Is the System Tipping Over Into Deflation Once Again?
Earlier this week, when Dr. Robert McHugh noted that we have now gotten our official Hinderburg Omen, our IDW intensity measure dropped to the lowest possible reading of negative 3. The reading at the end of this week for our IDW was 131.21. That compared with an all time high of 146.57 on May 30, 2008 and a low of 93.64 on March 6, 2009.
What a negative 3 reading means is that all of the moving averages relative to each other are in maximum bearish relationships with each shorter term average “pulling down” the next longest moving average. With the rally in the stocks at the end of the week, our IDW Moving Average Intensity reading rose to minus 2.0, which is the next to the most bearish reading. Only the weekly reading was higher than the next longest moving average, namely the three-week average. Clearly the momentum of this broad measure of systemic inflation or deflation remains headed toward the deflation side of the equation.
Inflation/Deflation Defined
I get myself into trouble with my Austrian economic thinking friends when I talk about “deflation” at the same time that Federal Reserve Bank is printing money like there is no tomorrow. Yet we know much the same thing happened in the 1930s. Money was pumped into the banking system, but banks would not lend it out.
I very much agree with the Austrians definition of money. Inflation is the growth in the money supply and deflation is the decrease in the money supply. Neither inflation nor deflation can be measured by some arbitrary basket of goods chosen by politicians. Prices of goods and services contained in such a basket will, in part, be a result of an increase or decrease in the money supply.
Money is not so easily defined these days given all manner of fake money instruments that have been created by Wall Street and allowed by Washington in the biggest legalized heist against individual citizens in the history of humankind.
Robert Bluman, an Austrian economic school thinker has provided a very insightful paper on those parts of what is considered money today that can be deflated and those that cannot be deflated. Robert shared his thoughts on this topic with me during the second hour of Turning Hard Times into Good Times on my August 10th show. If you really care about the forces of deflation and inflation within our current monetary system, I highly recommend you listen. Robert comes on to the show during about the 75th minute of my two-hour web radio show.
But it is not only the quantity of money that causes prices to increases or decrease. One other very important factor is the velocity or turnover of money. When people are confident in their future, they tend to spend and turn the money over faster. When they are fearful and concerned about the future, they tend to hold on to their money. There is a great amount of rational fear out there now which is exactly why people and companies are not spending money and why banks are not lending it out.
As during the 1930s, this is a time when people are becoming ever more fearful about spending money and for very good reason. Millions of Americans are bankrupt and millions of Americans are unemployed or if they do have jobs they are paying far less than they did when they took on enormous levels of debt. Moreover, when you listen to mainstream economists like Laurence Kotlikoff who was on my radio show on August 17th and as my main guest on August 24th,you realize that America itself is broke. As Laurence noted, based on IMF numbers and the office of management and budget, the actual amount of debt the U.S. government is on the hook for is not the “mere” $9 trillion it claims but $202 trillion! Kotlikoff’s remedy is to tax more and/or reduce government spending. As one who believes in free markets rather than government remedies, spending reductions is the better option. But the immediate impact of cutting spending in the unlikely event that occurs would also be to reduce demand in the economy and lead to even more joblessness and bankruptcies. Listen to Professor Kotlikoff – August 17th show.
August 24th show
Jay Taylor
Jay Taylor
Mr. Taylor is editor of J Taylor's Gold, Energy & Techn Stocks newsletter. A native of Ohio, he has resided in New York since 1973 when he began working there for Barlcay's Bank International. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares.
In 1981 he began publishing North American Gold Mining Stocks, which preceded his current newsletter. His continuing interest in gold mining prompted him to study geology at Hunter College in New York City, supplementing his MBA in Finance & Investments. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp.
In 1997 he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital.
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