It's Still Tokyo Deflation...Then Buenos Aires Inflation - The Daily Reckoning

It's Still Tokyo Deflation...Then Buenos Aires Inflation

Nov 2, 2015

- By Bill Bonner

Bill Bonner
Poitou, France

Last week, young colleagues from our Florida office put us on the spot.

'Who are we,' they asked? 'What are we doing? How are we different from anyone else?'

'What do we think that others don't?'

We're not the only ones to offer opinions. And not the only ones with alternative points of view. But let's look first at the range of opinion on offer.

First, there is the 'the authorities must know what they are doing...besides, I have more important things to think about' camp. This is by far the largest group. The hoi polloi. The masses. The lumpenproletariat.

There may be some grumbling and kvetching, but most people count on the feds to manage the economy, foreign policy, the future, and the government itself. They expect mistakes from time to time. But they also believe that the system can be trusted to produce an acceptable, though perhaps not always ideal, outcome.

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And if not, God help them. Because the difference between the outcome if they bothered to think about it and the outcome if they didn't is the same. They have no ability to influence public policy and not much room to maneuver in their private lives. They get salaries, pensions, social security. They need jobs, mortgages. Student loans. And medical insurance. They have little capital to invest or protect. They depend so heavily on 'the system' they can't afford to believe there is anything wrong with it. They go along. They get along.

At the other end of the idea spectrum, there are the edgy, malcontent, marginal, maverick, 'alternative' opinions. A man, sitting in his double wide, watching TV, can come to hold all sorts of whacky views. There is a whole infotainment industry that provides screwball opinions. You want to think Obama is a Muslim? You want to believe the Bilderbergers, the Rothschilds, or the Rockefellers run the world? You want to know about GM's perpetual motion engine that - if the secret got out - would put the entire auto industry out of business? Well, that is a market. But it is not ours. Let others fill that demand.

(There used to be a 'news'paper called the Weekly World News. Perhaps it is still in business. You would see it at the convenience store, right in front of the checkout counter...with enticing headlines such as Obama's Secret Love Child or 150-year-old man Finally Graduates from High School. Our favorite was a giant photo of an airplane crashed on the surface of the moon. WWII Bomber Found on Moon was the headline. 'Pilot Error' Say Experts.)

But it is money...economics...and finance...that interests us. We try to figure it out. We try to understand. We try to see what's coming before it arrives. And we try to be serious about it.

Apart from the mainstream view - that the authorities have things under control - almost all serious analysts see that there is a terminal problem developing. The current situation (with zero and even negative interest rates...and debt expanding much faster than GDP) can't go on. It had a beginning, in the early 80s. It must also have an end. Most of the guesswork is now focussed on when and how that end comes. Recently, one of our dear readers summarised the three major points of view, along with one minor one:

    Deflation Camp:

    Harry Dent is in line with the Austrian business cycle theory: money printing causes financial bubbles, distorts the economy and is therefore counterproductive.

    Like Bob Prechter (I didn't follow him recently but his argumentation sounds similar) he [Dent] bets on deflation and depression. Fighting debt deleveraging and demographics is like putting yourself in front of a tsunami (you said this week that Tall Paul [Volker] could stop a train). In such an environment the US Dollar would gain purchasing power and gold would underperform significantly (Harry sees it back to $700 in 2018-2019). Cash/T-Bills/short-term Treasuries is the place to be. Rates will stay low for very long.

    Inflation Camp:

    Jim Rickard's thesis 'inflate debt away via a massive issuance SDR's after China has joined the club' is also very credible - world currencies are massively diluted via issuance of SDRs, which serves only the powers that be. Rather than a new gold standard, this is the solution to Triffin's dilemma (more flexibility for the elite). Citizens are excluded/not allowed to own SDRs. Their purchasing power shrinks. They don't know who to blame, the IMF does not consist of elected officials, and the majority of the population doesn't even know it plays a role in creating inflation. And they can pretend that they have to save the world too (part of Greek bail-out etc).

    Hyperinflation Camp:

    Shadow Stats John Williams is having a really hard time fighting for his ideas. He is right on the 'CPI-CP Lie' and the current true state of the economy but whoever invests along his ideas is running out of capital to stay in the game. Peter Schiff and Mike Maloney are on a similar line. The problem with them being that they have a conflict of interest with their businesses. But I have no doubt [about] their integrity: they do/live what they say.

    Deflation to Hyperinflation Camp:

    I recall an interview with Nassim Taleb on Bloomberg TV in 2009 when he said: 'We will go from deflation to hyperinflation without seeing inflation.'

Our guess is that Taleb is right. Back in 2009, we predicted: 'Tokyo...then Buenos Aires.' Most likely, there will be no stop in-between for moderate levels of inflation.

Inflation, as Milton Friedman observed, is a monetary phenomenon. But hyperinflation is a political phenomenon. It is caused by those same authorities the masses think they can trust. When they are threatened, they will protect themselves by printing money on a scale we haven't seen since the US War Between the States, when prices in Richmond rose 6,700% by 1865.

There are times when printing money seems like the best course of action - especially for the people with the printing press. It may not do the common man any good, but it gets the feds out of a jam.

But that is a long story...and one for the future.

We're still in a Tokyo-style long, slow slump. And it looks like we're going to be there a while longer. (Tomorrow, we'll look at China...and more reasons why we think we are in a deflationary trend.)

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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