The Case for Inflation, Deflation & Hyperinflation

The economic discussion under my last post segues nicely into this next read. This is especially for Bantering Bear, who so far has not seen a good case for hyperinflation and doesn’t think the current crises will go that far.

The following is a special report written by a career economist who argues that we are part of a much larger cycle, one that began in 1933, when Roosevelt decoupled from the gold standard. He says that inflationary recession is in place, that the banking solvency crisis has opened the first phase of monetary inflation, and that hyperinflationary depression remains likely as early as 2010. Interestingly, this report was written almost one year ago, with many of his predictions beginning to unfold. I’ll be interested to hear what you guys think. Warning, this is a long, academic read, but well worth the effort. Here’s the PDF Version.

About the author: Walter J. "John" Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.

[Note: For those of you who only care about local real estate, skip this post. However please consider the possibility that if these events unfold as predicted, it will very much affect the value of your dollar, your real estate and your quality of life. I have always only been interested in the truth about our marketplace. In time, the aftermath of large-scale, global, monetary policy decisions will trickle down to Reno and I believe affect us all. We should be prepared.]

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17 Responses to The Case for Inflation, Deflation & Hyperinflation

  1. Avatar bob says:

    Ron Pual & Peter Schiff feel the same!

  2. Avatar bob says:

    err. Ron Paul.

  3. Avatar BanteringBear says:

    Wow, a post especially for me! (Wiping tears of joy from my eyes (/sarcasm)).

    After reading the whole report, it would appear that the author has already been proven dead wrong. Why? Because, having been written nearly a year ago, there’s not so much as a whisper of the deflationary spiral we’re currently mired in. He missed it. Probably because he underestimated the magnitude of the wealth destruction which was underway.

    I don’t think that this depression is “special”. I believe we already had inflation over the course of this bubble, and now we are in the correction mode. What’s continually being overlooked by all of the “hyperinflationistas” is the enormity of the wealth destruction. And we’re not even into the commercial real estate bust. If “Helicopter Ben” was so adamant about not repeating those deflationary times, why hasn’t he been able to stop this? He’s been talking about it since at least 2002. Did he just get a late start on things? I don’t think so. Methinks market forces are in play, and you can’t stop a freight train. Enjoy deflation, until its finally runs its course.

  4. Avatar CommercialLender says:

    Sorry, I posted my last under the wrong thread. Reposting here.

    BB – you have numerous good points, so does Smarten, One of your most poignant, to me at least, is the concept of the wealth-loss-effect on the economy as a whole and the relative smaller effect these massive gov’t stimuli has on the in/de-flation argument. Namely, the economy is down more than the money supply is up. Well, can one only hope in this example this condition will not too suddenly reverse?!. You have me pondering and have done so on this point for several months.

    Lost in the rest of your argument, though, is the effect of money “in the consumers’ hands” to the inflation argument. Can you name an historical example where the people had buckets full of money simultaneously in a gov’t with horrific inflation or hyper inflation? Germany 1930s? Russia 1990’s? Mexico crisis? Zimbabwe? Not to my limited knowledge. What we saw is a situation where the people have the same amount, fixed salaries, fixed savings, etc. but the gov’t got in a bind and printed too much money (or defaulted causing the pain thru its burdensome debt obligations).

    You describe correctly that we have been thru our inflation period already, namely the past 5+ years where we all readily point to real estate inflation. I’ve been saying for years that our inflation was not inflation in the textbook sense, but in the AGGREGATE. Namely, we did not necessarily pay more for Goods A, B and C, but we bought more of them. How much junk does the typical American’s garage have stuffed in it? We bought more, not paid more with some items excepted. However, that in no way means we did not have ‘inflation’ in the aggregate.

