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Wednesday, June 26, 2013

Inflation vs Deflation XII

Nate closes out the Great Inflation Debate with his final entry:
So at long last we understand how hyper-inflation works.  It is caused by hyper-velocity.  Meaning folks are spending their money as soon as they get it.  I'm not going to go much into the differences in Weimar and today... because honestly the differences are actually smaller than Vox indicates.  See we have the worlds leading reserve currency.   Companies and governments have enormous amounts of cash on hand ready to dump.  As I showed previously... the Fed has no idea how much cash is actually out there in the international market.  We know that there is roughly 2 trillion in corporate cash reserves in the domestic market... but we're told its actually as much as 5 or 6 trillion in the international market.. and that's on the low end.  Kids... that isn't even counting what the governments around the world are hoarding.  Remember one of the benefits of being the foremost reserve currency is that oil is priced in dollars...  so to buy oil you first have to buy dollars. That's important  Its a big deal.  So there is a lot of demand for dollars out there.  And a lot of dollars hoarded up.

And thus we see that the engine is certainly sufficient to put the train in motion.  In fact there is probably enough cash out there to blow it to hell and gone.  No.. its not like Weimar.  Its different.  Its very different.  But history doesn't repeat.  It rhymes.

A common, but often ignored, phenomenon is that even during hyper-inflation the central bankers think that there isn't enough money to go around.  Why?  Because I have explained it is velocity driving the problem.  Not an increased supply in money.  Remember that central bankers are all worshipers of John Maynard Keynes.  Damn his eyes.  So they see complex economic situations as simplistic equations that can be manipulated with god-like precision.  They have equations that they really believe accurately can describe something as complex as an economy.  To much X?  Add a little Y.  To much V?  take away some Q.  I know this sounds insane... because well... it is... insane.  Keynesianism is far more idiotic than you probably think it is.
I leave it to the readers to decide which case they found more convincing. Of course, time will be the only meaningful judge, as for all we know, the current state of monetary disinflation could, at least in principle, continue until the sun grows cold.  In this regard, I somewhat disagree with Nate, in that if hyperinflation doesn't at least begin to appear by 2016, I don't think it would be necessary for him to concede. In any event, as one reader commented, there are no winners in this debate, everyone, including Ben Bernanke and Goldman Sachs, looks to lose out in some way.  It is better to be a shopkeeper in peacetime than a king in chaos; those whose times are ignored by the historians because "nothing happened" are the fortunate ones.

It might be interesting, however, to learn if your views were modified at all as a result of the debate.  By which I mean if you were formerly inclined to expect deflation but now consider hyperinflation more likely, or vice-versa.

Nate is putting the debate into epub format which will be cleaned up a little for typos and then made available as a free ebook for future reference.

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122 Comments:

Anonymous JW June 26, 2013 1:08 PM  

Too bad both of you are not on CNBC to discuss your positions. It would be enlightening for many.
I'm just going to keep holding/buying gold & silver.

Blogger Nate June 26, 2013 1:08 PM  

Thanks again mate. And well played.

Anonymous Mr. Nightstick June 26, 2013 1:16 PM  

I have to admit, you guys convinced me to get off my ass and buy PMs. On the other hand, I have lost bucket loads since then but have never been more happy to do so.

Blogger Bodichi June 26, 2013 1:21 PM  

Great debate gentlemen. I hope both of you are right, that we experience crushing deflation leading to astronomical hyper inflation as a reactionary measure. I hope this leads to a Seneca curve style collapse that results in a very drastic 90% die off world wide.

I think that would be a great time to see a revival in faith.

Blogger Doom June 26, 2013 1:23 PM  

Not so much on the hyper-inflation. I see where he is going with it. We have been here before, although militarily. We called it the cold war, or more specifically mutually assured destruction. This time it is merely economical-political. Sure, China alone could probably blow chunks in the gasket. But their boat is directly linked to our ship, only their waterline will assure they will sink first. As such, they are far more of a watchdog than an economic enemy. We sink, they swim first, easy targets while we sink. Many nations and individuals are likewise linked, and lower in the water, or beholding to those who are economically linked (or fearful of them). China, even Britain and France, have no problems just killing someone. Russia is downright enthusiastic about killing people, as usual, whether they be "spies", newsmen, politicians, or billionaires.

Oh, sure, the money is out there, and could be spilled like milk, destroying the value. But the groups, people, companies, and governments who hold know the story, their story, would end, if they spilled that milk.

The need, and want, is there. China recently sold a boatload of silver, blipping silver down to $20 for half a day. That's a fuck lot of silver, at the time silver was going for $35-6? India bought silver back to it's previous level before the recent fall. No, if in need of cash (liquidity?), gold, silver, and just about anything else will be sacrificed before the greenback. Not for the greenbacks sake, but for the general markets sake. I am guessing, if someone is completely dependent on that value, either they will be forced to sink rather than create ruin or the other players will pitch in and forgive/renegotiate debt to make sure the dollar maintains a certain level of value, no matter how beyond disbelief it is or becomes.

I'm not an economist, I don't even play one on tv. I'm about a quarter insane on good days, and mostly dead to. But... well... you did ask.

Anonymous Josh June 26, 2013 1:24 PM  

Started the debate on the side of deflation, and remain on that side.

Blogger Nate June 26, 2013 1:24 PM  

"I hope this leads to a Seneca curve style collapse that results in a very drastic 90% die off world wide. "

well good to know we have at least one optimist around here...

Blogger Nate June 26, 2013 1:25 PM  

"Started the debate on the side of deflation, and remain on that side."

closed minded bigot.

Anonymous Josh June 26, 2013 1:25 PM  

The need, and want, is there. 

Holy crap, Les Miles reads the blog?

Anonymous Aviendha June 26, 2013 1:25 PM  

I'm more worried about deflation than inflation because I'm more prepared for the former. I have many end of the world bets (to collect from who) but then since I'm not about to quit my job it is better than a money market.
I appreciate the effort of both participants and as always learned a ton.
Thanks fellas

Now let me get back to stacking...

Anonymous Toby Temple June 26, 2013 1:28 PM  

I started out as an agnostic.

Now I'm on the side of hyperinflation.

Anonymous Josh June 26, 2013 1:28 PM  

closed minded bigot.

I don't think you could have done a better job arguing your case.

But when you have had massive interventions by central banks to prop up the credit markets for years, and it still results in confiscating deposits to contain a collapsing banking system, I don't see how it ends in fire...

Anonymous Porky June 26, 2013 1:28 PM  

That was kinda anticlimactic.

Blogger James Dixon June 26, 2013 1:30 PM  

> It might be interesting, however, to learn if your views were modified at all as a result of the debate. By which I mean if you were formerly inclined to expect deflation but now consider hyperinflation more likely, or vice-versa.

I still have absolutely no idea. :( I can see the merit in both positions.

Anonymous VD June 26, 2013 1:30 PM  

Thanks again mate. And well played.

Likewise.

Anonymous Will Best June 26, 2013 1:36 PM  

In 2012 I was hedging inflation, I have since hedged deflation. The high level discussion was interesting, but I generally take my queue from what I see in my business and what concerns other small business owners system have or be facing.

Anonymous indyjones June 26, 2013 1:38 PM  

I have to side with deflation. When credit money is cheap and easy you see inflation as its added and deflation as it goes bad and disappears. Credit money blew up stocks, houses, and pm,s. As credit money collapses so will everything it inflated.

