason for that: since the 1930s no country has been on a national gold standard.
There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era. No more 30% deflations. On the rare short term periods when deflation happens it is less than -5% most months and only once since Bretton Woods exceeded 10% in one month.
Take-away: No gold standard, not deflation spirals. Ever again.
The first years of the 1960s were the golden era of monetary stability. In fact life was so good the US government decided to ruin it by starting a war, building the military industrial complex, and launching numerous entitlement programs that we are to this day still kidding ourselves into thinking we can pay for. Ran up a deficit, the Europeans figured we were cheating, called our bluff by demanding payment of debts in gold, so we defaulted. US to the world: Thanks for playing!
This was the ugly era of birth of the FIRE Economy. I won’t go into the details here but, clearly, deflation was not the problem. I will mention that this is when we came up with the dollar cartel to knock back OPEC and Nixon got to tell OPEC: "Thanks for playing!"
As the Volcker Fed raised interest rates, the US economy experienced a short spike of deflation around -5%. Since the technology stock bubble popped in 2000, the US has had several months of deflation like that in 2002, 2004, 2006, and 2007.
If you want to call today’s period of low inflation a "deflationary period" then you must also call 2002, 2004, 2006, and 2007 deflationary–actually more deflationary than today if you look at the graphs. Meanwhile oil increased from $20 to $147 over that period, which is not exactly a typical symptom of deflation.
Japan also has never experienced a deflation spiral. They could end their modest deflation, never exceeding -2% in a quarter off and on for more than a decade in short order, but the trade-off for them is a crashed yen– so they don't. I think we'll crash the dollar fighting off deflation.
The critical take-away is that we are indeed experiencing short term deflation. We call it disinflation here in the context of Ka-Poom Theory to keep readers from confusing the process with the start of a deflation spiral–which cannot happen under a floating exchange rate, fiat money system. The only way it could is if governments around the world all got together and decided to crash the global economy. That strikes us as unlikely. More likely one or more will move to reflate using currency devaluation.
If the Fed so desired the US could have 100% inflation by the middle of 2009 as the US did in 1946. All that is needed is for Congress to borrow a few more trillion into existence to fund old and new liabilities and have the Fed print it because our government cannot borrow the money from overseas or raise taxes, or devalue the dollar, or both.
It’s just that simple. Wish it wasn’t so. Trust your government not to do it?
Neither do we.
The truth about deflation
by Eric Janszen
With all of this panicking into dollars we get asked a lot about deflation. "Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100." The reason is that we are 100% certain that dollar appreciation that we call "Ka" as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cost $2,000, although there will be plenty of cheap used cars for sale, and gold will not go to $200. Here's why.
The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.
This ain't deflation
We're not nit picking terminology here. We’ll show you what a real deflation spiral looks like: nothing whatsoever like the deflation we are seeing today that we have long forecast and call disinflation to distinguish it from the run-away deflations that occurred under the gold standard in the pre Bretton Woods era.
Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold to inflate the money supply to stop deflation, especially in times of war.
Note the early 1920s deflation reached -30% in some months and on and off for years at a time. Note also the massive inflations produced as the US government temporarily suspended gold convertibility and printed money to fund wars. Many forget that these huge swings occurred: 80% inflation during WWI and 100% inflation after WWII.
Governments can always produce inflation. Always.
The period of deflation that occurred in the early 1930s is the one that most people think about when they hear the word "deflation." What they really mean is a deflation spiral, with the money supply imploding, credit contacting, large scale bankruptcies, rising unemployment, and falling economic output. Note that there was not a single month of inflation from 1930 to 1933. Prices went down and down and down. For years.
The 1930s deflation spiral ended abruptly in 1934. Why? FDR took the US off the gold standard and devalued the dollar against gold which remained the international currency for trade transactions. And–this is key–there has never been another similar period of deflation since in any country. Ever.
Only one other government made the choice to stay on the gold standard at the time, Germany. Every other government got off the gold standard in the 1930s and inflated. Many, such as the US, resorted to currency depreciation, thus the impetus for Bretton Woods after the war; nations in a global depression that fight each other with competitive currency devaluations are soon fighting each other with guns.
There is a reason for that: since the 1930s no country has been on a national gold standard.
There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era. No more 30% deflations. On the rare short term periods when deflation happens it is less than -5% most months and only once since Bretton Woods exceeded 10% in one month.
Take-away: No gold standard, not deflation spirals. Ever again.
The first years of the 1960s were the golden era of monetary stability. In fact life was so good the US government decided to ruin it by starting a war, building the military industrial complex, and launching numerous entitlement programs that we are to this day still kidding ourselves into thinking we can pay for. Ran up a deficit, the Europeans figured we were cheating, called our bluff by demanding payment of debts in gold, so we defaulted. US to the world: Thanks for playing!
This was the ugly era of birth of the FIRE Economy. I won’t go into the details here but, clearly, deflation was not the problem. I will mention that this is when we came up with the dollar cartel to knock back OPEC and Nixon got to tell OPEC: "Thanks for playing!"
As the Volcker Fed raised interest rates, the US economy experienced a short spike of deflation around -5%. Since the technology stock bubble popped in 2000, the US has had several months of deflation like that in 2002, 2004, 2006, and 2007.
If you want to call today’s period of low inflation a "deflationary period" then you must also call 2002, 2004, 2006, and 2007 deflationary–actually more deflationary than today if you look at the graphs. Meanwhile oil increased from $20 to $147 over that period, which is not exactly a typical symptom of deflation.
Japan also has never experienced a deflation spiral. They could end their modest deflation, never exceeding -2% in a quarter off and on for more than a decade in short order, but the trade-off for them is a crashed yen– so they don't. I think we'll crash the dollar fighting off deflation.
The critical take-away is that we are indeed experiencing short term deflation. We call it disinflation here in the context of Ka-Poom Theory to keep readers from confusing the process with the start of a deflation spiral–which cannot happen under a floating exchange rate, fiat money system. The only way it could is if governments around the world all got together and decided to crash the global economy. That strikes us as unlikely. More likely one or more will move to reflate using currency devaluation.
If the Fed so desired the US could have 100% inflation by the middle of 2009 as the US did in 1946. All that is needed is for Congress to borrow a few more trillion into existence to fund old and new liabilities and have the Fed print it because our government cannot borrow the money from overseas or raise taxes, or devalue the dollar, or both.
It’s just that simple. Wish it wasn’t so. Trust your government not to do it?
Neither do we.