    Now, we have de-flation in BOTH the pricing and in the aggregate senses. Housing prices are falling, but then so are the number of homes-per-household such as 2nd homes for retirees. Prices for, say, jeans are down, but then people are holding off buying that other pair of jeans until they are more certain of their incomes. So, sales of goods are falling AND prices, too. My point here is not so simple as supply-vs-demand because in our current deflation, caused by poor sentiment and over-extension of consumers’ balance sheets, it does not matter how much the price of X falls, ‘cuz I ain’t buying! This mentality is leading the average person to save/horde cash and pay down debt, which we are also experiencing. This is the effect you allude to whereby citizens are removing money supply from the system, at least temporarily, while the government is putting money into the system, albeit to banks who are not lending back to citizens.

    I’m not sure I agree with you that inflation is not around the corner again. When citizens and banks start getting their money out again, we’ll have dangerously too much money supply. I agree I’m having a time trying to figure the catalyst that will swing us quite uncomfortably from de- to in- flation, but I feel confident we will in the not distant future. The simple fact is that these govt surpluses and excessive bond sales will, despite the consumer/publics lack of direct benefit at the moment, cause our fiat currency to be valued less in the future than now. This is more so true if a backup or secondary (or new primary) reserve currency is established, heaven forbid. The Chinese and other bond holders will look at the US government and demand higher rates for this monetary over stimulus, or will shun the greenback to the same effect.

    That’s totally irrespective of whether we consumers will have too much money in our hands and therefore start paying too much for loaves of bread and houses. So, there’s your path you seek. Indeed, this is exactly what happened to each country listed above – watch out little guy and pensioner.

    Finally, let’s keep in perspective that the late 1970’s massive inflation and high interest rates (real) came in that order. The baby boomers were just getting on the scene, women en masse entered the workforce, the govt printed too much money to fund the Vietnam war, etc. Volcker correctly realized that inflation was the enemy and embarked on a policy to raise interest rates dramatically. Greenspan was the reverse, I believe. He did not realize that goods in the aggregate were being consumed in my theoretical explanation of a secondary cause of inflation, and tried to manage what was a temporary employment blip post and 9/11 by reducing rates. This caused more people to buy more things and some with pricing inflation (houses, high end cars for example).

    This is why we are left to face very painful deflation, but the inflation that will result particularly from today’s late-Bush and early-Obama policies will come home to roost via weakened dollar and higher bond yields. We have not seen this so far by virtue of the fact everyone else on earth is similarly situated so the relative dollar demand is hovering around a flatline.

    All that said, BB, the wildcard to our discussion of if or when deflation will turn to inflation is demographics. Those same babyboomers are starting to retire and horde cash, buy less and generally be net sellers/users of their assets. Is this demographic effect enough to keep us out of a near term inflationary whipsaw?

  5. Avatar Martin says:

    Remember when the topic of this blog used to be the Reno/Sparks real estate market? Is it still?

    I know it’s Diane’s blog and she can put up anything she wants. Not that the topic isn’t meaningful, but there are a thousand blogs where people can post their pontifications on the state of the economy and what the near term/long term future holds. If this blog is going to tun into another one of those, well quite frankly there are a lot better ones around. I would hope we can get back to talking about the Reno/Sparks housing market soon.
    Just my $0.02.

  6. Avatar BanteringBear says:

    A good post, CommercialLender, and one I’d like to take a moment to respond to. You posted:

    “Can you name an historical example where the people had buckets full of money simultaneously in a gov’t with horrific inflation or hyper inflation?”

    My point has been that, in large part, the money created thus far is NOT making it into the consumers hands, or the economy as a whole. It is literally going up in smoke, held as reserves by institutions which continue to hemorrhage cash due to the declining value of assets on their balance sheets. I have not seen any proof of a money supply which is rapidly increasing at this time- especially at a rate conducive to hyperinflation. Should such an increase develop, it would also need to be buoyed by a widespread unwillingness to hold the currency- both by citizens as well as countries abroad. I do not foresee such an event. I believe that the PTB understand what terrible effects a hyperinflation scenario would have on the country as a whole, and would do anything to avoid it. It would threaten our position in the worldwide community, and almost anything is better than that.


