Why I’m Not Worried About Inflation…At Least for a Good While Yet

Sharon November 30th, 2008

Well, I wish I could take the credit for having constructed a brilliant analysis, but really, the best answer I can give is “What she said.”  That is, Ilargi and Stoneleigh have been running analysis of the credit crisis since before most people knew there was a crisis.  I frankly thought Ilargi was out of his mind when he told me that the economic crisis would reshape peak oil and climate change discourse, and ought to be our focus.  I was wrong, he was right.  Their analysis has been solidly spot-on, and I think it will continue to be.  We are in a self-reinforcing deflationary spiral.  Inflation may eventually be a response to that, but for right now and the immediate future, well, it isn’t.  Here’s an excerpt from Stoneleigh’s remarkable analysis.

“Thanks to a credit boom that dates back to at least the early 1980s, and which accelerated rapidly after the millennium, the vast majority of the effective money supply is credit. A credit boom can mimic currency inflation in important ways, as credit acts as a money equivalent during the expansion phase. There are, however, important differences. Whereas currency inflation divides the real wealth pie into smaller and smaller pieces, devaluing each one in a form of forced loss sharing, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. This generates the appearance of a substantial increase in real wealth through leverage, but is an illusion. The apparent wealth is virtual, and once expansion morphs into contraction, the excess claims are rapidly extinguished in a chaotic real wealth grab. It is this prospect that we are currently facing today, as credit destruction is already well underway, and the destruction of credit is hugely deflationary. As money is the lubricant in the economic engine, a shortage will cause that engine to seize up, as happened in the 1930s. An important point to remember is that demand is not what people want, it is what they are ready, willing and able to pay for. The fall in aggregate demand that characterizes a depression reflects a lack of purchasing power, not a lack of want. With very little money and no access to credit, people can starve amid plenty.

Attempts by governments and central bankers to reinflate the money supply are doomed to fail as debt monetization cannot keep pace with credit destruction, and liquidity injected into the system is being hoarded by nervous banks rather than being used to initiate new lending, as was the stated intent of the various bailout schemes. Bailouts only ever benefit a few insiders. Available credit is already being squeezed across the board, although we are still far closer to the beginning of the contraction than the end of it. Further attempts at reinflation may eventually cause a crisis of confidence among international lenders, which could lead to a serious dislocation in the treasury bond market at some point.”

I think it is important that we be prepared for the real crisis - a long term, deep, deflationary Depression.  As I’ve mentioned before, most rhetoric about the Depression tends to look at the deepest part of the Depression, observe that we aren’t there yet (something along the lines of “During the Depression, unemployment was 25%, but at present we are nearly at 7%, a long way away from that).  All of this ignores the fact that during the Depression, unemployment rose gradually too.  In the fall of 1929, unemployment rose only very slowly.  But between March 1930 and March 1931, unemployment doubled, and didn’t reach its peak until 1933, more than 3 1/2 years after the crash.

My claim is not that we will travel precisely the same road as described in the Depression. But one of the things about crises worth noting is this.  They have their moments of screaming and running around, of explosions and flames.  And then they have most of the rest of the time, which is rather like life, only with incrementally painful shifts. 

One of the incrementally painful shifts we are facing is that addressing peak oil and climate change are likely to be pushed to the back burner.  Obama has already noted that some of his energy goals will probably have to be put off.  The problem is that the odds are good that if they are put off, they won’t happen.  Meanwhile, over at The Oil Drum, Gail the Actuary has another clear-eyed post about how this will affect our long term energy infrastructure

BTW, if you’ve relied as much as I have on their analysis, and can afford it, you might consider donating to the Automatic Earth’s Holiday Fundraiser, on the sidebar.  Ilargi has been doing the work of researching and writing full time, and essentially, they are trying to make sure he can keep doing it.  His goal - to make as much as a McDonalds burger flipper by exploring the financial crisis and helping people address it - seems pretty reasonable to me - I’d sure as heck rather have the two of them doing this work. 


10 Responses to “Why I’m Not Worried About Inflation…At Least for a Good While Yet”

  1. Androson 30 Nov 2008 at 1:05 pm

    Yeah… fuck you.

  2. Anion 30 Nov 2008 at 2:05 pm

    It’s an interesting thought- because of course deflation is far different than inflation. So on a personal level, rather than assuming that if we want to purchase an item, we’d better hurry and do so before the price goes up, with deflation, well, we might as well wait for the price to drop. And of course, if everyone is sitting on the sidelines waiting for the price to drop then no one is buying even if they have the means. And if they don’t have the cash or credit they are out of the game in any event. I don’t recall living in any deflationary times and I would guess that most of us, at least here in the US don’t either so it is uncharted waters I’d suppose.

    I have also been thinking a lot about the whole notion of unemployment during the depression; if even 30% were unemployed,then that meant that 70% were employed. Life is very different if you’ve got a job and income or if you don’t obviously- so I am guessing that at present there is already a divide between those who have secure jobs and income- in some fields that is the case, those who are nervous about losing their jobs and those who already have. Friends fall into all 3 of those categories at present and I can see how different it is for all of them. I would expect that to be even more the case in the future- so where you fall in this spectrum will totally control how you fare…….

