In a recent interview at Casey Research, Jim Puplava shed some light on the ongoing inflation / deflation debate. He takes the position that in a fiat money system, there can be no deflation – deflation meaning as measured in prices.
This is one of the problems we have when talking about deflation. You will often hear, for example, that "housing prices fell by 30%" or the "stock market fell by 40%," supposedly meaning it was deflationary. But that is a specious argument at best, because if we call the crash in real estate and the stock market deflation, then what would the deflationists argue now that housing is starting to turn around? What would they call the S&P going from 666 to 1,373? It's up over 100%... is that deflation?
Let's take the popular definition of inflation – rising prices, which is really a symptom of inflation. During the financial crisis, there were only three months where the CPI was negative. Prior to 2008, the last time you saw a negative CPI was in 1954, when Eisenhower was president! So despite all the claims about deflation, all you would have to do is look at a graph of M1 and M2 and see that the money supply actually expanded during this period.
Under a strict gold standard, deflation was certainly possible, for instance during the 1920-1921 recession:
Even before that. Step back to 1920-1921… If you look at the statistics during that period of time when we were on an actual gold standard, you saw a huge contraction of GDP and in the price of goods. Here are the actual numbers: between the summer of 1920 and 1921, nominal GDP fell by 23.9%; wholesale prices as measured by the PPI dropped by 40.8%; and the CPI fell by 8.3%. It lasted for roughly two years.
He makes a key point: even under a gold standard in the 1930s, once Roosevelt confiscated and revalued the dollar to gold, inflation again was the result:
Furthermore, even in the gold standard we had during the '20s and '30s, we had inflation. President Roosevelt devalued the dollar by 60% in March of 1933, and when he repriced gold from $20 to $35, he stopped deflation dead in its tracks. By the end of the month we were experiencing inflation. We were running single-digit inflation rates the very month he did that in 1933, all the way up to 1937, when FDR and the Federal Reserve reversed course. So as a result of the devaluation we got large doses of inflation.
I have long held that as long as inflation is measured in prices – a measurement that government will always manipulate lower than reality – central banks will be free to implement policies that support monetary inflation. And it is in monetary inflation where the big theft takes place. Prices are a sideshow meant to distract the audience from the actual theft.
One of my first posts at this site more than two years ago was on this subject:
In the era of modern central banking, there is only inflation. One cannot even credibly use Japan as a proxy. Check the numbers; they have had some minor pluses and minuses -- but nothing coming close to wholesale deflation of prices. Plus or minus two percent per year is within error -- given the manipulation and randomness of the statistics used.
Central banks want inflation. This has proven difficult to achieve lately, however do not discount for a minute the desire to get it. There are still many tools available for banks and governments to get this wish. As long as we do not have price inflation in the standard government statistics, they will feel free to keep pumping. So they will keep pumping until they get price inflation. Any shrinking in credit markets only gives room to pump further.
The FED’s balance sheet tripled during the crisis of 2008/2009. Who says they will not keep tripling it until price inflation gets in the way? There is no argument one can make for the FED to not buy junk debt from the banks at face value in order to save the banks…until we get to price inflation or mass inflation. Nothing has stopped them from buying a lot of junk so far.
As long as [the Fed’s] yardstick is inflation as measured by the CPI, they will be under no constraints to continue pumping until they get serious inflation as measured by the CPI.
Jim Puplava, welcome to my world. The deflationists of the world have no chance with central bankers in charge.
As long as it is commonly accepted wisdom to measure inflation / deflation in terms of a basket of consumer prices – with the measurement controlled and manipulated by the government – and the prices as measured are not increasing at significant (low double-digit perhaps?) rates, there will be no deflation: not in prices and not in money supply.
There are many issues to draw our concern in the current economy; deflation is not one of the issues.