    “My point here is not so simple as supply-vs-demand because in our current deflation, caused by poor sentiment and over-extension of consumers’ balance sheets, it does not matter how much the price of X falls, ‘cuz I ain’t buying! This mentality is leading the average person to save/horde cash and pay down debt…”

    I don’t entirely agree with this. The staggering numbers of job losses are real. That’s demand destruction. It’s not by choice that supplies are growing and demand shrinking. Fewer jobs equals less money chasing goods and services which leads to a surplus and price declines. Also, the increase in the labor pool is putting downward pressure on wages, which will lead to even fewer discretionary and non-discretionary purchases.


    “I’m not sure I agree with you that inflation is not around the corner again. When citizens and banks start getting their money out again, we’ll have dangerously too much money supply…babyboomers are starting to retire and horde cash, buy less and generally be net sellers/users of their assets”

    With unemployment at near record or record levels, the banks will have a very paltry customer base. Baby boomers are hemorrhaging cash. I don’t see all this “money” making it into the system, short of the government issuing big checks to every citizen in this country.

  7. Avatar Raymond says:

    I have to join in with Martin. Blogs where the topic is the state of the economy are a dime a dozen. You can turn this blog into one of those, and watch your readership sink like the Titanic. A bunch of people talking out of their behinds about Bernanke, Geithner, Volker, FDR, and the Hoover administration is the internet equivalent of late night TV infomercials. It gets very boring, very quickly.
    Please lets get back to one of Mike’s threads about the foreclosure activity in a local neighborhood, or one of RI’s anaylsis of the current month’s Reno market sales data. Or one of Smarten’s analysis of the Lake Tahoe market. Please?

  8. Avatar BanteringBear says:

    Martin and Raymond-

    It’s been nice to see your posts, I’ve enjoyed them, and I hope you continue to contribute, but Diane specifically requested that those of you who only care about real estate skip this post. Why complain instead of heeding that advice? Furthermore, this has EVERYTHING to do with housing. I’d suggest for those of you who believe hyperinflation is in store, to get out and start shopping for homes and gold as they’re certainly going to be a good hedge against what you believe to be coming. Me? Meh…

  9. Avatar Waldo says:

    Once this blog starts taking up topics of large scale macro global significance that could impact local real estate, the sky is the limit, no? I suppose that this blog could take up the topic of North Korea’s nuclear ambitions, and it’s ongoing efforts to develop rocket capacity to deliver a nuclear warhead to the western shore of the US. Because if the North Koreans develop such capacity, as some predict, and they land a nuclear warhead on San Francisco, it will very much “affect the value of your dollar, your real estate and your quality of life.”

    It’s your blog, Diane. But nothing has been posted on this blog in the past two weeks that I couldn’t find on 500 other blogs.

  10. Avatar Reno Ignoramus says:

    I have heard a rumour that Lawrence Yun is coming to Reno. I have not yet verified that the Northern Nevada Board of Realtors will be hosting an open Kool-Aide bar prior to Mr. Yun’s presentation.

  11. Avatar Mike says:

    RI, it’s true. Guy sent me a notice about it but I unfortunitly deleted it. Think we should do some sort of protest outside in our RRB T-shirts?

  12. Avatar Reno Ignoramus says:

    Hey Mike, do you think they could throw in Leslie Appleton-Young as part of the deal? Maybe as the “NAR-CAR” Fantasies in Real Estate symposium?

  13. Avatar CommercialLender says:

    Martin, Waldo and Raymond,
    Fair points, but Diane introduced this specifically as a way to see the big picture then drill it down to demand for housing in REno/Tahoe. Sorry to everyone I went so long yesterday, but the point is that many things are effecting the housing bust and will effect any recovery to include macro econ issues, consumer sentiment, buyer psychology, rates, and what the gov’t does to our financial instituations and tax rates.

    Other blogs abound, but they don’t have a tie to our local real estate like this. You can choose to read/contribute or go elsewhere, no worries.