Blogger Bodichi June 26, 2013 1:56 PM  

For those who side with deflation and only deflation, why wouldn't that (which I agree with) directly lead to hyperinflation via direct economic monetary injection? Bernanke has stated that he would drop money from helicopters to prevent deflation.

Why can't they both happen, one after the other? Why wouldn't you want to see both happen?

Anonymous rho June 26, 2013 2:04 PM  

I'm more inclined towards inflation myself. I have a suspicion that inflation is preferable to those in power, and that it will come either incidentally or be engineered.

I did like VD's deflation argument, and it makes sense, but I don't think it will be allowed to happen. Mine is not an economic argument, it's a psychological one--as much as those two can be disentangled.

Enjoyed this very much, gentlemen. Thanks for all the hard work.

Blogger Conan the Cimmerian, King of Aquilonia June 26, 2013 2:04 PM  

Great reading as posts go.

I was a hyperinflationist before, I am mixed now.

I am mixed, not because of the arguments presented (though they have helped in general understanding), just that I am not sure I have the discernment at this time to call it.

I be a needin' moar edumacation on the ekonomiks.

Blogger Nate June 26, 2013 2:05 PM  

Both can happen bodichi. I actually made that point in the debate.

Blogger Jason Brunson June 26, 2013 2:06 PM  

Call it a draw and save nickles...

Blogger Nate June 26, 2013 2:06 PM  

"Great reading as posts go.

I was a hyperinflationist before, I am mixed now."


traitor.

Blogger Nate June 26, 2013 2:09 PM  

"That was kinda anticlimactic. "

If you were a keynesian... I can assure you... you would not find the assertion that your fundamental equations are so wrong they would lead you to conclude that hyper inflation was actually a money shortage... anti-climactic.

Anonymous Tallen June 26, 2013 2:11 PM  

Just for shits and giggles have you two considered doing the debate over but switching sides? I followed enough to understand you can each make the others' case.

Blogger Bodichi June 26, 2013 2:12 PM  

I have another interesting question to posit to both VD and Nate. What does societal decline look like in:
A: A world undergoing deflation, is this just a repeat of the great depression, almost like a modern cover song?

B: Inflation, is this just an update of Weimar leading to inevitable total war?

C: Both followed by Seneca style collapse of modern life.

Blogger Jason Brunson June 26, 2013 2:18 PM  

Call it a draw and save nickles...

Blogger Nate June 26, 2013 2:18 PM  

"Too bad both of you are not on CNBC to discuss your positions. It would be enlightening for many."

we would just end up agreeing on the end of the world and talking about the NFL.

Anonymous Orville June 26, 2013 2:18 PM  

Still a deflationist.

Anonymous Porky June 26, 2013 2:20 PM  

If you were a keynesian... I can assure you... you would not find the assertion that your fundamental equations are so wrong they would lead you to conclude that hyper inflation was actually a money shortage... anti-climactic.

I liked that part. And it's probably true.

But I tend to not ascribe to Keynesian mal-education what can more readily be ascribed to greed. Irredeemable liabilities, unlimited cash printing ability and seignorage are a temptation few progressives will ever walk away from.

Anonymous Executive Summary June 26, 2013 2:23 PM  

There's nothing sure
The rich get rich and the poor get poor
In the meantime, in between time
Ain't we got fun?

Anonymous zen0 June 26, 2013 2:27 PM  

Bodichi wants it easy:
I have another interesting question to posit to both VD and Nate.

I thought they both covered that in their last posts. Nate was more detailed.

Anonymous Noah B> June 26, 2013 2:32 PM  

I still find myself mostly in the WZ camp. I don't think we're on a direct path to get there, and we will likely see many more oscillations between inflation and deflation before the big blowup.

The debate has hardened my belief that either outcome is possible and that it simply depends on what the central bankers do. (Many deflationists seem to believe that cash would continue to have value after a collapse of the banking system, but it seems very unlikely to me that cash would hold much value for long.) I think it would be interesting to discuss in more detail who we believe to be controlling the central banks and what their motives are. One thing that troubles me is that I seem to have a different opinion than both Vox and Nate regarding the Fed's motives.

It also seems to me that the final inflationary/deflationary event will result in the rapid destruction of the financial system, and if that's true, then the planning required in anticipation of either outcome should be similar.

Blogger TontoBubbaGoldstein June 26, 2013 2:35 PM  

I went in as a smug, pompous member of Team WZ. I actually thought Nate would make Vox his li'l bitch in this debate.

I came out, while still on the hyperinflation side, understanding that deflation is a real possibility.

Anonymous Northern Observer June 26, 2013 2:45 PM  

You're both right and the effects will cancel each other out. Status quo FTW.

But for real; Nate: so it's the dump and not the pump that will drive hyper inflation? (the pump causing the dump aside)

Anonymous hardscrabble farmer June 26, 2013 2:46 PM  

Milk is now $6 per gallon, fuel is around $4. Last year a 40 pound bag of seed corn was $7, this year its $15. A cubic yard of concrete ran about $60 in 2006, this year it's $125. CDX plywood has tripled in price in the last four years while timber prices have declined by 50%. We get $60-$75 per gallon of maple syrup, $120 per gallon if I bottle it in nice glass. My neighbor remembers when it was $1 a gallon. A new car costs about 2X what I bought my first house for in 1985. In 2005 hat house sold for 20X what I paid for it. Our current property taxes have quadrupled in just over 10 years. We installed a new well pump last Summer for 20K, the last one was installed in 1990 for 2K.

I could go on, but that's just off the top of my head. I certainly don't want to be one of those old coots who goes around saying "When I was your age I could buy a house for a hand full of dryer lint and get change." But the fact remains that anyone who can argue that we are not currently experiencing inflation on a massive scale is so full of shit or delusional I don't really want to have a conversation with them.

I have no idea what hyper inflation will look like, but what's taking place on the ground today in the real world where human beings live, work and eat looks awfully goddamned hyperinflationary to me.

Anonymous JartStar June 26, 2013 2:49 PM  

I leaned towards hyperinflation, but I'm tending more towards Vox's timeline and economic malaise for the next 20 years or so until the end. I wouldn't be surprised if it is 30 years or more before there is a big collapse. What I've learned out of all of this is that the powers that be are very, very good at kicking the can.

Anonymous Noah B. June 26, 2013 2:58 PM  

Should have read the last part of your post before I posted mine, Nate. Well said.

Anonymous Raggededge June 26, 2013 2:58 PM  

I lean inflation, but I'm not convinced with Nate's timeline. I agree with Vox, if it doesn't happen by 2016, I don't think that means Nate is wrong about inflation, only that he got the timing wrong.

Anonymous Daniel June 26, 2013 3:00 PM  

Before the debate, I was deflation-minded, just because if the only legitimate option was hyperinflation, I was doubtful that hyperinflation is more likely to come at the end of a century+ of inflation.

Not a very scientific opinion, I admit. Now, with the help of the debate, I'm persuaded that hyperinflation is, to a degree, in the eye of the beholder. What Nate views very legitimately as hyperinflation, seems to function, in a number of significant ways, as practical deflation.

I propose a Hyperinflation-Deflation Duality. Given the current variables, deflation and hyperinflation, from a practical perspective, take on the characteristics of the other in real-time.

The key proof of the debate however, is that "Bad Thing Happening to the Value of Money" is not only fated to occur, it already has. Any debate over "is bad coming or not" is identical to two men debating if their sinking ship might hit another iceberg on the way down.

