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Inflation-deflation debates often involve arguing over which is more likely:
deflation or hyperinflation. Since both deflation and hyperinflation are
extremely unlikely over what most people would consider to be a normal
investment timeframe, these debates are effectively arguments
about which of two remote possibilities is the least remote. The more
useful debate would start with the question: Deflation or more of the same
(plenty of inflation, but not hyperinflation)?
Framing the inflation-deflation debate as deflation versus hyperinflation is
done more often by 'deflationists' (people who expect deflation) than 'inflationists' (people who expect inflation). It's a type
of "straw man" argument, in that it misrepresents a forecast for
more inflation as a forecast for hyperinflation in order to make the forecast
easier to discredit. After all, it is difficult to argue that more inflation
is unlikely in the US when the US has experienced inflation and nothing but
inflation since 1933. It is much easier to argue that hyperinflation is
unlikely, because hyperinflation would require a dramatic shift in both
monetary policy and mass psychology.
To be fair, we'll note that some inflationists have
made the mistake of arguing that hyperinflation is not only a long-term
inevitability, but likely to happen in the near future. For example, some inflationists have shown charts of what happened in
Germany during the early-1920s and implied that something similar was a
realistic possibility for the US within the coming year or two. In doing so
they gave the deflationists a helping hand, because a bad argument in favour of an idea can be more damaging to the credibility
of the idea than a good argument against it.
The deflationists point at the forecasters of near-term US hyperinflation and
exclaim: "The Fed has printed heaps of money, but there is no sign of
the hyperinflation you've been predicting. You have obviously been
wrong!" These are true words, but, as mentioned above, deflationists
often distort the truth by insinuating that ALL inflationists
have been predicting imminent hyperinflation.
Unfortunately, while the deflationists are generally quick to take the
hyperinflation forecasters to task, they are generally slow to explain why
their own forecasts have been completely wrong. We want the deflationists who
told us, back in 2008-2009, that the Fed would be powerless to prevent
deflation, to explain why there has been so much inflation -- regardless of
how the word "inflation" is defined -- in the US over the past four
years.
As far as we can tell, the deflation theory that became very popular a few
years ago was largely based on the fact that the amount of debt was huge
relative to the amount of money. It wasn't a good theory then and it is not a
good theory now, because it confuses/conflates money and debt. Back in
late-2008 and early-2009 you needed to understand the difference between
money and debt to know why there would be no deflation in the US if the Fed
continued the aggressive money-creation program that began in September of
2008, but as time went by it became increasingly obvious just by observing
price changes that there was something fatally wrong with the popular
deflation theory. The question that deflationists need to answer now is: with
the theory that the Fed either couldn't or wouldn't create inflation having
been thoroughly debunked by events, what is the basis of your current
deflation forecast?
Our view is that the US will eventually experience hyperinflation, but there
is not a realistic chance of it happening within the next two years (and
there is no point looking further ahead than two years). This has been our
view since the inauguration of the TSI subscription service more than 12
years ago. While deflation has a better chance than hyperinflation of
happening within the next two years, its probability is also extremely low.
Over the next two years there is likely to be no deflation and no
hyperinflation, just more inflation of both the monetary kind and the price
kind. There is also likely to be another deflation scare, which we define as
a period when rapid monetary inflation occurs in parallel with rising
irrational fear of deflation.
The article is excerpted from a commentary
originally posted at www.speculative-investor.com on 4th April 2013.
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