    If you disagree, I for one would love to hear how Reno/Tahoe real estate would otherwise not be effected by these bigger picture views.

  14. Avatar DonC says:

    OMG I’m agreeing with BB again!

    Just to add a few points: BB said the author had missed the deflationary spiral. I’m not sure we have a deflationary spiral, but the author did have some benchmarks that indicated hyper inflation was on its way. Those were things like a weak dollar, rising oil prices, and inflation at ever increasing rates over the then current 4.7%. What we have today, a year later, is a stronger dollar, oil prices down 50%, and inflation closer to 1.7% than to 4.7%.

    The author’s real argument for hyperinflation is that the government will have to pay for the unfunded entitlement programs like medicare and medicaid. While those liabilities are indeed large and a concern, they are also still down the road a decade or more.

    Not only do people have a shorter time horizon than this, but systems tend to adapt. For example, while some scientists have predicted that we would “run out” of certain commodities, in fact that never happens. What happens is that as supply dwindles prices rise and substitutes are found. This is not exactly the same but the point would be that many things can and hopefully will change.

    Just for the record, to address a point BB made, and perhaps to satisfy those longing for something about real estate, AFAIK because of “mark to market” the legacy aka toxic aka mortgage loans have by and large been fully written down by the banks. Those assets will not exert further downward pressure.

    However, as alluded to by BB, we do have commercial real estate. Many loans on problematic ventures have and are coming due, and these loans, many of them construction, are being rolled over by the banks. This is much like what the Japanese banks did and it’s a fairly good way of creating the famed zombie banks. In this regard, the program announced by the FDIC is designed to attack this. It may work since the FDIC can exert great pressure on banks to unload these loans at market prices and take the losses. This may cause some more bank failures but it would also get commercial lending moving again.

    Your take CL? It’s definitely in your area.

  15. Avatar Roger says:

    Hey Diane, just a thought from a long time reader infrequent poster. Why don’t you open a Forum section on the state of the economy, inflation v. deflation, etc., and then those who want to comment on it can do so there. I observe that 95% of all the comments over the past two weeks on the economy and where it is going have been from about the same four people. They just keep saying the same thing over and over and over again. I agree with the others that it is getting old and boring.

  16. Avatar stockboy says:

    As a reader for some time, I wonder, do blogs have a life cycle?

  17. Avatar CommercialLender says:

    Stockboy = Derreck. At least the guy or gal is persistent.


    DonC – I agree with most of your post, save a glaring error. Banks are in no way close to having written the values down on their loans to ‘market’ yet. To do so would be to bankrupt a great many of them. IMHO, a good number of banks are plain insolvent, but you won’t here this in the media or govt.

    Many games are still being played, even look at Mike’s post of today regarding NODs being temporarily halted. If you believe there is a great backlog of NODs, you must also recognize that the banks are only pretending to mark down loans to ‘market’. Let’s just say I know this to be the case at least in some companies in my part of the industry – we’ll leave it at that.

    Why? Well, many reasons we’ve discussed here in the past including they think Big Govt will bail them out and are waiting the best deal and also that they can’t tie up any more capital in losses or they are finished as a going concern. Now, some companies may also be taking too aggressive marks to, say, negotiate with certain stakeholders.

    I don’t really take a position on mark to market, but I can see both sides. SUffice to say, the market for some of this paper is weak at best and non-existant in some strata at worst. But mark to market among other things misses the basic concept of adjustments for ‘money good’ loans and those in or near default.

    No different than my rental house in Reno, which I’m upside down on. Since I don’t need to sell and thankfully can hold on for 5-10 years, and have some compensating balances at that bank, what does it matter the today market value to the bank? But if I lost my job, etc. and started skipping payments, then the house has a real ‘mark’ to take as far as the bank is concerned. Now Imagine a bank with tens of thousands of home loans….

    Hope that’s clear – sorry for the rant

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