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Sunday, December 12, 2010 1:52 PM

Williams Calls for "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal

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Those looking for Sunday entertainment can pull out the popcorn and watch this video of John Williams calling for the "Great Hyperinflationary Great Depression", coming your way soon.

I have rebutted such thinking a hundreds of times, so I do not even have to write a rebuttal. It's been prepared in advance. Here is a 5 point summary of where Williams goes wrong.

1. Williams focuses on money supply, ignoring credit although credit is far more important
2. William ignores numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are. Monetary printing in China far exceeds that in the US, and it is the Euro and the Yen most at risk now, not the US dollar.
3. Williams ignores relatively small changes in Social Security that can keep that system afloat for another decade or longer. Regardless, SS is a huge future problem that will matter at some point, just not now. Currently, collapsing consumer credit in the US is soaking up all the Fed's printing.
4. Williams ignores numerous constraints on the Fed and Congress
5. Williams ignores US gold holdings, the largest in the world
6. Williams ignores the massive influence of consumer attitudes and bank attitudes towards lending.

For a look at constraints, please see Failure to Consider Constraints - My Response to "Has Mish Deflated the Inflationistas?"

For a look at global interconnections including a discussion of rampant inflation in China and why hyperinflation is more likely in Japan than the US, please see Multiple Simultaneous Games of "Chicken"; Price Controls on Walmart; China Declares Shift to "Prudent" Monetary Policy

For a look at currency issues including a lengthy discussion of credit and why it is important please consider Fiat World Mathematical Model

Finally, Williams seems to ignore that hyperinflation is primarily a political event not a monetary event. The idea the world is going to flat out abandon dollars anytime soon is quite simply preposterous.

For further discussion of inflation, deflation, and what causes hyperinflation, please see "Straight Talk" with Economic Bloggers, an interview with Chris Martenson.

My call does not change. The US will go in and out of deflation for a considerable period of time, just as Japan did. The determining factor is mark-to market valuation of credit and money supply.

Right now, the Fed has temporarily overcome massive deflationary forces. For how long remains to be seen.

For the "hyperinflationary great depression", all we have to do now is wait a year to see.


Numerous people have asked me to respond to Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse

For starters I do not concern myself with M3 and I have been consistent on ignoring it in both directions.

Moreover, monetary inflation never really stopped, and that is something I have said many times, even called for in advance. It is irrelevant given that credit is far more important.

If one views inflation through the eyes of monetary measures alone, then we will have the absurd scenario of seeing "deflation" just as the economy is strong enough for Bernanke to start contacting the Fed's balance sheet. Practically speaking that is of course preposterous, and it is one of many reasons focusing on various monetary measures in isolation leads to absurd conclusions.

This is not pointing a finger at ZH as I actually agree with his statement "Bernanke Succeeds In Offsetting Shadow Banking Collapse".

In simple terms, the Fed and government spending have temporarily overcome credit deflation. This is nothing new. It has gone on since March of 2009.

I did think the economy was about ready to slip back into deflation in summer of 2010, but speculation on QE followed by actual QE put that on hold.

Now, Congress has stepped to the plate with more stimulus and that will likely put the kibosh on a double dip-recession in 2011. I did not see that coming and I do not know anyone who did. I think Bernanke is the one who put Obama up to that. If so, it does suggest the economy is far weaker than most realize.

However, the idea that either QEII or the new stimulus is going to ignite serious "price inflation" is flawed. Even with that stimulus, all Congress really did is replace the stimulus effects now expiring. It will take that stimulus to barely maintain the economy at the stall rate.

One thing I agree with Bernanke on is the GDP stall rate is about 2.5%. I look at it this way: The first 2.5% of GDP is hedonics, imputations, and other statistical nonsense that did not happen at all.

Thus, it should be no surprise there is little to no decrease in unemployment until GDP starts growing faster than 2.5%.

Finally, risks are still skewed to the downside. State cutbacks loom, Build America Bonds (BABs) are set to expire, risk of municipal bankruptcies is great, home prices are again contracting, inventories are rising, Europe is likely to slip back into recession, and there still is no driver for jobs yet benefits for 99er's are set to expire. Yes Congress did extend the program, but not the number of weeks, at least not yet.

That is one hell of a lot of headwinds even if Congress extends the number of weeks of unemployment insurance. I am sure I missed many more.

All things concluded, there is ample reason to believe the US is still following the path of Japan, and on a marked-to-market credit aspect basis the US will likely hop in and out of deflation for the foreseeable future.

Mike "Mish" Shedlock
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