Quote of the Day: Ludwig von Mises


"No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves."

-Ludwig von Mises



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  1. Jonathan commented on Jan 31

    Brilliantly said.

  2. Mike M commented on Jan 31

    Cheers to Mises and the Austrians. Down with Keynes!

  3. cinefoz commented on Jan 31

    Yeah, but those first whiffs smell oh so sweet. And if you can get out before the bubble bursts, then ooh la la, Fifi.

    At least, that’s what I always say.

  4. Justin commented on Jan 31

    Love it Barry, but I’m hearing the inflation/deflation argument, just like back in 99 before deflation won the day…what’s up this time around? I know home prices are sticky, so deflation from that sector should be muffled at best…five years from now it will probably be figured in.

  5. Mike commented on Jan 31

    amen, brother! That’s why I say, “go, corn!” There’s always a bull market somewhere, right?

  6. johnny m commented on Jan 31

    I would counter that inflation could be the only way out in the event of a liquidity trap. Truer especially if we hit the zero bound, which appears to be coming up fast. Krugman pointed this out with regard to Japan. As a debt-free saver and renter, however, I share the discontent.

  7. techy2468 commented on Jan 31

    Off topic:
    right now looks like euphoria is trumping everything, maybe this rally can go on for a few more days? but what if we get the bad news about economy, consumer, housing or financials in next few days?

    anyone has any insight about how long this rally may go on? (itching to start few short positions)

  8. bob commented on Jan 31

    Don’t you just love the smell of a short squeeze…

  9. cinefoz commented on Jan 31

    bob said:

    Don’t you just love the smell of a short squeeze…

    reply: ooh la la, Fifi.

  10. Justin commented on Jan 31

    They just keep blowing smoke up our asses…are you really believing this shit? The whole crew is pumping this market, why??? Something must really be wrong.

  11. mags commented on Jan 31

    We’re up some 1200 points on the Dow in 8 trading days and we’ve gotten 125 basis points of cheaper money in a record short time. Is it our job to really care what the ramifications are, as personally repugnant and long-term disastrous as it may be? There is no way to increase wages in this environment, so this is excellent for all owners of capital.

    What I don’t understand is why this hasn’t been reflected in lower LCDX and other spreads yet. Why hasn’t the credit market caught fire with this cheap money yet?

  12. SAM commented on Jan 31

    where is inflation . barry? look at 10 yr.
    if are that worried about inflation, go short on ’em.

  13. jw commented on Jan 31

    The link you posted contains a scary tidbit:
    “White House officials have told us that President Bush intervened forcibly to convince an initially reluctant Federal Reserve to reduce interest rates. “There were some telephone calls from the White House to the Fed in which some very crude language was used.””

    Let’s see – the market, rogue traders, the
    White House, Jim Cramer… is there anyone left who doesn’t know how to slap the fed into getting what they want? Bernanke is beginning to look like a victim of domestic violence.

  14. Pat Gorup commented on Jan 31

    Yep, that just about sums it up unless of course you have a hidden agenda.

  15. Vermont Trader.. commented on Jan 31

    very impressive short squeeze… must be the goldilocks economy.

    uh oh whats S&P saying?

    These bulls have no conviction

  16. John commented on Jan 31

    The agenda is to avoid a 08 Recession at all costs. Nothing else matters otherwise the whole rickety apparatus of the last seven years lands in a Republican lap with very few alibis. Kick the can down the road a year then they can blame the next guy/gal. A bit like Iraq if you think about it. I think the Fed is has completely lost sight of it’s principal mission although they don’t seem to have done so in the Euro central banks which means they are going to come out of this in much better shape than you know who.

  17. Shane commented on Jan 31

    Words more truthful than that are rarely spoken.

    Deflation won the day in ’99?? I’m not exactly sure where you get your stats, but according to the “official” CPI stats price deflation did not happen, it was 1.6% in ’98, 2.2% in ’99, 3.4% in ’00.

    If you look at the pre-Clinton CPI (he adjusted it you know b/c he wanted a lower inflation rate) it was 5% in 2000 and it is standing at ~6.5% now. Hardly deflation. Hmmm, let’s see silver hit $17 and gold $929.

    All you price deflation-heads . . . show me when since the Great Depression has the CPI deflated. Answer: -.4 in 1955, and -1.2 in 1949.

    I find the fears of deflation hardly justified. And before remarking that the great depression was because of deflation, please do a little more research beside a cursory glance. Their were a lot of factors involved, and not the least of which was massive government intervention and a lowering of interest rates (yes they lowered interest rates at the beginning to try and stave off a crisis-and they were hardly high to begin with).

    Deflation: code word for . . . my pet investment vehicle (be it stocks, or real estate) went through a massive bubble and is crashing, oh no it’s deflation!

    How in the world we can have deflation when the dollar is sinking like a rock is beyond me.

