Inflation and Deflation

By: Gary Tanashian | Mon, Mar 23, 2009
Print Email

Excerpted from the March 21 edition of Notes From the Rabbit Hole.

"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months." -US Federal Reserve Statement, March 18, 2009

Let the printing begin, or more accurately, continue in ever more intense fashion.

The Fed has chosen the 'nuclear option', which of course carries as much 'all or nothing' risk as the garden variety call or put option held to expiry on an equity. In this case however, the equity we are talking about is that of the United States' standing in the world, and this equity (one definition: the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc.) is by definition zero, or well below zero considering the massive liabilities attached.

The only reason that the United States is able to maintain the illusion of solvency is because it is merely one insolvent inflator among many, and it has been the top global dog for so many decades - again, the collective mindset still exists in yesterday, and as such, we pursue policy that has been in effect since the creation of the Federal Reserve. We pursue inflationary policy, only this time it is the inflationary policy of incestuously buying up and monetizing our own debt.

Now, I want NFTRH to go beyond the inflation-deflation debate, where proponents on either side fixate on prices. We will instead look at the massive monetary fire hose set on auto pump (new debt) and the equally massive deflationary destruction of existing debt. Inflation and deflation; one cannot exist without the other. You could look at this as a sort of insane balance sheet. Government has limitless ability to print money and as long as it is the popular thing to do (inflation expectations are not even on radar) they have the backing of the citizenry, and the ever more absurd cycles are not likely to end until the majority of people wake up to the idea that monetary policy has long since replaced money and that it is this policy that has prompted ever more intense boom and bust cycles.

Here is a look at the True Money Supply, compliments of

Per The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply. The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed. For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000). The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.

The rising TMS is the starting point. Now consider that the Fed is getting up into the $Trillions in liabilities following Ben Bernanke's theories on battling deflation, and there is no doubt that we are inflating. But we are deflating as well. Money is growing exponentially to try to meet the debts that grew exponentially for decades under the guise of a supposedly sound monetary system. Money supply is rising and this money will find its way into the most precious of assets even as the deflation threat keeps many people perceiving safety in cash and government debt.

What the Fed is trying to do is instill confidence that would theoretically carry the ball the rest of the way for the completed 'Hail Mary'. What they will actually do is blow another in a long line of bubbles, and that bubble may include some commodities, but this being a monetary event on a grand and macro scale, the most likely bubble is... Beuller? Yes, it will be a bubble in the ancient monetary relic from the past, at least in its ratio to everything else, which would translate to well, gold for the bottom lines of the companies that dig it out of the ground. This would all take place as the public slowly realizes how royally their compliance to conventional wisdom has led them astray and as gold rises in all currencies and against all other assets.

That is the longer term. In the short term, as you know, I have been bullish on oil and other positively correlated (to 'hope' and the economy) commodities for a several weeks now. But this is a trade only. The battle between inflation and deflation is likely to grind on for a long while before it transitions into a MOAIP (mother of all inflation problems). Maybe as long as it takes the large, potential rising wedge in the US dollar (shown later in the report) to play out.

Instinct is telling me that the usual suspects - the ones who remained trapped aboard the peak oil and energy mania straight on through the initial deflation impulse of the last several months - are more than ready to begin pumping commodities once again. NFTRH is now looking ahead to targets for a top in oil, industrial metals and most importantly, the Silver-Gold ratio, also discussed later in the report. Gold will likely be an underperformer for as long as the hopeful and bullish condition - actually a resetting of sentiment - persists.

If you are reading this newsletter, it is likely because you are not looking for reinforcement of popular beliefs. You are looking for an edge of some sort, a different vantage point. It is helpful not to think in terms of inflation or deflation, but rather in terms of a big picture in which the perceptions of the old world are slated for the scrap heap as we slowly and painfully transition into the new normalcy, while two compelling forces go head on in a battle that is likely to one day end the very system in which they hold sway.



Gary Tanashian

Author: Gary Tanashian

Gary Tanashian

Disclaimer: does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2017 Gary Tanashian

All Images, XHTML Renderings, and Source Code Copyright ©