Inflation. Deflation. Debt. (Update)(x2)

I’ve been trying to get an explanation from supposedly knowledgeable people who seem to believe inflation, or even hyper-inflation, is in the offing.  What makes them think that?

Robert Wenzel writes a busy blog called Economic Policy Journal.  He’s one of those Austrian economists, strongly associated with the Lew Rockwell crowd.  I’ve been asking him. Watch M2, he says, and not much else.

That’s not much of an explanation, especially since a lot of people can show that M2 is not correlated with inflation, or even negatively correlated with it.  There are so many opinions about M2 and what it means for inflation or deflation that it’s just intellectual noise at this point:

I think the problem is much more fundamental than policy geek data.  This article on Zero Hedge has it just about right.  The economy as a whole – globally, that is – is not only unable to repay the principal debt it has already incurred; it cannot even “service” the debt.

If this were an individual or a business it would be bankruptcy time, and anyone who has done bankruptcy work for debtors knows that there comes a point where it is inevitable, it is a mathematical certainty.

But bankruptcy is not possible for an entire economy, an entire world.  So what then?

I’m open to suggestion, but I’m not hearing any.  “Watch M2” doesn’t cut it.

UpdateClick here to see that my conversation with Mr. Wenzel apparently ran out of steam.  It centered on the relationship between the money supply statistic known as “M2” and inflation or deflation or neither or both.  A sub-issue of that was Wenzel’s assertion that an increase in “required” bank reserves meant necessarily that banks were making more loans.

He said the required reserves were tracked every week and indeed they are.  He said the “required reserves” had recently increased significantly and indeed they have.

Here is the latest weekly chart of bank reserves published by the Federal Reserve.  Dry stuff, isn’t it?  Note also that the “monetary base” is not just flat but has actually declined over the last year.  That doesn’t sound inflationary, but what do I know?

Anyway, there is a category for “required” reserves, but the implication is that this is dependent not only on the amount of loans but also on regulatory reserve requirements that can change.  Although I don’t know for sure and I’m apparently not going to find out from Mr. Wenzel.

It’s an important question because if the only reason “required” reserves increase is because there is more money loaned out then there’s an argument for inflation.  But if more reserves are required because the banks have been told to increase reserves by regulators, then that would not support an argument for inflation at all.

I’m happy to hear from others on this, but I don’t think Wenzel is correct at all and if he’s not I don’t see any support for an inflation argument right now.  Larger considerations argues otherwise as well.  Such as the worldwide amount of debt.

Update 2:  I’ve reconsidered the value of Wenzel’s blog, and as my last official blogging act of 2010 I’ve deleted Economic Policy Journal from the blogroll.




Filed under financial crisis

25 responses to “Inflation. Deflation. Debt. (Update)(x2)

  1. DM

    To the guys that say “inflation concerns are overblown” I’d say, hey assholes! Looked at the price of: gold, corn, oil, cotton, soybeans, silver, platinum… well basically pretty much everything YTD. What do you call that fucktards? What is that? Unless you like a diet of hot chocolate and rice and use natural gas for energy exclusively you’re fucked. These people that call inflation fears overblown are downright retarded. We have inflation already. The question is if or when hyperinflation or will somebody just be honest and default. That’s what we’re dealing with now.


    • Do you think the Fed can get into a situation where it is “pushing on a string”? If yes, and you understand why that is possible, there’s an argument to be made for deflation due to the massive debt overhang.

      And “everything” has not increased in price. Real estate, for example, is experiencing a precipitous decline.


    • Jacko

      This is always an interesting point to contemplate:

      The Net Debt of the entire world is Zero.

      The problem is that those that have leant are rightfully entitled to be paid back.

      But if you quest were to determine a methodology for wiping debt …

      OPTION 1:

      Wipe all debt except to the extent of the following:

      1. Legislate that all debts will be wiped unless means testing of the debtor indicates a case to not do so.

      2. Legislate that the owners of all lending institutions fund the bad debt ammount unless means testing of the owner indicates a case not to do so.

      OPTION 2:

      Legislate that all prices of a litst of proclaimed goods and services [housing, particular foodstuffs, particular clothing] is to remain at the same price for 10 years and then pump the system with money to inflat around those prices.


      • I don’t see how the “net debt” of the world is zero. I cannot follow your “options”, or discern how they are commendable or not. Sorry.


        • Jacko

          That’s OK.

          For every debt there is both a debtor and a creditor. The net debt of the world is zero as sure as 1 – 1 is zero.

          The rest is probably a little brief on detail. Don’t burden yourself with it.

          Good luck mate.



    • Tictawk

      our money is DEBT BASED. Read the green in your wallet, it says “Federal reserve NOTE”. A note is a form of debt. Our DEBT BASED economic system grew till every level of society was engulfed in DEBT. There is no means to solve a debt based problem other than DEFAULT. Our 15 trillion dollar economy is lubed by a fiat currency based on debt and levered via a fractional reserve system.
      Can the Fed buy every piece of bad debt out there and monetize it? Its impossible!