    “The error in equating the drop in prices with the crisis and, thus, considering the cause of this crisis to be the insufficient production of gold (my comment-replace with credit for today) is especially dangerous. It leads to the view that the crisis could be overcome by increasing the fiduciary media in circulation. Thus the banks are asked to stimulate business conditions with the issue of additional banknotes and an additional credit expansion through credit entries. At first, to be sure, a boom can be generated in this way. However, as we have seen, such an upswing must eventually lead to a collapse in the business outlook and a new crisis.”

    “The periodically returning crises of cyclical changes in business conditions are the effect of attempts, undertaken repeatedly, to underbid the interest rates which develop on the unhampered market. These attempts to underbid unhampered market interest rates are made through the intervention of banking policy—by credit expansion through the additional creation of uncovered notes and checking deposits—in order to bring about a boom. The crisis under which we are now suffering is of this type, too. However, it goes beyond the typical business cycle depression, not only in scale but also in character— because the interventions with market processes which evoked the crisis were not limited only to influencing the rate of interest. The interventions have directly affected wage rates and commodity prices, too.”

    “All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program.”
    –The Causes of the Economic Crisis, Ludwig Von Mises

  18. WhatInflation commented on Jan 31

    Can someone tell me what level of inflation we have right now? I don’t believe the Fed’s published Core CPI that is so often quoted by the media and government. It’s clearly flawed to use a measure of inflation that excludes food and energy and uses substitutions to adjust wages when most people spend their wages on food and energy.

    I’ve heard that inflation if measured in the traditional manner that is composed of a basket of goods and services that correlates to the consumption of the population that inflation is much much higher.

    So when people say there is no inflation what are they basing that opinion on? We better have a solid understanding of where inflation is really at or it will distort any other measures we make.

    Measuring inflation as the rise in prices is very subjective because everybody has different consumption habits. Should you measure inflation as the increase in the money supply instead?

  19. donna commented on Jan 31

    Well, with this administration, there is no “merely” about exculpating themselves.

    It’s all they do, after all.

  20. Estragon commented on Jan 31

    WhatInflation – “Should you measure inflation as the increase in the money supply instead?”

    Maybe, but there are a couple of problems with that approach.

    The first is in defining “money” and “supply”. Does money include various forms of credit? Should velocity be considered in supply? What about the supply of money circulating outside the US?

    The second is that money supply has to facilitate (but no more) “natural” growth in economic activity. Nobody knows what this growth can be with any precision.

  21. WhatInflation commented on Jan 31

    Thanks Estragon.

    So how can anybody say with any confidence that inflation is under control based on the Fed’s CPI measure? Aren’t we all constantly getting poorer if Core CPI (which doesn’t accurately measure consumer prices) is used to adjust wages for inflation?

  22. LFC commented on Jan 31

    The agenda is to avoid a 08 Recession at all costs. Nothing else matters otherwise the whole rickety apparatus of the last seven years lands in a Republican lap with very few alibis. Kick the can down the road a year then they can blame the next guy/gal.

    Although leaving a mess for the next person to clean up has pretty much been the story of Bush’s life (Spectrum, Harken, $1 billion deficit bequeathed to Texas), I don’t think the GOP has the gall to try to pass the blame on. Certainly people like Kudlow and Rush will, but they’re clowns.

    I think the current plan is to simply delay the pain until after the election. After the debacle of Iraq, the economy was supposed to be the GOP’s one shining star. They were planning on touting their economic “successes” under George. Instead we’re staring at recession after adding a mere $3.5 trillion (and counting) to U.S. debt. Delay, delay, delay. (As compared to DeLay, another GOP albatross.)

    At this point, I can’t imagine anybody with half a brain that would want to run on the record of GOP “accomplishments”.

  23. David commented on Jan 31

    “No emergency can justify a return to inflation…”

    No emergency except, of course, a presidential election.

    (And the inflation won’t be here until 2009).

  24. Shane commented on Jan 31

    I personally believe that yes, true inflation is M3, the increase in the total money supply. I wrote a long comment on this a couple of article back.

    Interestingly enough the government stopped producing M3 statistics in ’05 b/c they claimed they weren’t relevant or something like that (yeah right).
    At http://www.shadowstats.com/alternate_data, they have a “reconstructed” M3, from what I’ve gathered the government still prints most if not all the numbers to calculate M3, they just don’t print the calculated M3. They reconstruct what M3 would currently look like, which is ~15% today.

    The kicker with monetary creation is that it doesn’t just “show-up” in CPI data. M3 is created from fractional-reserve banking, government deficits and lower interest rates causing banks to borrow more and thus increase the money supply. I believe there are a few more causes, but those are the main ones. Banks get a lower interest rate to borrow from the government. Say they borrow $100 dollars, with the magic of fractional reserve banking (which is something like 10% today) they can lend out $1000, and voila money supply has increased. Obviously, I’m glossing over a lot of details, but that’s essentially what happens.

    But let’s not forget probably the biggest contributer to an increase in M3, the federal government. Hmm, where do you think the actual deficit money comes from? I mean when the government runs a deficit the money goes somewhere and someone gets paid (be it a contractor company or federal employees). It comes from the Federal Reserve-A semi-quasi-private bank, I might add. From my understanding the government essentially takes a loan from the Federal Reserve to make up for the deficit, thereby increasing M3.