You want a winner or loser? That's easy.

Krugman lost.

Not only that, but he lost in round 1. It was not very different than the off-hand implosion of PZ Meyers last shred of professional authority at the almost unwitting hands of Vox. In a dark corner of the interneterati, a man's career hung in the balance, and the balance gave way.

Anonymous Noah B. June 26, 2013 3:01 PM  

Here's something not to forget about the timing of all this: as bad as things are in the USA and Europe, Japan is in far worse condition. I'm betting that's where it starts.

Anonymous the bandit June 26, 2013 3:05 PM  

I came out of this debate wanting either (or both) of these men as a neighbor.

Blogger Nate June 26, 2013 3:06 PM  

"You want a winner or loser? That's easy.

Krugman lost. "

I dare say VD and I will both accept that with a little satisfaction.

Anonymous allyn71 June 26, 2013 3:15 PM  

"I have to side with deflation. When credit money is cheap and easy you see inflation as its added and deflation as it goes bad and disappears. Credit money blew up stocks, houses, and pm,s. As credit money collapses so will everything it inflated." - indyjones June 26, 2013 1:38 PM


I wrote out a long, articulate (for me) response with my rationale. Took me about 1/2 an hour and when I hit publish it went to the internet never never land. indyjones' post pretty much sums it up and will have to suffice as I don't want to go through the hassle of trying to recreate it again.

Well done to you both. I went into it siding with Vox and after looking at it in new and unexpected ways I still do. Sorry Nate but we will have to agree to disagree on this one. I think credit money and leverage doom the WZ scenario vs. the "Great Deflate" and don't think your position changed that.

At the end of the day, it doesn't really matter which road we go down. Whether money evaporates to nothing via default and contraction or is inflated away to nothingness, it is still worth nothing and the only thing that will matter is what you physically possess and what you can maintain possession of the rest will just be fairy tales.

One last note that addresses Daniel proposition of Hyperinflation-Deflation Duality argument above. Spatial considerations was a subject that never was really nailed down in this exercise (really the only loose end I saw unresolved throughout) and at times I didn't know if you both were operating in similiar time zones. I do think there could be a very short timed hyperinflation period in an overall deflationary scenario right before the whole thing went "poof" and defaulted away to the abyss.

Anonymous Daniel June 26, 2013 3:15 PM  

hardscrabble farmer

I have no idea what hyper inflation will look like, but what's taking place on the ground today in the real world where human beings live, work and eat looks awfully goddamned hyperinflationary to me.

Your figures are dead on, hf, but you are describing incremental increases over years. It's bad. It's obvious, but it isn't hyperinflation.

In 1840 (I'm pulling a number out of the air), old folks did not complain about how stuff used to cost a haypenny, and now it was a penny or a nickel. That's because the steady inflation that we have seen over the last hundred years does, indeed, seem to be accelerating somewhat. I mean, there's a reason we don't even have the haypenny anymore, and why there is a movement afoot to abandon the penny. Worse - milk, education, gas, etc. have all just gone completely insane over the last twenty years or so. (Heck, remember when gas was 90 cents in 2000? I do.)

A lot of that inflation is closely associated with the malinvesting force of hidden debt (milk, education, gas, etc. are all, notably, federally subsidized goods), and it seems to be getting worse. In order for it to end in hyperinflation - the already artifically propped price of milk has to somehow take off like a rocket - literally going up every morning. This is what Nate forsees, and that is the hyperinflation we are looking for.

My thought is that is if milk already has fake high prices, where is the juice to start multiplying those? My thought is that these prices are already phony, it makes more sense that the bottom will drop out and prices will crash (which isn't a good thing, either, as you very well know. Imagine having to adjust your syrup income back to a dollar!) than that they will have anything of substance to drive them up.

Nate and Vox nailed this coffin from both sides with far better nails than I could hope to conjure. My point is that your description of inflation is completely accurate (and as a simultaneous consumer of both maple syrup and milk, it sucks!): it just doesn't happen to be hyperinflation.

Blogger Nate June 26, 2013 3:19 PM  

"My thought is that is if milk already has fake high prices, where is the juice to start multiplying those? "

In Apple's bank accounts... and those of every soveriegn that buys oil...

Ask yourself what happens to those dollars when they aren't needed for oil purchaces?

Blogger GAHCindy June 26, 2013 3:20 PM  

I came around to Nate's way of thinking in his last post, and I still think he's got it. Doesn't matter much, though, does it? It's just gonna suck, is all. We'll be OK, but it's a good thing we're hillbillies. Hillbillies like beans. ;-)

Blogger wahsatchmo June 26, 2013 3:21 PM  

I began reading this debate as a hyper-inflationist honestly without even conceiving how deflation could happen given the current state of the world. This is the first time I actually understood the mechanisms by which deflation could occur, so I appreciate the time and effort Vox and Nate put into this debate.

But yeah, the conclusion is still the same either way: we are well and truly fucked.

Anonymous ZhukovG June 26, 2013 3:24 PM  

Very well done, both of you. Frankly, I'm not sure which of you is right, but I do lean toward Nate's timeline. Hell, Paul Craig Roberts thinks the lights may go out in late 2013.

Anonymous allyn71 June 26, 2013 3:26 PM  

"hardscrabble farmer

'I have no idea what hyper inflation will look like, but what's taking place on the ground today in the real world where human beings live, work and eat looks awfully goddamned hyperinflationary to me.'

Your figures are dead on, hf, but you are describing incremental increases over years. It's bad. It's obvious, but it isn't hyperinflation." - Daniel June 26, 2013 3:15 PM


Go to Vox's disinflation post. It covers alot of this ground. Also, as prices are inflated at a relatively fixed nominal rate (say 4%/yr.) the real world expression of that is quite a jump.

4% inflation of something priced at a $1.00 is 1.04.

4% inflation of something priced at $1000.00 is $1040.00. Which one seems like more sticker shock?

As inflation has incrementally increased prices, it has caused a seemingly greater rate of inflation because the numbers grow faster. Still isn't hyperinflation though.

Anonymous hardscrabble farmer June 26, 2013 3:27 PM  

"...the only thing that will matter is what you physically possess and what you can maintain possession..."

And when your property tax bill goes from 3K to 150K in a couple of years, what's possession going to do for anyone? How many folks are going to shoot it out with the taxman and of those who choose that route how many will retain possession of their land?

Whatever way it goes, the population loses everything and TPTB with the guns and the goons retain everything.

Next stop neo-feudalism.

Anonymous Daniel June 26, 2013 3:30 PM  

In Apple's bank accounts... and those of every soveriegn that buys oil...

Yep, and there's the rub exactly (which both of you have done a great job of hashing out, by the way). At a certain point, each of you had to make an intelligent prediction on where those dollars would go. And that is the precise point where I throw my hat in with my opinion that it is, in fact, an aristocracy that is coming for me and (more importantly) my children and their children in the next cycle just as Vox Cicero alluded to in his closing statement.

It won't go to milk. Not like that. I could be wrong. I usually am.

I think allyn71's time zone hypothesis is a good one. I don't remember (I haven't gone back to read the whole thing since the interlude) either of you taking much time with that concept, if any.

Anonymous Razoraid June 26, 2013 3:30 PM  

It all looks like one heck of a pig's ear, with no makers of silk purses anywhere in sight.

