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A Practical Look at “Flation”

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It took me some time to realise that numerous signals in the market can be a wreck if you do not have a clear understanding about economic situation.

Mike Shedlock have an interesting table that tries to determine what we are in the midst in:

*** Current Conditions
** Base Money Supply spiked during Great Depression as one of the previous charts shows
* The Purchasing power of gold is in relation to other commodities

I see a perfect match on 15 items using Case-Shiller CPI (CS-CPI) for number item 7. See Case Shiller CPI vs. CPI-U November 2008 Analysis, for why CS-CPI is a far better measure of consumer prices than the reported CPI-U. CS-CPI is explains treasury rates and the Fed’s actions quite nicely.

Those using practical definitions have an easy time explaining things. Those lost souls screaming hyperinflation missed the boat completely. Hyperinflationists have had trouble for years explaining falling home prices, and falling treasury yields.

Those screaming stagflation no longer have a case with falling commodity prices, a rising dollar, and falling treasury yields.

Disinflation makes no sense with stock prices down 40% and corporate bond yields soaring. Stocks do best in disinflation. Corporate bond yields drop in disinflation. This is not disinflation by any stretch of the imagination.

Routine inflation makes no sense in light of corporate bond yields priced for bankruptcy, collapsing stocks, plunging commodity prices and a negative CPI.

Those who think inflation is about prices alone were busy shorting treasuries, and looking the wrong direction for over a year. Only after the stock market fell 50% and gasoline prices crashed did the media start picking up on “deflation”. Only those who knew what a destruction in credit would do to jobs, to lending, to retail sales, to the stock market, to corporate bond yields and to treasury yields got it right.

What It’s Not

It’s Not Disinflation
It’s Not Stagflation
It’s Not Inflation
It’s Not Hyperinflation

What’s left looks like a duck, walks like a duck, flies like a duck, and squawks like a duck. And that duck is deflation no matter what Humpty Dumpty suggests.

Those who stick to a monetary definition of inflation pointing at M3, MZM, base money supply, or even Money AMS, are selecting a definition that makes absolutely no practical sense. Worse yet they do it screaming about bond-bubbles at yields of 5% or higher, all because they refuse to see or admit the destruction of credit is happening far faster than the Fed is printing.

And it is that destruction of credit, coupled with the fact that what the Fed is printing is not even being lent that matters, not some Humpty-Dumptyish academic definition that has no real world practical application!

Phooey. I prefer a practical definition of deflation that matches and even predicts what the credit markets and stock markets are going to do, not some definition that is useless for anything but academic debate.

The trick now is to figure out how long deflation will last, not whether we are in it. Humpty Dumpty is of no use, he cannot even see where we are.

Kyith
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