Deflation Or Inflation?

At the prodding of a NFTRH subscriber who was combing through old issues, I went back and read NFTRH 7, from November of 2008 and was struck by how things have really not changed in the last 6 years of non-stop inflationary policy; they have intensified and gone global, but the mechanics have not changed.

The current inflation operation is failing world-wide, with the US holding out for now.  As pertains to the gold and gold mining case mentioned in the article below (as we got hyper bullish in Q4 2008), things are moving much more slowly now.  The current backdrop is a different animal than the 2008 deflationary impulse, but its potential is to much more wide-ranging and ultimately destructive.

From NFTRH 7:

Deflation or Inflation?

November 8, 2008

I would like to call your attention to an email exchange I once had with Rick Ackerman regarding a provocative article written by Rick on the subject that is now foremost in the financial and economic community’s consciousness. Talk of deflation is everywhere now, but in this little corner of the internet it was going on 3-1/2 years ago:

 http://www.rickackerman.com/2005/06/readers-weigh-in-on-deflation-threat/

The reason I dug this up is that all too often, subjects like inflation and deflation are batted around and discussed in abstract, almost cartoon-like fashion. Inflation and deflation are buzz words in a system that creates money out of thin air in ever less successful attempts to stimulate economic growth and prosperity. It is also relevant now because if I am known for something other than a generally negative attitude toward the Ponzinomic edifice that so many have taken for granted as a financial system, it is my current bullishness on the gold miners, a sector that most people would not associate positively with deflation.

This is my most direct point from the Ackerman exchange and indeed its premise is being tested today: “In my view, the inflation game is played against the deflationary impulse or need to correct. It is the Fed and other forces pushing on a string, and one day they will find the string simply goes limp and all the inflated chickens will then come home to roost.”

Cluck cluck… they reside at the national doorstep. Having been lectured recently about deflation by a gentleman commenting on a recent article and having noticed legions of ‘deflationists’ appear on the scene after the market began eating credit for breakfast, lunch and dinner, I think it is time to at least look into the subject a little more closely now that the lonely few, led by Robert Prechter have gotten reinforcements en masse.

Don’t get me wrong, people concerned about deflation are some of the smartest I know of; thoughtful people who understand the components of what an unsound economy is built on. The great post-9/11, post-recession inflation bull market in commodities and to a lesser extent, stocks, was actually the result of successful inflation policy from the preceding crisis. The actual inflation occurred during the depths of the economic downturn early in the decade. The effects of the inflation were apparent for years after, with the punctuation taking the form of oil at $147 a barrel back in those relatively carefree days of summer, 2008.

Things are indeed more dicey this time around and global central banks are pushing on that string as hard as they can. The deflation argument holds that their attempts will fail as the gaping maw of many $Trillions in liabilities just yawns wider with each attempt and says ‘gimme more’. The inflation argument however – at least the proper inflation argument – holds that it is the act of money creation that will lead to higher prices one day and the associated rising inflation fears that will crest into the next cycle.

But first of course, there is the current and very brutal cycle to deal with. Which is why we watch things like what deflationists call ‘the velocity of money’ in an attempt to gauge how well our official would-be inflators are doing. This week our often watched M2 and MZM have each hitched down a notch. On the other side of the mixed bag, the 1 and 3 month LIBOR rates have plummeted to new depths implying that somebody gave a big official cattle prod to the banks to ‘get it in gear’. All we can do is to keep watching these and other indicators closely in trying to determine whether policy is successful (success defined as a new inflation cycle).

No matter whether or not official policy ultimately proves ‘successful’, the global economy is likely to experience a prolonged downturn as authorities feed the beast at one end and then deal with the – how can I put this… by-product at the other. At the moment systems are breaking down and inflation effects, if policy makers are ‘successful’, will likely have to wait quite a while before taking root.

This is why I find it troubling as a gold stock trader/investor when this asset class moves in tandem with the widely touted ‘resources’ trade and even the stock market. Raging inflation bulls want you to protect yourself from a coming inflation but do not discriminate between the monetary (currency, bonds and sometimes gold) and the economically positively correlated (commodities, stock markets and sometimes gold).

As blog readers know, throughout the most recent inflation bull cycle, I awaited the contraction, which would be the time the gold miners become distinguished as a unique asset class. The title of this article should actually be Deflation AND Inflation because that is what we currently have; deflationary destruction of credit/liquidity and global authorities pushing on that string. We were never going to get active inflation policy until a well rooted deflation impulse took hold. It is here, it is monetary and gold is outperforming, which is all the gold miner investment stance needs.

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