Anonymous allyn71 June 26, 2013 3:36 PM  

"And when your property tax bill goes from 3K to 150K in a couple of years,..." - hardscrabble farmer June 26, 2013 3:27 PM

You (and everyone around you) will have defaulted long before you get to taxes to 150k. That is Vox's whole point. The air will becoming out of the tire faster than the Fed can pump it in even if they want to.

Other than that, yes if you want to possess something you will have to fight to keep it. If you don't fight for it you won't keep it. Reconstruction vs. Feudalism will come down to who fights and who wins the fight. In 1861 the Feudal lords (banksters) won. Not sure who will this time around, but there will be some level of a fight. Hence the DHS preps., they know there will be a fight also. "All politics in this country now is just dress rehearsal for civil war" - Billy Beck, August 2009

Anonymous Roundtine June 26, 2013 3:47 PM  

In the past six weeks, the Brazilian real and Australian dollar have tanked due to the deflating bubble in China. While it's possible the US could go into hyperinflation first, a more likely scenario is that foreign currencies hyperinflate first as the bubbles pop. For every nation that hyperinflates or sees their currency devalued (think 50-75% overnight devaluations), it makes hyperinflation in the U.S. more likely because it will push the U.S. into more and more extreme deflation. U.S. debt increases in value relative to global GDP every time the U.S. dollar strengthens.

On the foreign ledger, when a currency devalues 50-75% or more, it wipes out the nation's debts and clears the balance sheet. Countries that go through a devaluation (and aren't a serial basket case like Argentina) will be positioned to survive a U.S. hyperinflation and even profit from it. Countries that defaulted in the late 1990s include Thailand, Indonesia, Russia, South Korea and China (by stealth, the bailed out all their banks). They were all strong economically even post 2008. China blew another bubble and is in trouble again. I expect they will eventually devalue the yuan, and that will cause all their emerging market trading partners to revalue. The euro will be dead at that point as well, with even Germany's exports suffering. The last one standing will be the dollar. And then comes the collapse.

Blogger Eric Wilson June 26, 2013 3:48 PM  

I'm not sure I truly understood deflation before the debate; in fact, the debate is what got me reading VP religiously. So, I might say I was on Team WZ. But only by default.

Now, I think I'm still WZ, but like JartStar, I'm thinking it will take longer than 2016. Nate keeps pointing to debt servicing costs as the catalyst, but I'm pretty sure the fed can keep interest rates sufficiently low for longer than that.

Not to say that VD's case was poor. Truthfully, I'm am more worried as my own personal finances go if
deflation occurs than HI. And besides which, I can't help but note that the only way I think I can see to play deflation is to be cash heavy, Nate's excellent suggestions notwithstanding.

Anonymous GreyS June 26, 2013 3:49 PM  

OT: for the Diversity file.. "Teens"

http://www.upi.com/Odd_News/Blog/2013/06/26/Lauderhill-Mall-fight-with-200-teens-sparked-by-social-media/2591372263328/

Anonymous hardscrabbe farmer June 26, 2013 3:53 PM  

"Also, as prices are inflated at a relatively fixed nominal rate (say 4%/yr.)"

I just used acouple of figures for materials and neccessities off the top of my head and none of them were even remotely close to 4%. Seed corn more than doubling in a single growing cycle is an example. If you went to your favorite restaurant with your wife evey year for your anniversary and the price doubled every time, you'd think it was somewhat more than "nominal".

What's going on in terms of doo dads and gee haws being priced lower and lower (think of those glowing retard screens every biped over the age of 9 thumbs incessantly as an example) doesn't offset something like fuel and grocery staples- or more importantly property taxes and healthcare that increases at rates in the 100's of percents. I can't feed my animals 96% less than last year to keep up with feed costs or house them in a barn that's 10% of the size of the one they wintered in last year. And my customers aren't going to continue buying from me if I double the price every couple of years.

I know that the only acceptable interpretation of hyper inflation is the lady with the wheelbarrow in Germany going out for a loaf of bread, but come on, can we at least discuss parameters for what is off the chart price increases? The other part of this is wages. i thankfully do not work for someone else, but virtuallyeveryone I know who does sings the same refrain- longer hours for less pay- so how do they factor in the steady income stream to the rapidly escalating costs of day to day life? Is that not an additional factor in the widening distance between the value of a dollar adjusted for inflation?

Anonymous Daniel June 26, 2013 3:59 PM  

My biggest problem with debate was my personality bias. I expected Nate to win, based only a number of his very specific long-term predictions that have come to pass, whereas Vox's numerous successful predictions always have the necessary Austrian haze cast upon them (fundamentally true - specific timing is irrelevant). I should have realized the basic principle: the guy who hits the extremely accurate predictions is the one most likely to be off on his next one. (paraphrasing RGD)

Call it the Austrian's Excuse. A little of the Ludwig Van is definitely the way to finish the night, but there's no telling what tomorrow, specifically, will bring. Nate's specificity is bold and useful, even if it turns out to be wrong.

Anonymous Cederq June 26, 2013 4:00 PM  

My costs are up over 60% from 6 mos ago, copper wire in different gauges are killing my profit, I am basically just servicing my current contracts and able to keep the lights on, thank the devils that be it ain't winter and I have to pay for heat, which ever the way the economies go, deflation/hyperinflation,a lot of small business owners are going to tank.

Anonymous Quadko June 26, 2013 4:02 PM  

I just picked up this book on the related subject. I'm not far in, but very interesting.
Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free by Ellen Hodgson Brown

The two things so far that I hadn't heard before was that the bankers behind the Fed aren't just "an American Problem", but are part of the greater society of international bankers, and that using something like a gold standard helps them since "they own much of the gold anyway" and used gold-backed dollars to gain the control they have.

If she's correct and I understood her properly, it won't change much to simply employ the solution I hear often of removing the Fed and returning to a materials-backed currency. That still leaves the same people in control who historically put us on a gold standard and then moved us to fiat currency. They've already been through that process and it worked out fine for them. More must be done if things are really to be fixed.

I'll have to finish the book before drawing any conclusions, but the first few chapters make for a good read, and the recommendations have been nice. Anyone else read it? It's been around since '07 at least.

Anonymous hardscrabble farmer June 26, 2013 4:03 PM  

"You (and everyone around you) will have defaulted long before you get to taxes to 150k."

How? My fixed expenses are tied almost exclusively to taxes and fuel. We've already moved to anima lpower for most of our production and even though we will miss things like coffee and citrus, we certainly produce enough food to feed ten times our number. Ditto energy. I see all of this as a scheme to eliminate private property and be able to say, "Gee, that darned old inflation just got out of hand" rather than some incompetent overproduction of "money" by the Fed.The tax increase will lead to siezures and that will be all she wrote. This is intentional and they don't even seem to care who notices it. And the tax increases will be cradled in the old line that it's "for the poor, poor, starving chilleruns", mark my words.

Blogger JCclimber June 26, 2013 4:30 PM  

I originally was on the hyperinflation wagon, having studied the Weimar model a couple decades ago, combined with direct observation of inflation in my life.

Then, as I read more of Vox's position, and observed the Fed pumping trillions of $$ into the economy, without rampant inflation (bad, but not rampant), I started to question some of my assumptions.

Namely, short of literal helicopters dumping cash out into city streets, how are they going to get consumers to spend money? Most people I know believe debt does matter, and for the most part try to pay down their debts when more money comes their way. There may be a significant minority who will spend at a faster rate, and do, but they don't have enough buying power.

Food stamps and welfare payments will have to be bumped up 2x or even 3x before they can start that particular ball rolling. At which point the tax paying schlubs may start to wake up....

