kidmercury

I previously wrote about inflation vs. deflation, and how I was strongly on the side of inflation.

I want to address the deflation argument, because I must admit it is more credible than I originally thought, but let me make two critical points in favor of inflation:

1. Bernanke's own words. In this speech from November 21, 2002, Bernanke admits that deflation cannot really happen, as the Fed can print its way out of it -- meaning it can expand the money supply infinitely. This is a shocking admission when one thinks about it, and inflationists are fond of citing it. With that said, there is always the possibility that Bernanke may have changed his mind, or may act differently in the days ahead. Of course, it's also possible that George Bush Jr. will admit that 9/11 was an inside job. Clearly, possibility and probability are two different things.

2. History. I am a big believer in change: tomorrow is exciting because it doesn't have to be like today or yesterday. With that said, I am reluctant to bet against history -- especially when people are not aware of it (or, more frighteningly, are aware of it but choose to repeat its negative aspects anyway). The history of fiat money is that the printing presses run wild and the currency is inflated to death. Check the history.

Now, with that said, here's an interesting debate that got me questioning inflation and deflation:

It started with Peter Schiff comparing this depression to the previous one. Schiff notes that the Great Depression 1.0 was born during a time when the US was on a gold standard, and thus going wild with the printing press was not an option. Deflation, thus, naturally reigned. This time, though, there is no gold standard -- no restriction on letting the printing press go wild. And thus, the currency will be inflated to death. (Schiff offers other reasons as well).

Sounds good, right? Right. Game over, inflation is here, run for your lives and buy gold. Right?

Not if Mike Shedlock has anything to say about it. I like Shedlock and think he is a very smart guy. He got me questioning. FinancialArmageddon also posts links to smart people arguing both inflation and deflation. I found their analyses to be a bit thought-provoking.

So maybe it's a coin toss?

NOT SO FAST, BUSTER.

Stefan Karlsson drops it like its hot, putting the smackdown on Shedlock's argument. LOL. The monetary policy blogosphere can be a ruthless place. I've read a lot of Karlsson's stuff over at the Mises blog and he is one of my favorites, both because his analysis is really clear and compelling and because he has a funny writing style that pulls no punches. My favorite is Karlsson's assault on Shedlock for the argument that gold will do well in a deflationary environment. LOL. I'm half-tempted to write a song about Karlsson vs. Shedlock. You know I'd do it!

For me it is largely a question of how insane the Fed and the New World Order is. While they are brilliant criminals, obsessive love for power invariably breeds insanity. If recent events are any indication, their love for power is reaching new heights, while their sanity has crossed below the zero line. This psychological element, coupled with the strong economic rationale Karlsson and Schiff provide, lead me to conclude that inflation is how this story ends.