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Just
when I thought it was safe to set the Hyperinflation vs. Deflation debate on
autopilot, along comes Gary North with a smugly condescending essay posted
at lewrockwell.com that put my name in the
headline and unspoken words in my mouth: “Rick Ackerman Defects to the Hyperinflationists Camp After 30 Years.” Not so
fast, Gary. I’d still back anyone with a good deflation argument, of
which there are many, and I can still take the deflationist side of the
debate against you or anyone else without fear of getting pushed around. Nor
will I ever be comfortable sitting in the same pew as Liro
Gonzala, Jim Willie and a few other inflationistas who go “all-in” every time
someone even mildly contradicts them. And just because I was impressed with FOFOA blogspot’s hyperinflation arguments is no reason to
infer that I cannot find holes in them. Even he doesn’t
claim to have a crystal ball, or that the debate is over.
There
will always be room for doubt. Take his counterintuitive
assertion that the bankers who hold our mortgages would fare better in a
hyperinflation than a deflation. While deflation would likely reduce
them to bag holders in a tidal wave of bankruptcies, the mere whiff of
hyperinflation supposedly would set them scrambling for tangible assets
before the rest of us even have time to panic. FOFOA convinced me that this
is indeed plausible with a step-by-step argument much clearer than any I had
come across. But even he would concede that things might not go so smoothly
for the Masters of the Universe. For starters, there’s the
assumption that they will be cashed out at 100 cents on the dollar and have
time to trade the money for real goods just ahead of the dollar’s
collapse. Although there is precedent for this in the banking bailout
agreements of the last several years, the actual “cashing out”
has proceeded at the whim and pace of the political process. Who’s to
say the dollar could not collapse so swiftly that there would be no
opportunity, even for financiers who operate just a step or two from the
central bank, to take the money and run?
No Shame
Here…
Getting
back to North, he writes as though I should be ashamed for having harbored
deflationist thoughts over the last 30 years. In fact, they have served me
well, allowing me, for one, to predict more than a decade ago a housing
collapse that virtually no one else but Comstock Partners foresaw and wrote
about. Some years earlier, with virtually every economist expecting a
nasty bout of consumer inflation in the wake of an S&L-crisis monetary
blowout, I asserted – correctly, as events proved — that they
would be flat-out wrong. I continued to insist, in my newsletter and in
columns that I wrote for the San Francisco Examiner and other publications, not
only that deflation was a far bigger threat, but that Alan Greenspan knew it.
This is notwithstanding occasional fright-mask threats warning of Fed
tightening to come. For instance, in July 1996, when Fed Governor Lyle Gramley said a rate hike was imminent, I headlined a
commentary in my Black Box Forecasts newsletter that said, in effect,
“You’re bluffing, Mr. Gramley.
There’s not going to be any tightening.”
I
stayed glued to that track for yet another decade, allowing me to play
errorless ball predicting Fed policy over a period of nearly two decades. A
think-piece on deflation that I freelanced to Barron’s in
the late 1990s anticipated Professor Antal Fekete’s essays years later on the “marginal
productivity of debt,” which tells us why each new dollar borrowed now
by the U.S. government will produce negative growth. In the essay, I
described the Fed’s tightening camp as “friendly fire”
trained on the wrong target. Concerning my forecast that home prices
would eventually fall by at least 70 percent — we’re halfway
there. Want to bet against me? And I continue to predict – like
Gonzalo Lira, actually, and many other hyperinflationists
— that Quantitative Easing will end only after the financial system has
collapsed.
In
his essay, chiding deflationists as though they were either stupid or crazy,
North fails to acknowledge the spectacular asset deflation that has indeed
occurred. For him, apparently, inflation at the grocery store and gas pump
evidently outweigh the ongoing, deflationary implosion of an $800 trillion
dollar derivatives bubble. He also asserts — incorrectly, several
times – that I have been predicting
price deflation all these years. In fact, it was asset deflation alone
that concerned me — and asset deflation is exactly what we got, hitting
with tectonic force even if North seems unable to detect it.
Not
that I’d ever assert that North is wrong wrong
wrong, as he and a few others would me.
He’s a very smart guy, an unrivaled polemicist (not to mention, a
fellow film-buff who has written many memorable pieces on that subject), and
he probably knows as much about money, the Fed and the banking system as any
economist alive. But his judgment is hardly infallible, as anyone who tracked
Y2K hysteria may recall. North was arguably the most hysterical guy in
America, hunkering down in the boondocks with triply redundant emergency
systems in the event of the civilizational collapse
that he was so certain would occur. He got similarly stoked about the
prospect of bird flu ending life as we know it (although I’d have to
concede that the jury may still be out on that one).
In Bernanke He Trusts
Given
his penchant for a good sky-is-falling story, it seems ironic that North
would have become a voice of moderation in assessing the odds of a financial
collapse. For in fact, he sees no collapse at all: “I don’t
think we are near an era of central bank monetary stability [sic?],
recession, and depression. Central bankers can still safely inflate, and
they will.” With this statement, he puts himself
boldly at odds with hyperinflationists and
deflationists alike – all of us ruinists,
as far as I’m concerned. I feel strongly that he will be wrong, but
I’m not going to pretend that we can, or should, close the door on his
line of argument.
At
the end of his essay North acknowledges two deflationists left
standing: Bob Prechter and Mish Shedlock. I leave it to them to fight the good
fight, since, at the moment, I’ve got far
more-pressing concerns in my life than “winning” arguments with
the likes of Lira and Jim Willie. In the meantime, I don’t consider
myself to have switched sides, but to have allowed myself to imbibe the
excellent arguments made by FOFOA with an open mind. For now (although
not, perforce, in this essay), I view myself as perhaps 55% hyperinflationist and 45% deflationist. However, the
illuminating discussion of hyperinflation vs. deflation in the Rick’s Picks forum has
made it clear to me that neither side holds all the cards. Because of
the cosmic sums of debt needing to be liquidated, and the fact that the
dollar is the world’s sole reserve currency, it can be said that there
is no precedent in history for the disaster that looms – not Weimar,
not Argentina, not Zimbabwe. Under the circumstances, the advice of
anyone who claims to know for certain how things will play out should be
scorned. The safest prediction one could make is that each of us, and
everyone, will prove to have been wrong in some significant way.
Rick Ackerman
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