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soda.jerkNote:  This is somewhat personal and subjective to and, but if any venue can take a little off the beaten path content, I figure Slope can.  Thanks in advance to Tim if he should choose to publish it.

Well, now that the title has hopefully gotten your attention I’d like to talk about the ‘d’ and ‘i’ words that so many financial types – myself included – throw around so often. This is due to a reader/subscriber KR’s aggravation at my use of the word deflation, which he had thought was meant sarcastically, but then came to find out I am serious when I use it.

First I want to note that I seem to have been pissing everyone off lately, gold bugs (one of which I am) and gold bears in particular. That is due to my writing style being one where if I’ve got something to say, I say it. Sometimes that’s bad for business, as I can get a little heavy handed.

I’ll try to be less heavy handed going forward but in criticizing what I view as promotion with little backing substance (whether bullish or bearish), I don’t retract any comments aimed at the type of people that I think are not being square with readers or are simply not doing the work required (i.e. promoting lazy analytical thinking).

So dear gold bugs, if I have offended you by showing my disgust, just remember that anyone writing a blog is a human being as well. Disgust is an emotion and well, blogs are there in part to document opinions and yeh, sometimes feelings. I have written the same things in good times (with gold above 1800) and bad. Consistency my friends.

Since I do not yet have the emailer’s permission to quote him, I’ll use his main points in my own words and offer answers to what I have “aggravated” him with.

The Soda Jerk in the photo above was used in a past post inspired by my late friend Jonathan’s* colorful words about Bernanke serving up inflationary Tutti Fruities. Also reference “It’s Inflation All the Way Baby”, a more recent article using another one of this colorful and quotable man’s statements to me (this one from when he and I and what seemed like about 3 other people on the planet became bullish on gold stocks and commodities, and bearish on the pervasive Deflation story, in Q4 2008).

Base Money in the US is through the roof.

a: Yes, and that is most certainly the result of inflation, which has gone directly to stocks on this cycle. The chart I’ve often shown with the S&P 500 goose stepping upward in line with Monetary Base tells the story. They have been inflating 24/7, 365 for 6 years years now in the current operation.

Where is the deflation? Where is a hint of it even lurking? Falling prices is not deflation.

a: I totally agree that falling prices do not represent deflation. But I would say that they can be the product of failing inflation. My point is and has (since I began writing a decade ago) been that there is a natural deflationary force, always at work seeking to violently administrate the debt stacked, inflationary excesses layered in by policy makers.

They try their best not to allow a deflationary address of the inflated bubbles to take things down but in 2008 we saw what happens when it gets a good bit in its mouth. But again, since Q4 2008 it has been inflation 24/7, 365 to the current day (which is why I have to laugh at any strong pretense of normalizing the Fed Funds rate).

KR notes that inflation, not deflation has created the distortions. Abundant credit has fueled commodity mal-investment and the collapse in those prices is due to inflation’s distortions.

a: I could not agree more KR. I have written about that quite often. I have also written about commodity bubbles. It was due to inflation on the way up, but a deflationary force (simply deflating the inflated) is what is taking it down.

strawmanI see deflation as simply a corrective and before it was made toxic by debt-leveraged inflationary policy, would have been a good thing, as this article I wrote 10 years ago clearly shows. Imagine that, declining prices and increasing productivity… who would want that? More recently, part of the point of the title Deflationary Straw Man is that it is a thing stood up against which the Fed can inflate 24/7.

My views have basically not changed in 10 years because I have seen nothing in that time to change them. Inflationists have been decimated over the last 2 years while holding to their beliefs. But the situation is much more complex than any one dogmatic stance can handle. I don’t pretend I understand it all, but especially when you don’t understand what is in play you do not stand in its way on your ideology. You get out of the way and live to fight the fucker another day.

KR also notes something else I have mentioned repeatedly, that the act of inflating (buying long-term T bonds as part of QE) has actually served to paint the macro as if there is no inflation (rising yields being an inflation indicator).

a: I have also talked about the myth of the Bond Vigilantes, most recently using this chart in NFTRH and at the website a week or two ago calling out said Vigilantes, who have apparently been asleep (or extinct) for decades.


KR was actually very complimentary of my other work, but seems to think I may have a mental block when it comes to deflation. 🙂

Not so sir! But I do see deflation as part of an equation and it is the part that is economically natural as opposed to inflation, which is totally man-made and subject to man’s faults.

* I miss Jon’s colorful viewpoints and I miss the camaraderie of comparing notes with a man of high repute who did not need to keep in such close contact with some blogger out there in the wilderness. I always felt he was sort of watching over me. Right on down to the moment he pleaded with me not to launch a commercial service… and then became its very first subscriber!