Anonymous Josh June 26, 2013 4:30 PM  

I just picked up this book on the related subject. I'm not far in, but very interesting.Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free by Ellen Hodgson Brown

Brown is a greenbacker and a national socialist. Her main problem with the federal reserve is that it doesn't print enough money.

Anonymous Quadko June 26, 2013 4:36 PM  

Brown is a greenbacker and a national socialist

Wow, I did not get that from the recommendations. Thanks for the warning. It will be interesting to see where she goes after the initial history section and the "solution" she supports.

Anonymous wstwind June 26, 2013 4:39 PM  

Have been persuaded by Vox's arguments for Deflation.

Anonymous allyn71 June 26, 2013 4:49 PM  

"If you went to your favorite restaurant with your wife evey year for your anniversary and the price doubled every time, you'd think it was somewhat more than "nominal"." - hardscrabbe farmer June 26, 2013 3:53 PM

"How? My fixed expenses are tied almost exclusively to taxes and fuel. We've already moved to anima lpower for most of our production and even though we will miss things like coffee and citrus, we certainly produce enough food to feed ten times our number. Ditto energy. I see all of this as a scheme to eliminate private property and be able to say, "Gee, that darned old inflation just got out of hand" rather than some incompetent overproduction of "money" by the Fed.The tax increase will lead to siezures and that will be all she wrote. This is intentional and they don't even seem to care who notices it." - hardscrabble farmer June 26, 2013 4:03 PM

Couple of things hardscrabble, first nominal =/= menial. Nominal is a specific term describing a fixed interest rate. Referring to something as nominal doesn't lesson it's significance.

Second most of what you describe is the affect of what credit inflation has done to the price of everything, fuel, seed, land, etc. Credit money and the regular inflation it has caused is why prices have gone up on things that are used in the global economy. Seed corn that can be planted in Brazil as well as the USA is affected differently than a house that is in a fixed location here. We are seeing inflation (but not hyperinflation) in global commodities resulting from the fed debasing the currency.

The stagnation in wages that are squeezing out the middle class are primarily a result of "free trade" agreements and the offshoring of manufacturing. This is the one-world government, commie dream of everyone being equal. The hot money leads to increasing commodity costs, but wages are reverting back to the shitty world mean. Vox went over this in his posts on the fallacy of Ricardian free trade embraced by main stream libertarians.

You are right in that it is purposeful and the globalist/commie cabal want to destroy property rights and the middle class.

As the tax burden and fuel cost increases due to regular price inflation combined with stagnating wages resulting from globalization, there will be property forfeit and seizure. On a large scale that will result in default and collapse. There is a reason that small scale family farming has been collapsing for 30+ yrs. and more and more it is a corporate enterprise. While I don't know the specifics of the most recent iteration of the farm bill being shopped around, I would not be shocked to learn that all the subsidies are for the top end corporate farmers that crony capitalism secured for them and there is basically nothing buy institutionalized hardship for someone like you and your family.

The commies never want people that can exist without the government. They are well on their way to creating that world where all are dependent on them. That is ultimate power and ultimate power is their game.



Anonymous Josh June 26, 2013 4:50 PM  

Wow, I did not get that from the recommendations. Thanks for the warning. It will be interesting to see where she goes after the initial history section and the "solution" she supports

Both Gary North and Tom Woods have annihilated her arguments in brutal fashion.

Anonymous Stilicho June 26, 2013 4:56 PM  

I enjoyed the debate. It made me look at some of the issues from a different perspective. It did not change my opinion as to which is more likely.

Anonymous Noah B. June 26, 2013 5:03 PM  

"Brown is a greenbacker and a national socialist."

It's springtime...for Krugman... and Bernanke....

Anonymous CunningDove June 26, 2013 5:07 PM  

I started as agnostic, possibly leaning toward deflation.

Now, I find I'm leaning toward hyper-inflation. Mostly because MPAI. When the crazy starts, they won't know what is going on & they will panic. Oh, they will panic with much enthusiasm.

I am wondering what the Cartels, Gun Runners & others in the black markets are going to start doing. If they think the dollars that they are holding are worthless, it will take almost no time for them to shift to something else. Not sure what it will be, but I know they won't hold dollars for sentimental reasons.

Anonymous LES June 26, 2013 5:12 PM  

I just hope silver goes up eventually so I can sell and break even.

Anonymous Quadko June 26, 2013 5:14 PM  

Gary North and Tom Woods
I've added these authors to my follow up reading list, much appreciated.

Anonymous Cheddarman June 26, 2013 5:18 PM  

I started as agnostic, possibly leaning toward deflation.

"Now, I find I'm leaning toward hyper-inflation. Mostly because MPAI. When the crazy starts, they won't know what is going on & they will panic. Oh, they will panic with much enthusiasm.

I am wondering what the Cartels, Gun Runners & others in the black markets are going to start doing. If they think the dollars that they are holding are worthless, it will take almost no time for them to shift to something else. Not sure what it will be, but I know they won't hold dollars for sentimental reasons." - Cunning Dove

The drug cartels could always issue their own currency, backed by cocaine, heroin, or meth-amphetamine.

Anonymous Stilicho June 26, 2013 5:33 PM  

In Apple's bank accounts... and those of every soveriegn that buys oil...

Ask yourself what happens to those dollars when they aren't needed for oil purchaces?


Which is small compared to the amount of debt (55 trillion from Z1 alone) that also bids on oil and other things. What happens when that debt goes tits up?

Anonymous scoobius dubious June 26, 2013 5:37 PM  

I just saw "World War Z" the other night.

Inflation? Deflation? Child's play. I'm predicting zombie apocalypse. You *know* they've built the virus, and they're keeping it in freezers at the CDC. Just waiting for the right moment......

I didn't understand a word of your debate, but thanks for all the hard work, gentlemen. It was a very civilized undertaking, and ya don't see too many of those, these days.



Blogger Eric Wilson June 26, 2013 5:37 PM  

Lol Cheds, that's probably more sound money than Fed promises.

Blogger Eric Wilson June 26, 2013 5:44 PM  

A lot of people here have noted that they are not sure which it will be. I assume that VD and Nate are in that same camp to some extant. Now that it's all over I would be interested to see what they feel the odds of each actually are. For instance mine would go something like:
Hyperinflation - 50%
Deflation - 30%
Something else (possibly never seen before) - 20%

Anonymous Dan in Tx June 26, 2013 6:14 PM  

Interesting times indeed. Thanks to both Vox and Nate for a great series. My gold and silver holdings are deflating horribly right now while all my daily necessities are inflating. Wages stagnant for years. Yeah, whatever the final outcome is declared to be, it sucks.

Anonymous Daniel June 26, 2013 6:17 PM  

Which is small compared to the amount of debt (55 trillion from Z1 alone) that also bids on oil and other things. What happens when that debt goes tits up?

Nate addressed this in VI.

Anonymous Conservative Language Institute of America June 26, 2013 7:02 PM  

Gentlemen, thanks for having and posting this debate. If I had truly understood it, I could honestly say well done... But at least I can see the care and effort that went into it. Whether it be my ignorance as lack of baseline to the issues, or my lack of IQ, it all seems to me like an animal chasing its tail. There doesn't ever seem to be a place to start, a set of unmoving, a priori principles to act as a primary unaffected foundation.

