Deflation, Inflation or Hyperinflation?

I had a post yesterday regarding local real estate for you, but I have set it aside for now.

A couple of weeks ago, on August 24th, I made a post (which you can read here) on a theoretical framework for the arrival of hyperinflation. It was reprinted from the blog of Gonzalo Lira and Lira's thread went viral on the internet.

One of the reasons it garnered so much attention is because the issue cuts to the biggest and most confounding debate that's going on right now in all of finance: what will the final outcome of the Fed's market manipulative actions be?

Will the end result be deflation, inflation or hyperinflation (which is a distinctly different phenomenon from either of deflation or inflation).

Lira's post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push things beyond the tipping point of monetary imprudence.

Recently Mish Shedlock came out with a rebuttal to Lira in a podcast on Global Edge with Eric Townsend and Michael Hampton. In the podcast, Shedlock's conclusion was that Hyperinflation is the endgame, "so it is unlikely."

Mish followed this up with a post on his blog.

Yesterday Lira responded saying that Shedlock had turned the issue into a personal attack and that Mish had taken many of his points out of context (you can see a portion of Lira's response in yesterday's comments section). Lira has proposed an open debate with Mish on the topic. We will see if Mish accepts.

I bring all of this up because it triggered a comment in yesterday's comments section AND a whole whack of emails to my inbox.

As I said at the start of this post, this topic is THE biggest and most confounding debate that's going on right now in all of finance.

With that in mind I note that John Williams has come out with another bold statement today.

John Williams runs a website (www.shadowstats.com) on which he provides a stunning amount of real, unmanipulated government data.

Williams received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. For nearly 30 years he has been a private consulting economist specializing in government economic reporting.

His website, Shadow Stats, often paints a dramatically different picture of the state of the economy from the spin offered by government. Williams will, for example, offer you statistics on the Consumer Price Index as it existed prior to 2000. That was the year the formula for calculating inflation was changed. If you were to calculate inflation today using the same formula used before 2000, the rate is in excess of 6%!

Considering we are now force-fed statistics that pacify the masses by stating there is not inflation, that is significant.

Of course it's because the government has changed the way that figure is now calculated so - voila! - there is no inflation (even though you are feeling it in your pocketbook).

The impact of this cannot be understated. Inflation is just as present now as it was in the early 1970s. The only difference is the government now claims that many of those higher costs simply don't count (four legs good, two legs bad becomes four legs good, two legs better).

John Williams is yet another economist who has stated his firm believe that hyperinflation is in the offing. In 2009 he put out this analysis.

And today he has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today.

With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the US Federal Reserve doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument?

Here, if you interested, is the statement from John Williams. I personally think it is important to read the likes of Lira, Shedlock and Williams to try and understand this important debate and make up your own mind on this critical economic issue.

Excerpts from statement from John Williams of the blog Shadow Stats

• SUMMARY OUTLOOK: Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable.
  
  Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.
  

What does this mean for US financial markets?

• In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.

If the Lira/Shedlock debate comes together, I'll let you know.

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