      • A couple of years ago, in the middle of all the distress, the Fed discussed in a trial balloon sort of way, the concept of “extraordinary measures”, where they might buy up things that were not financial assets. So they buy up real estate, for example, paying the owners directly for their land and improvements. This is a way to put money out there without it being owed back in. They have never done this. If they did, it’s sort of a game-changer. Thinking that through is not easy.


  2. enicar333

    For those that believe in the conspiracy theories of the Elite: and

    For the Darkside of Peak Oil and Industrialized Society: and

    For the Survivalist:

    My opinion: A continual creeping collapse punctuated by disastrous waterfall events (both natural and man-made) leading to the disintegration of the United States and possible foreign invasions to claim agricultural land.

    Best to slow down and enjoy life now. Prepare for the worst, maintain hope, but watch your back at all times.


  3. responed to your response…ruffian here……inflate away/ monitize all debt til there is none left so interest payments no longer exist either. Of course prices will explode and anyone that does not have physical gold will be fucked. The left side of the balance sheet must be inflated via a revaluation of gold that makes any current prediction of price paultry. If you have physical your purchasing power will be protected and during the one time massive revaluation actually increase dramatically. There is no other answer… are right….the interest and principal can never be repaid except by printing trillions in fiat…best, RUFF


    • Murray Rothbard thought that gold would have to be valued at about $7500 per oz., but that was almost 20 years ago. I’m figuring more like $25,000 per oz. now. But a related and perhaps bigger question is, what about everyone else’s debt?

      The private economy is basically bogged down. Without debt relief nothing can get moving again.


  4. Velocity

    Inflation v Deflation?

    No contest, Deflation in full suck every asset class dry mode.

    Why deflation? 2 reasons. 20 years of credit inflation.

    The inflationist camp have already had their inflation of all asset classes (property, stocks, commodities like Oil and Gold) as the Fed and Big Bad Banks have expanded the money (cash + credit) supply. It’s ‘Game Over’ for inflation, even the Fed can’t create it pushing on credit that nobody is pulling on and willing to take any more of.

    Deflation of the credit bubble will suck the life (money and value) out of every asset class, including consumer prices. And contrary to the inflationists fears about the currency being trashed, Cash will be King. Cash will be the only real hard asset left.

    And 2nd reason for Deflation?? Because everybody is expecting inflation. The herd always calls it wrong.


    • I don’t think it’s simply a matter of being “unwilling” to take any more debt; it’s a matter of being unable. The subprime crisis showed that there is a paucity of qualified borrowers. Banks like to run things, it is true. But they do that by making loans, which only makes sense if the loans can be paid back. The subprime thing showed that the banks are between a rock and a hard place: they want to keep making loans but they’re real short of good ones they can make.


      • Velocity

        The sub-prime crisis was all about the quality of the borrowers as you say the banks had leant to, namely ‘sub-standard’.

        The banks were on a financial mission, to ‘generate’ (fabricate!) financial products, even if they were junk, to sell to pension funds and dumb investors around the globe to generate huge profits and bonuses.

        Some have suggested it was a pyramid or Ponzi scheme as the banks created fraud throughout the mortgage process.

        If the banks are “between a rock and a hard place” they have nobody to blame but themselves. Business is all about decision making. Clearly the mega-bonuses and mega-profits were a big enough carrot for all sorts of questionable practices to be shoved under the rug.

        So we have sub-prime exploding in their faces, we also have $1 Trillion in student loans looking rocky and that’s before we even touch the $700 Trillion in derivatives.

        My these bansters have been busy boys!!


        • It’s not quite as simple as the proposition that “the banksters did it”. They control some very important things, but not everything. They make loans because it’s in their interest to do so, true enough. But in their minds they are not harming the borrower, just as the borrower doesn’t believe he is harming himself. It’s an easy enough delusion: after all, the borrower walks away with money, or a house, or some such.

          Because lending is profitable – short term, anyway – there is pressure on bank officials to make loans. Like any other business where there is pressure for profit – and that’s every business – the drive for quick profits leads to cutting corners and increasingly dishonest practices.

          In a healthy economy you would never see sub-prime lending because it wouldn’t be in anybody’s interest other than in an immediate gratification kind of way. The fact that it was occurring at all was an unmistakable marker of extreme short-sightedness.

          But that was the tail end of a long trend. Whose fault is it? There’s a lot of blame to go around. The people most at fault are all long dead.

          I need to make another post on all this.


          • Velocity


            I don’t understand how you can think the sub-prime crisis and mass systemic mortgage fraud is anybody elses fault but the banks. OK throw in Fanny and Freddie and Washington DC if you like but Wall Street have made the bed they’re now lying in like it or not.

            You say “In a healthy economy you would never see sub-prime lending because it wouldn’t be in anybody’s interest other than in an immediate gratification kind of way.”

            In any economy, healthy or otherwise, good business and good lending goes on and badbiz/lending goes on too. The poiunt of a competitive free market is the crap goes to the wall.