Oh well... there is one minor point that has leapt out at me as a result of reading your debate:

The only thing that prevents the rest of the world from calling out the dollar is Saudi Arabia. The dollar is massively supported by hot air... without QE, the lid would quickly be ripped off of the US economy and it would be found to be floating on a sea of worthless paper/computer bits. But since the world is also forced to buy its oil in dollars (petrodollars) as required by Saudi Arabia, this keeps the world from trying to peek behind the curtain. It's all predicated on lies, but Saudi Arabia is the gate-keeper. If the Saudi's suddenly decided one day to accept other currencies as an exchange mechanism, then the next day the dollar would go belly-up. This is why we allow Saudi's to run rampant in our country, to come and go freely as they please regardless of the crimes any one of them has committed, and why we turn the other way and pretend that massive amounts of Wahabi money are not flowing into this country to support hard-line Islam as practiced and exported by the Saudi's. This is why every President has been so ultra-chummy with the Saudi royals and what passes for a government in that country, and why Islam has been allowed to run rampant in this country.

The damn Saudis have us over a barrel, both literally and figuratively, and that lying leftist scum in the WH is making sure we do absolutely nothing about it.

Anonymous allyn71 June 26, 2013 7:13 PM  

"The damn Saudis have us over a barrel, both literally and figuratively, and that lying leftist scum in the WH is making sure we do absolutely nothing about it." - Conservative Language Institute of America June 26, 2013 7:02 PM

Also look at Quatar, Syria, Russia, EU, and natural gaspiplines.

The necessity of of Saudi support for the petrodollar and Saudi/Quatari desires for a pipeline through the Med. to tap into the European natural gas market (and Russian opposition to folks muscling in on their turf) which is why the US is risking WWIII over Syria and why so many big time players are getting in on the action there.

The world is getting sick of US dominance and dollar hegemony. Russia and China are actively setting up alternate trade agreements for national currency transactions. They are already dropping the dollar and the movement is accelerating. Have to ask yourself how long the Saudi's are gonna play along before the see the writing on the wall and jump ship to someone else that can protect them.

Didn't say something about milk cows and getting all they can before turning them into burger? Ask yourself, is the US gonna be the farmer or the cow in this scenario?

Anonymous CunningDove June 26, 2013 7:13 PM  

The drug cartels could always issue their own currency, backed by cocaine, heroin, or meth-amphetamine. - Cheddarman

What would they accept as payment from their main market, the amerikans? And they have not shown a great deal of interest in being everyone's bank or government. Not unlike dollars have no value in & of themselves... the drugs are not inherently valuable. Gun dealers tend to sell in other nations, but at least used to deal in dollars. They don't make money if the guns don't move...

I ask the black market question because I saw how people in Africa would quote prices for things in their currency first, then as soon as I started to think through the math on the exchange rate, they would blurt out how much they would take in American Dollars. In a WZ scenario, those dollars are going to be less valuable... not immediately, but eventually. And the math will be much closer to (1) American Dollar = (1) Ethiopian Burr. At that exchange rate, no one will want Dollars any more than they currently want Burr.

Anonymous allyn71 June 26, 2013 7:17 PM  

"I am wondering what the Cartels, Gun Runners & others in the black markets are going to start doing. If they think the dollars that they are holding are worthless, it will take almost no time for them to shift to something else. Not sure what it will be, but I know they won't hold dollars for sentimental reasons." - CunningDove June 26, 2013 5:07 PM

I am guessing it will be the Chinese Yuan but there are problems there as well. Whatever it is (including the drug commodity currency option suggested by cheddarman) they (the black marketeers) will be the ones leading the way. Funny how markets work like that.

Anonymous allyn71 June 26, 2013 7:22 PM  


"In a WZ scenario, those dollars are going to be less valuable... not immediately, but eventually. And the math will be much closer to (1) American Dollar = (1) Ethiopian Burr. At that exchange rate, no one will want Dollars any more than they currently want Burr." - CunningDove June 26, 2013 7:13 PM

That happening is what Nate says will cause WZ to happen here. No one else will be wanting those dollars so they all come rushing home causing everything to hyperinflate.

Vox says those dollars are credit dollars created from leverage and they will go bye-bye in the default credit crackup and hence there will be less dollars and deflation.

Whoever is right it doesn't sound good does it?

Anonymous CunningDove June 26, 2013 7:22 PM  

The only, and I do mean only, problem with the Chinese Yuan is that it is currently tied to the dollar. Cutting that tie causes all sorts of trade problems for both sides. However, if we go to war over Syria... that tie will be severed & the howling about not being able to get iPads & other things will really get started.

Either way it is starting to feel like that moment just before the tornado drops out of the cloud. You can feel something in the air, you can see the storm clouds... but you are a fool if you think you know with absolute certainty where and when that funnel cloud is going to drop.

Anonymous Myrddin June 26, 2013 7:27 PM  

Took neither side, prior to the debate. If pressed, I would have leaned hyperinflation.

Now, I still lack the brains to pick the winner. But I don't lack the brains to note that one can as easily prepare for both as for either. So ultimately, I don't have to work out who 'won' the debate. I merely have to work out the specifics of my plan to overcome.

Anonymous allyn71 June 26, 2013 7:31 PM  

Yeah, that is why I said I was guessing on the Yuan. The moves they are making leads one to believe that is where we might be headed regarding reserve currency, but there are alot of problems there. The dollar peg being one of them but not the only problem with the Yuan.

Wherever we are headed, the black market will probably be the first to show the way. If you have to get your fix in pre-1964 silver dimes then it is a good bet we are going back to a commodity currency with a gold/silver standard.

If you have to buy your 8-ball with a handful of .22lr shells or garden seeds we are going for Fallout4 land.

Anonymous CunningDove June 26, 2013 7:34 PM  

If you have to buy your 8-ball with a handful of .22lr shells or garden seeds we are going for Fallout4 land. - allyn71

LOL!!! Nice. I agree.

Anonymous Rally June 26, 2013 7:42 PM  

Thank you both for the time you've put into this. I'm looking forward to the ebook.

Blogger TontoBubbaGoldstein June 26, 2013 8:06 PM  

The damn Saudis have us over a barrel, both literally and figuratively, and that lying leftist scum in the WH is making sure we do absolutely nothing about it." - Conservative Language Institute of America June 26, 2013 7:02 PM


This has been true for, what.....25 years?

Anonymous MC June 26, 2013 8:20 PM  

Started agnostic as between inflation or muddling through, not even contemplating that deflation was possible given the amount of money printing.

I'm now leaning deflation but not even close to sure.

OpenID cailcorishev June 26, 2013 8:21 PM  

I've leaned toward deflation ever since running across Keen a few years ago, and that hasn't changed. Deflation and hyper-inflation seem a bit like apples and oranges to me, though.

As I understand it, deflation is coming (and here, to some extent, considering the mildness of the inflationary effect of the massive money-printing they've already done) because the money that's helicoptered is going to pay down debt rather than to buy stuff and prime the spending pump. Since it was debt that created the money in the first place, this takes it out of circulation, shrinking the money supply and lowering prices of consumer goods (but not commodities, because those are inflated by other causes). So deflation is a symptom of an actual change in the money supply -- something real that's happening.

Hyper-inflation, on the other hand, is all about perception. It might happen as the result of massive money printing, but that doesn't actually cause it. As long as people trust the money, inflating the supply will only give you proportional inflation. Hyper-inflation happens when people start to see the money as worthless or nearly so, when they fear that it won't be worth nearly as much tomorrow as it was today. It seems to me that that could happen during a period of deflation as easily as a period of inflation. It's more likely to be caused by a war, natural disaster, or some other large disturbance that makes people look at tomorrow's dollar value in the way they look at next decade's Social Security: something you can't trust to be there.