  3. Lisa Zon 30 Nov 2008 at 2:15 pm

    The pastor at church said in her sermon today that 10% of Minnesota families are using the food banks. That’s 10% of families here can’t afford to feed their kids–that we know of. I started to cry. I didn’t think it was that bad here yet because all around me I see a lot of business as usual, despite the worries and hand-wringing.

    Times are indeed tough already for many.

  4. Veganon 30 Nov 2008 at 3:25 pm

    Great post!

    I read TAE on a daily basis and recently made a donation. TAE is a very thorough source for understanding today’s economic/financial climate. Ilargi and Stoneleigh are unique in their insightful analysis.

    Thanks, Sharon, for referring your readers to their site.

  5. Rebeccaon 30 Nov 2008 at 4:15 pm

    TAE is a great site, and if I had the money I’d definitely donate. (As it is, I need donations myself, lol.)

    Ani, I still think stocking up on things you need might be a good idea. Why? Well, for one thing, not everything will go down in price during a deflationary episode. Some things won’t go down and others will go down at different rates. Secondly, in a depression scenario many things will be in short supply or will stop being produced. So you might want to get it now before it becomes a moot point.

    I do think we will eventually have to deal with hyperinflation (or at least inflation as well) because you just can’t keep printing money and have it become any more than worthless.

  6. Anion 30 Nov 2008 at 4:38 pm


    Agreed- and that is part of the problem- if we had a crystal ball we could forsee what would become cheaper and what would not- but as those who did the “pre-buy”on their heating oil this year found out- sometimes prices drop rapidly and you’re left kicking yourself and wishing you had waited. Or not. I think that was an interesting thing to contemplate in the full article on Automatic Earth- in terms of how some things would drop radically in price, but others, often the most needed ones, would not. So does this mean a world where wide-screen plasma tv’s, Elmo’s and cubic zirconium earings are cheap but bread and milk are out-of-sight price-wise? Wonder how much the crystal balls will be going for?? :)

  7. Rebeccaon 30 Nov 2008 at 6:19 pm

    Ani, my best guess is that things people actually need (the bread and milk) will maintain their value or go up, where the other things you cited will be incredbily cheap.
    Other things I expect to increase or hold value and/or become difficult to acquire are good farmland, garden tools and seeds, and the like.
    The ability to grow their own food got a lot of people through the depression. Many of the elders I’ve talked with say things like “without the farm/garden we would have starved”. What’s going to happen to this generation?

  8. Brad K.on 30 Nov 2008 at 8:45 pm

    Ani, you need to be careful about the unemployment numbers. I believe a moderately recent president - Clinton? Bush I? - set the unemployment numbers to those filing for unemployment that week or month. That is - only newly unemployed. At some point there was a second number - the long term unemployed. Those were people that had been unemployed when their unemployment benefits ran out.

    What is quoted today is *not* the number of people out of work. It might or might not include everyone collecting unemployment benefits. The long-term unemployed, say from a plant closing, haven’t been reported in years.

    And not all workers are eligible, or are denied, benefits. So they go unreported/under-reported.

    I believe the 1930’s numbers were likely aggregate, “unemployed” divided by “employed plus unemployed”.

    The recent hikes in minimum wage work against small businesses and workers in tight times - by reducing the number of people a given amount of business transactions will support. When a owner-operated grocery/deli (like one down the street from me) drops weekly income by 45% in 60 days, the urge to turn out a few employees and put the family to work at longer (unpaid) hours is going to be irresistible. Nothing is going to turn that cycle back around, until there are people with the money to spend for fast-food-priced meals. That is, half of the customers, about, are cutting back on using this store/deli for workday lunches and evening takeout.

    Cutting back on hours that employees are allowed to work may help the business - but not the employees with the same amount of bills outstanding.

    I expect to see a lot of us drop below a marked divide - into a lower income social class. And that divide between the low class and middle class will become very distinct, and difficult to close again.

  9. Anion 01 Dec 2008 at 7:15 am


    Yes- understood. I know people who both fell of the unemployment rolls with no job in sight and also some who are not eligible even if they lose their job- weird exclusions exist I guess for small businesses or something that don’t pay into unemployment. And of course those of us who are contract workers are not counted if we lose our contract work and those who are self-employed are not either if our business fails or slows down. I myself fit into those catagories so I have zilch if my income stops…..(well other than a lot of stored potatoes!)So yes, I do know the numbers are pretty soft- but what does seem apparent to me is that there is this huge gap already between the jobless and the vulnerable to job loss and those in more secure positions.

  10. Sharonon 01 Dec 2008 at 9:34 am

    During the depression, hours declined quite dramatically, as did wages - from 1929 to 1933, average wages in Ohio (representative) fell from $1499 annually to $923 annually. So yes, keeping a job is good - but it doesn’t really fix the problem. In fact, in the current model, I suspect we’re likely to have a lot of people who end up quitting work, because their jobs no longer pay enough to make them worth putting kids in daycare, maintaining a vehicle, etc…


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