Gary North is wrong

North attacks deflationists.  Again.

He argument is simple.  Governments need inflation to remain viable.  Governments are in control of M1.  Therefore, inflation will continue.  Japan’s CPI was never negative throughout the ’90s and this proves deflation never happened.

His fundamental thesis is right, but he misses a crucial point:  In order for the money to start circulating it needs to get into the hands of borrowers.  If borrowers are broke they won’t borrow more.  The only way to get money into the system to keep inflating is through govt deficit spending.  When the debt load becomes unsustainable even that dries up.  Then what?

North continues to miss the sporadic and volatile nature of the growth in electronic M3, and the associated periodic eruption of “panic” deflationary liquidations due to the debt loads not matching growth in the real economy (i.e. the existence of bubbles through debt).

To say that the US is in imminent risk of hyperinflation is simply ridiculous.  With a housing bust occurring there is unquestionably DEflation occurring.  It’s been occurring now for over 18 months.  The Fed is fighting this for all they are worth (and they are worth trillions).  They are losing, just as they lost in the Great Depression, because they are leaning against a total private debt stock of $16.7 trillion and a total public debt stock of $12 trillion.

As you can see live at the US debt clock website, the private debt load is CONTRACTING, principally due to mortgage default and the associated decline in total mortgage debt.  Not surprisingly this has reduced consumers’ capacity to rack up more debt to spend on credit, because of collapsing collateral rippling through the system, contracting spending through the whole economy.  This is squeezing producers and causing a reduction in capital asset values and housing stock.  This is deflationary.

The CPI is a joke.  North cannot have it both ways.  He cannot say the Austrians consider the CPI to be a joke and were well aware that monetary inflation was soaring between 2001-2007 due to massive house price inflation – and then say that today’s positive CPI figures prove inflation is occurring and the Austrians were right.

The CPI was and is a joke.  It measures whatever the govt wants to measure at the time.  It’s a propaganda tool to manipulate expectations as much as anything else.  True inflation (growth in the money supply) was soaring between 2001-2007 due to a massive increase in M3 which was in turn due to a massive housing bubble gushing credit into the system (supported by securitisation and insane AAA ratings on toxic SIVs which have turned HIV positive).  Deflation kicked in from 2007 (measured correctly to include housing) due to a collapse in the credit-fuelled housing and CRE bubble.

The price of food and other essentials as measured in the CPI will of course continue to go up in the US, in Japan, in Australia – everywhere – due to supply (shrinking) and demand (increasing) in these particular sectors.  But as every Austrian knows, this is simply a sectoral shift in pricing power due to market conditions – not inflation.  Inflation is debasement of the currency (or increases in the money supply).  M3 growth collapsed after the housing and CRE bubble burst.  We are in deflation.

It is remarkably difficult to create inflation (let alone hyperinflation) in this current environment, with the massive cancerous debt loads in the US and Japan.  What is the mechanism by which the money can be injected into the economy to circulate, if people aren’t willing (or able) to borrow more?  The “organic” growth in “voluntary” credit (where suckers voluntarily spend and get further into debt) has to be replaced by “involuntary” spending, by govt.  But the sheer scale of the hole is huge, and govts (even with the deficits of Japan and the US) cannot replace private credit growth during the boom years.

No one would call the denouement of Japan’s bubble a hyperinflationary period.  Many would call it a deflationary period.

Unless Ben fires up the helicopters with toilet paper money and throws it out into the streets, I fail to see how hyperinflation can really ignite.  Deficit spending will be overwhelmed by the debt load.  Private spending will be overwhelmed with collapsing asset values caused by mass insolvencies.

The only way a hyperinflationary event can occur is via the “Icelandic solution” – massive sudden currency depreciation.  That certainly will cause hyperinflation.  But how likely is that to occur in either the US or Australia?

Until that happens, I’m with Steve Keen and MISH.  And yes, I still consider myself an Austrian.  So would Frank Shostak.

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