So I could see a growing deflation as a continued poor economy with no tech boom or housing bubble to prop it up has people scaling back and reducing their debt, until things get pretty bad and then some event triggers a general fear that the dollar might not be backed much longer, and then we're off to the races with hyper-inflation.

Blogger Nate June 26, 2013 8:42 PM  

"Whoever is right it doesn't sound good does it? "

Vox and I have debated the color of the giant dong that will be used to sodomize everyone.

Anonymous geoff June 26, 2013 9:22 PM  

that word you use, hyper, i do not thin it means what u thin it means

Anonymous cheddarman June 26, 2013 9:42 PM  

Vox and Nate,

Thanks for the debate. I look forward to the final draft.

Sincerely

Cheddarman

Anonymous Salt June 26, 2013 9:53 PM  

I'd say it's deflation till it isn't.

Blogger Nate June 26, 2013 9:55 PM  

'I'd say it's deflation till it isn't."

I'm not saying there should be a like button... but if there was a like button... I would've used it.

Blogger IM2L844 June 26, 2013 10:10 PM  

I can see how it could go either way , but I've always thought the collapse of the petro-dollar was the most likely scenario. I guess I'm still leaning in that direction. Now, however, I'm less certain. I have a lot more to think about. Thanks, guys.

Anonymous farmer Tom June 26, 2013 10:12 PM  

I've tried to read the entire exchange. Before it started I was confused, now its worse.

I see the inflation that "hardscrabbe" talks about. I see land prices at least 70 percent higher than they were in 1990. I was trying to buy land, couldn't get any credit, had several pieces slip through my fingers at around $1200 an acre. One of them just sold recently for $9000 an acre and I still can't get any credit.

On the other hand, I see people driving cars and residing in houses which they really can not afford, living paycheck to paycheck.

So there has been massive inflation, but I don't see hyper-inflation in the near future, unless we have a major world war or a world wide several year famine.

On the other hand, I see another crash in housing and business property if we see any kind of increase in interest rates.

So, I still don't know what to think.

Anonymous Richard June 26, 2013 11:06 PM  

According to wikipedia, there have been almost 8 occurrences of hyperinflation for every occurrence of deflation.

http://en.wikipedia.org/wiki/Deflation (5)

http://en.wikipedia.org/wiki/Hyperinflation (39)

Anonymous kawaika June 26, 2013 11:24 PM  

"Nate is putting the debate into epub format which will be cleaned up a little for typos and then made available as a free ebook for future reference."

Markku ought to select the font for the ebook.

Anonymous NateM June 26, 2013 11:32 PM  

http://junctrebellion.wordpress.com/2012/08/12/how-the-american-university-was-killed-in-five-easy-steps/

semi on topic: a bunch of overeducated, underuseful putative academics lament that their vaunted humanities grad degree didn't get them that cushy prof job, so they doubled, and in this girls' case, quadrupled down on useless degrees. Apparently she thought if one grad degree was useless, then 2 or 3 more must be the ticket!

"After 20 years and 3-1/2 degrees, I am earning in the high 40′s. I now must make the final choice on my PhD…. do I sell out and get it in higher ed administration, so that I can earn more? Or do I get a useless PhD in my discipline. Sigh."

It might make her head explode to know 6 months after undergrad I had a job making about as much (and going up) that only really required a high school diploma...

Blogger Spirit of Truth June 26, 2013 11:43 PM  

Did I miss something? Did you talk about derivatives while I was not looking? Since the derivative market is several times the world economy I think of it as a bubble about to burst. However, I am ignorant of the whole issue. No one has talked about it tonight.

Anonymous sprach von Teufelhunden June 26, 2013 11:46 PM  

I have been on the side of inflation/hyper-inflation since the mid 90s, when I first discovered and listened to Marc Faber and Jim Rogers, via Bill Bonner and Co. (Strategic Investment, The Daily Reckoning, et al) As with Dr. Paul Craig Roberts and Doug Casey, none have changed their position. Nor will I.

It has been some "animal spirits" (and probably a real shaman) to keep monetary inflation from affecting most consumers in a significant manner. It cannot last forever. Mike Harris (CFO of Adamus Group, and semiconductor industry expert) says the collapse should have happened two years ago. He has been amazed how much they have the ability to "kick the can," and get away with it. It is just a matter of time, when Americans will pay from $12 to $100 for a gallon of gas, or a loaf of bread.

OT: (Squeaky-Leaks)

For the real scoop on Snowden, Assange, NSA:

Go here

Find out the difference between a whistle-squeaker, and a bonafide whistle-blower...

Blogger Nate June 27, 2013 12:18 AM  

"Since the derivative market is several times the world economy I think of it as a bubble about to burst."

The entire derivative market could go ***poof*** tomorrow and most of the world wouldn't notice.

And after it happens... you will be utterly stunned at how little difference it makes.

The economy ran just fine before the idiocy of derivatives. It will run just fine without them.

Anonymous Other Josh June 27, 2013 12:26 AM  

Eh. Hyperinflation or deflation... I really don't care. I'll just concern myself with following the Lord Jesus and being His disciple.

At the end of the day, that's all that matters. He'll take care the rest.

"Seek ye first the kingdom of God and His righteousness, and all these other things (what you physically need) will be added unto you."

Blogger Nate June 27, 2013 12:36 AM  

Nate's Take on Gold and Silver today:

you're seeing lots of leveraged folks being forced to sell. This is literally a forced collapse. When this sort of thing is happening... you're near the bottom. It may not be the actual bottom... but you're near it. When it turns... we'll be on a long term bull market in gold that is going all the way to 3500 or so around 2015... and that's assuming my hyper-inflation prediction does not hold. That's just the technicals. If you start looking at actual claims on gold verses actual inventory... its a much different picture... which could literally result in 1oz coins being worth about 100k each in today's dollars.

Anonymous rubberducky June 27, 2013 12:45 AM  

Total currency collapses are more common than either hyperinflation or deflation, aren't they? They've happened many times in American history alone. The Confederate Dollar, the Continental, the countless regional scrips, etc. Retired general George Washington himself was motivated to leave Mt. Vernon and get back into politics on precisely this issue, proclaiming, "Why does it take a wagon full of currency to buy a barrel full of goods?"

I've never fully understood how people navigated these events personally, when personal fortunes are vastly reduced or outright destroyed on a systemic scale. But navigate them they did. Historically the transition from one currency into the next has been a very painful but also very brief matter.

I have the keen suspicion that should we have to forge such a river these days, it will be very painful indeed, but it will not be brief. Heck no, we are too "well managed" for that to happen, I'm quite confident. They'll wind up slow roasting us all, and themselves in the bargain, according to modern theory. Our only hope may be that it blows up with such gusto that they lose utter control and events rapidly seal their doom. Left with any semblance of command, our betters are quite prepared to short the rations below decks for how many seas may come.

Anonymous Gapeseed June 27, 2013 12:59 AM  

Economist John Maynard Belushi, Chair of the Economics Department at Faber University and Father of Blutonomics, has followed this back and forth between Vox and Nate with great interest. He has studied the frothy aftermath of Hank Paulson and Dean Bernanke dumping a whole truckload of fizzies into the banking system, and after some prolonged reflection and meditation with two pencils stuck up his nose, he has decided that the world is in a period he terms "The Great Hyperstagflation Bubble Bath Party."

