The jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.
Why do deflationists have it wrong ?
It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble 'should' contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!
The bankrupt banks have not been allowed to go bankrupt, hence the debt is being systematically transferred to the state which has at its disposal the magic money printing press which can vanish the debt away by means of debt monetization.
Quantitative Easing is not just another ordinary policy measure. I have not been calling it the nuclear option for nothing for it's detonation is tantamount to MONETARY ARMAGEDDON! THIS IS NOT BEING RECOGNISED by either the mainstream press or the highly vocal deflationists who did catch the deflationary downdraft of 2008 but now having gained press and investor attention are stuck in a perpetual deflationary loop. The academic economists in the mainstream press, bereft of individual thought have jumped onto the deflationary bandwaggon and applauded money printing as my article of 12 months ago illustrated - Bankrupt Britain Trending Towards Hyper-Inflation?
Perhaps in 12 months time, the flaws in the deflationary arguments will be recognised and again we will witness the re-writing of history where a minor caveat here or there is pulled out of the hat to imply the deflationists were right all along! The answer is simple in that Monetization of debt feeds inflation and once monetization of debt starts it DOES NOT STOP until the currency is DESTROYED!
The reasons WHY x,y,z should happen are always obvious AFTER the market has moved as to WHY it has moved, the trick here to actually MAKE MONEY is to ACT BEFORE the market MOVES as I warned off back in March 2009 concerning the stocks stealth bull market and the relentless contracting corporate earnings mantra at that time- Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470
Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent. IT IS ONLY LONG AFTER THE FACT, AFTER MARKET'S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES.
Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM !
AGAIN NOTE THIS - BE UNDER NO ILLUSION - The central banks will NOT STOP MONETIZING DEBT ! Once started IT CANNOT BE STOPPED ! Forget what the Governor of the Bank of England Says or Fed Chairman, Quantitative Easing is here to stay and therefore INFLATION WILL EMERGE, IT IS ENIVTABLE ! INFLATION IS THE DOMINENT SCENERIO BEING PLAYED OUT NOT DEFLATION, regardless of what ever is stated today.
THERE IS NO ALTERNATIVE , INFLATION CANNOT BE AVOIDED. THERE IS NO WAY THE LIKES OF THE UK AND THE U.S. CAN SERVICE THEIR EXPLODING DEBT MOUNTAINS WITHOUT MONETIZING THE DEBT, THIS IS NOT SOMETHING THAT MIGHT HAPPEN BUT IT ACTUALLY IS HAPPENING RIGHT NOW !
For instance in the UK - first there was QE of £75 billion which might be enough, then £125 billion is DEFINETLY ENOUGH, later £175 billion NOW £200 billion, Tomorrow? The day after ? The week after ? THERE IS NO END IN SIGHT TO QUANTITATIVE EASING !
RECOGNISE THIS FACT and you can do something a) preserve your wealth and b) grow your wealth. I will touch on this later this week in my newsletter that pulls everything together.
The DEFLATIONISTS ARE DEAD WRONG !
The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months - it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG ! Off course by then those that were led down the blind alley will have not only lose money but not have participated in any of the gains as I pointed out in early April 2008 - That wishy washy commentary does not wash when it comes to monetizing analysis as you are either invested or you are not, there is no wafflly middle ground!
The internet is a great invention of accountability! Okay no one is perfect, no one has a crystal ball, everyone gets something wrong at sometime, BUT IF YOU REPEATEDLY RAM SOEMTHING DOWN PEOPLES THROAT THAT IS PLAIN WRONG THEN WHAT DO YOU CALL THAT ? It is either deliberate propaganda or there is something seriously wrong in the mechanisms that bring about the projected scenarios. LOOK at Nouriel Roubini's academic economist commentary following every dip.
The truth is that the SAME analysis can conclude either way, however it is the process of having to put ones own money on the line which creates the probability of arriving at the CORRECT conclusion. Nothing else, not media events on TV or radio or publicity stunts, nor pandering to fan clubs, but ones reaction to seeing a deployed scenario either leading to ones wealth growing or contracting.
Deflationists such as Dr Doom Roubini and the rest have frightened investors away from monetizing on one of the biggest stocks bull runs in history following the March low, and continue to do so to this very day where near every rally peak has been followed by the crash is coming mantra (Stocks Bull Market Destroys the Crash Bears Again).
DEFLATIONISTS WAKEUP AND SMELL THE INFLATION COFFEE BEFORE YOU LOSE ALL CREDIBILITY OVER THE COMING YEARS.
The warning of November 2008 of the worst case scenario of Hyperinflation has not only NOT diminished over the past 12 months, but it has been greatly reinforced, where 2010 looks set to the year of INFLATION NOT DEFLATION and 2011 may be Far worse as the Deflationists lose every penny they own and hold in Government Bonds that they so vocally now profess to pile into!
After the deflationary correction of 2008 we are about to witness the INFLATIONARY MEGA-TREND of the NEXT DECADE! the consequences of which are many.
What to Do ?
This is part of a New series on the INFLATIONARY outlook, ensure your subscribed to my always free newsletter to get the full scenario and it's implications in your in box THIS week it will be one of my seminal pieces much as The Stocks Stealth Bull Market Scenario of March 09 and Crude Oil Top of July 08, or the UK Housing Market August 07 Top and Bear Market were before it amongst many others.
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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