            The problem we have is we (corrupt Government) are propping up the crap, propping up the fraudulkent mortgages
            and propping up shit bankers.

            There wouldn’t be a problem were it not for bailouts, the frauds would have already gone to the wall (and hoprewfully jail too). Instead we’re still living amongst this scum and they’re still a part of the business fabric.


            • I’m not really disagreeing with you, just pointing out that there’s a very long history behind this. The incentives were put in place long ago and constituted a radical departure from then established practice. Most of the blame lies there, but they’re all long dead. After them, most people – with a few exceptions no doubt – were just following the incentives that their elders had promoted. Like I said, I will post more about this. Soon.


              • Velocity

                If you mean by “incentives” the Washington (Democrat Parties) tate meddling in the US property market and the systemic bad lending to sub-prime to house the poor then we agree.

                The likes of Chris Dodd, Barnie Frank and their predeccors have made a compete disaster of the US property market as becomes all State meddling in any market.

                The sooner the State returns to its 3% of GDP from the 40% in the US and 60% of GDP here in Europe the better.

                The State in any of its roles has never worked. Only the free market works to sort the good from the shit.


  5. Mike

    There is an amazing cognitive dissonance about debt and banks.

    Premise 1: Banks control the world. (This is actually true.)

    Premise 2: Therefore, inflation!

    Those premises are inconsistent, because inflation is terrible for banks. How so?

    I have student loans at a very low interest rate. If there is inflation, then I’ll re-pay my debt with inflated dollars. This is bad for the banks and good for me. Even if you say that wages won’t perfectly track inflation, inflation would still be good for me.

    Inflation would also be good for every “homeowner,” since most have fixed interest rate mortgages. Again, homeowners [sic] would pay their mortgages with inflated currency.

    Some loans are set to prime – which means that after the Fed raises interest rates to fight inflation, the interest rates on loans will increase. Yet that will mainly affect unsecured credit – personal loans and credit cards. With high inflation and 100%+ interest rates, consumers will file for bankruptcy in record numbers.

    Thus, the banks lose again.

    Banks do not want inflation. Those who cannot comprehend this are therefore infantile and unworthy of attention. The inability to use critical thinking is why I avoid conspiracy theory sites.


    • They don’t want inflation, that’s true. They also want to make loans, because that is how they control the world. If they maxed out on lending what they are capable of in the wake of the Fed’s having flooded them with reserves to shore them up, I don’t doubt that it would be inflationary. But of course they are not maxing out, and indeed they are holding large “excess reserves”.

      It looks like there’s no conventional way out of this for anyone.

      I don’t always avoid conspiracy theory sites, but I don’t care for them for the same reasons you don’t. But it is amazing, interesting and occasionally amusing the kind of stuff that is out there.


  6. Mike

    That Robert Wenzel guy embarrassed himself.

    Why are you talking to him? He doesn’t know what require reserves mean….The guy is therefore clearly an ignoramus.

    Is he some famous blogger or something? I’ve never heard of him, and after reading that exchange, am glad I never had.


    • I had some dealings in the past with the Lew Rockwell crowd, and Wenzel’s one of their fair haired boys. I believe he’s an economist, so it’s a little surprising that he has a gaping hole in his understanding of the central bank money creation process.

      But I suspect that that whole group does. They’ve been beating the inflation drum forever, but it’s nowhere in sight.

      You’re more accurate, intuitively, and without all the academic “economics” pretense: our rulers will tighten the yoke, not slacken it. As if this whole thing is the fault of the lowest people on the totem pole, the people who benefited the least from all that short-sighted profit taking.

      Ultimately it’s not economics. It’s ethics. That’s where the problem is.


  7. Bc

    I refer you to which is Steve Keen’s blog. He does a good job explaining how we got here. Unless The Bernank manages to print about 42 $Trillion he will not begin to inflate us out of this. Debt deflation as per Irving Fisher is our fate I’m afraid. Second great depression. Very painful.


    • I’m a fan of Steve Keen. He raises the issue of debt relief when almost no one else – Michael Hudson maybe – will. It’s what the powers that be refer to as a “non-starter”. (That phrase, btw, originated as inside the beltway talk).

      That’s a dangerous situation for sure, where the only sane alternative is ruled out of polite discussion in advance.

      People have to start talking about it and other than Keen and Hudson I’m not aware of anyone who does.

      I’ve deleted that Wenzel guy from the blogroll. Maybe I should add Steve Keen’s debt watch. I’ll think about it.


  8. Elizabeth

    There’s definitely already inflation. Just look at your own expenses! I’m spending more on clothes and food for my family. Gas is creeping up, too. My parents’ facility bill just went up 10%. College is going up avg. 7%/yr. The only thing deflating is house prices.


    • Well, prices are a symptom of inflation, not inflation itself. But your anecdotal evidence may point in that direction. Would the things you mention make up for the implosion of real estate prices? I don’t think so.

      The guru on the deflation argument is Shedlock. You should check out his blog, which I have linked to.


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