There is so much debt in the economy spread out over corporations, individuals and the government that deflation is almost axiomatic, as money not used for debt service can hardly cause any kind of inflation. The effects are borne out in the labor market. And yet, those with money or ZIRP credit in these increasingly unequal times can pour their liquidity into select asset classes, causing bubbles and micro-instances of inflation or even hyperinflation. Thus, artwork, stocks and Manhattan real estate see money-driven inflation even in an overall deflationary environment. Implicit or explicit government guarantees keeps the party going. Meanwhile, the distortions inherent in the resulting massive malinvestment cause a kind of supply-side stagflation that can mask the otherwise beneficial effect of dropping prices in response to flagging demand. Government intervention in the food and labor markets, among many other places, also contributes to the stagflationary malaise.

Despite Belushi's reputation as a party king, this is one party he would rather miss. "It's not as fun as it sounds," Belushi said. As debt crowds out all else (particularly should the Fed stick to its higher interest rate designs), the resulting hangover will be epic. Even an optimist like Belushi senses doom. "It's over. It wasn't over when the Germans bombed Pearl Harbor, but it's over now," he said.

Fat and drunk may be no way to go through life or death, but Belushi offers some less-than-sobering wisdom nevertheless. Despite the possible inflationary impact on his own preferred market, Belushi advised that it was "time to start drinking heavily."

(Seriously guys, well done.)

Blogger Jordan179 June 27, 2013 3:26 AM  

What causes the hyper-velocity? Usually, the reason why someone feels impelled to spend a currency rapidly is that they expect its value to drop rapidly. Hyper-velocity is thus caused by the expectation of hyper-infleation.

What causes the expectation of hyper-inflation in the first place? The knowledge that the agency issuing the currency is expanding the money supply far more rapidly than the rate of real economic growth.

Of course, once hyper-expansion occurs causing the expectation of hyper-inflation and thus hyper-velocity, this in turn causes hyper-inflation. Just remove the "hypers" and this is also an explanation of how ordinary inflation works. In fact, inflation is always caused by a increase in the ratio between currency and goods in an economy.

As for the magic of our money being the world's reserve currency, this was not a gift bestowed upon our nation by the Good Fairy Monetaria, it was in consequence of our money being the world's stablest, which was in turn in consequence of our economy being the world's stablest.

If we enter a hyper-inflationary spiral, people (outside America) will not hang on to our money with a death-grip, crying "Curses! Monetaria's magic powers prevent me from investing in other currency! What a world, what a world ..."

No. They will abandon our currency for some other currency -- whichever one looks the stablest. They will do so for the same reasons that they did the pound, the franc, the ducat, and earlier currencies of lost empires.

If we expect Monetaria's fairy magic to save us from the laws of basic economics, we have an unpleasant surprise coming.

Anonymous The other skeptic June 27, 2013 4:26 AM  

The French lost big time when the EURO was introduced.

Anonymous geoff June 27, 2013 7:22 AM  

so something good came out of the euro after all...

Blogger Nate June 27, 2013 7:51 AM  

"What causes the expectation of hyper-inflation in the first place? The knowledge that the agency issuing the currency is expanding the money supply far more rapidly than the rate of real economic growth."

Actually I spend a good 7000 words explaining exactly what causes it in the posts leading up to this. Its got nothing to do with printing... and can happen even during deflation.

The printing is a symptom.

OpenID newrebeluniv June 27, 2013 8:00 AM  

I'm just going to keep holding/buying gold & silver. --JW

I'm going to buy lead. In small denominations of 68 and 147 grains.

--Hale

Anonymous NorthernHamlet June 27, 2013 9:01 AM  

I was in the deflation camp. 2008 did it for me. All that credit going up in smoke. Bubbles popping. I figure nothing has changed in the system. Sure more printing. But it's the same problem as before: loaning money to defaulters doesn't work long.

Nate has given me a lot to think about though, and I have changed some of my investing and purchasing habits because I find his argument compelling. More planning for a combination of both situations over the long haul.

However, two issues keep me from considering Nate's the more likely:

1. They're hoarding cash.
When the foreign govts go to dump, I assume we'll do something in response to keep it from hyper-inflating us. What? Not sure; I'm not informed enough to know. Keep the system from accepting the cash. This must be possible in some way with all the country's in debt, etc, etc.

2. Intention.
I get the feeling that Vox and I agree that most of the situation we are in is by design. Thus the buying of defaulted assets on the cheap, no prosecutions, etc, etc. What's happening benefits them far too much to be coincidental to me. Nate believes they'll try to control it, but are too stupid to do so. I don't think they are as stupid as they pretend to be. Though I did very much enjoy the idea of just how wrong Nate believes their equations to be. I saw up for down for a moment and realized if I'm wrong and they are that stupid, they are really incredibly stupid.

So, I'm still deflationist but with a more comprehensive plan.


Nate and Vox, thanks again for letting us watch and for responding to our comments.

Anonymous Jack Amok June 27, 2013 12:37 PM  

Awfully late responding to this, but I just wanted to say thanks to both Vox and Nate. I suppose I changed my position slightly, in that I'm even more strongly convinced deflation is the only way out without an exceptional amount of violence. I think there will be violence in any event, but deflation will limit it somewhat.

But fundamentally I still believe we are going to make more of a lateral move out of the financial trap we're in, rather than either inflating or deflating out of it. Look at some parts of the economy and it will seem like we have hyperinflation. Others will look like deflation. The most basic problem with our financial system is that the feedback loops are broken. The data is suspect, our perceptions can't be trusted, I'm pretty sure I know where we will end up, but what path we think we'll have taken, what it will seem like happened when the dust finally settles, who knows.

Anonymous MendoScot June 27, 2013 12:42 PM  

'grats all round, guys. Sign me up for the epub.

I'm going for short deflation that starts a panic, leading to hyperinflation, devaluation then a protracted disinflation.

And strawberry topping.

Anonymous rubberducky June 27, 2013 9:33 PM  

Can't decide which rich line I like best, but I'm leaning toward this one: "Well, can I report them for just being complacent?"

Anonymous Luke June 28, 2013 7:09 AM  

Multiple ironies alert:

Poor English amongst top managers kept Japanese companies from being defrauded by Lehman's financial scams:

http://www.nst.com.my/latest/poor-english-saved-japan-bankers-from-lehman-1.309382

Anonymous FantasticSprite June 28, 2013 11:46 AM  

As much as I respect Vox's opinion here, I admit to being more swayed by Nate's arguments. The key point that caught my attention was VD's assertion that most Americans have less than $800 in savings. On the face of it, I can see where this could be a barrier to hyperinflation, but Nate's point about governments hoarding currency seems to counteract that. If governments weren't run by Keynesian slobs, I would agree with VD and suggest deflation as the more likely event. But if governments weren't Keynesian, we probably wouldn't be in this mess to begin with. All it takes, in my opinion, is a few more badly time "rescues" by the Keynesians to start up the train of hyper-inflation.

Nonetheless, the debate between VD and Nate shows how difficult it really is to predict and model an entire economy -- this alone should disabuse the Keynesians of the notion that they could do it any better.

Anonymous geoff June 30, 2013 2:54 PM  

was hyperinflationista before and still am...but damned if vox didnt scare me that this all might be intentional this time. boot on human face forever if deflation and gargamtuan wealth transfer is their agenda. so thanks for scaring the sheiss out of me. sure beats being surprised

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