    So sure right now you might have a credit contraction on the private side as risks finally comes into play and the banks don’t want to lend out as much money, but you still have a huge increase in M3 b/c of government deficits.

    Back to the CPI, think of it . . . there are all these way for an increase in the money supply to flow into the economy. The CPI measures “consumer” prices. Some of an increase in M3 goes to buy stocks, some to real estate, some to commodities. You can have inflation effects in everything from stocks to commodities. Housing prices going up 200% in 5 years is one huge effect of inflation (some of it was a “natural” boom) but inflation just augmented it. It overshot the top and it will overshoot the bottom.

    Basically what it all boils down to malinvestment, which inflation encourages.

    Another note on the CPI, if we measured the CPI the way they did in the 70’s it would be at 7-8%. Or another way of putting it, the inflation of the 70s looks like only 4% inflation today by the way the measurement has changed. You are 100% current that measuring inflation as price increases is very subjective, that’s why Barry has some excellent posts on Inflation-ex-Inflation.

  25. larrybob commented on Jan 31

    the notion that someone in the White House said mean words to Bernanke and he caved is utterly ridiculous (especially after his testimony last week about inappropriate tax cuts). Ben’s topics of study were the Great Depression and Japan’s Liquidity Trap of the 90’s, and he’s applying what he learned here. Von Mises and the Austrians are superflous to these problems, unless of course you like to see people hurt for the profligate behaviour of others; it is extraordinary how many posters here cover up their sadism with the fig leaf of “moral clarity”.
    No, i believe that Randall Forsyth is quite right to point out in his Barron’s column today that Libor holds more interest for the Fed than wherever the Dow is…

  26. Estragon commented on Jan 31

    WhatIsInflation – “Aren’t we all constantly getting poorer if Core CPI (which doesn’t accurately measure consumer prices) is used to adjust wages for inflation?”

    No, we aren’t all constantly getting poorer. If you’ve borrowed heavily to finance assets like oil and gold, or until recently stocks and houses, you’re probably doing just fine. Even stocks and houses are going to get “saved”.

  27. Shane commented on Jan 31

    I’d say it says that the free market system is trying to balance itself out (notice the huge spike in ’01)-of course with government intervention, fat chance it will happen.

  28. cinefoz commented on Jan 31


    Hey, buddy. I moved over here. How’ya been?

    They don’t talk politics much here, in favor of economics. Sometimes they coincide, but this isn’t like Kudlow’s place. BTW, I sent that clown an email asking him to reopen his blog for comments and he never replied. I guess he got tired of losing all those arguments to some of his more flagrant posts. Maybe he is ashamed. I can’t blame him if he is.

    I miss TC, though. We didn’t have any politics in common, but his advice and opinions on the market were OK.

    I really get to go over the top here. Some smart people also hang out here.

    Take care.

  29. techy2468 commented on Jan 31


    if you dont mind asking, whats your strategy going forward?

    i sold all my long positions today….have not started any shorts yet..

  30. Shane commented on Jan 31

    Do you know anything about Mises? The man wrote multiple articles from the beginning of the depression detailing exactly why it was happening and the solution. The government did not listen and it got worse.

    Rothbard, thirty years later wrote several excellent books explaining the causes of the depression.

    If you don’t agree with their ideas, fine . . . but to say they are superfluous . . . they studied the great depression and advocated a solution. Their solution was never implemented.

    I’m sorry anyone who advocates government intervention in markets to prop them up, isn’t looking out for the little guy or the economy, they are looking to protect their profits.

    Yes I’m sure if we do what Japan did we will all be better. They lowered rates to 0%, and kept them there for years and it did no good! Their economy didn’t rebound for 10 years, and real estate still hasn’t come back!

    You can not solve the problem of inflation with more inflation!!!

  31. cinefoz commented on Jan 31


    I wrote a fairly long post, actually several, in “Financial Sector: More Damage to Come”. I’m in 100%. Value is king, at this moment. Look out, above!

  32. WhatInflation commented on Jan 31

    Thanks Shane and Estragon for clarifying some stuff for me.

    Estragon, the average American is not invested in stocks. Those that have invested in houses are no longer wealthy. The housing ATM has dried up as the housing bubble deflates. It’s true that many American’s were living the high life on HELOCs but that wealth has evaporated. Can it be said for certain that the housing market has been “saved”?

    So without their stocks or appreciating homes the average American will find themselves a lot poorer than they were before the bubble because wages have diverged further from prices.

  33. LFC commented on Jan 31

    Hi, Foz. I wrote you a longer comment but it was trapped by the spam filter. Nice to see you here.

  34. Pat Gorup commented on Jan 31

    “Can someone tell me what level of inflation we have right now?”

    Shadow Stats pegs real inflation at around 11% which is what it was in 1979-1980. The price of gold confirms that view but silver doesn’t.

    “So when people say there is no inflation what are they basing that opinion on?”

    The FEDs B**LS**T numbers.

  35. Estragon commented on Jan 31


    I KNOW the average American gets hurt by inflation. There are some who benefit though, and coincidentally they seem to be the ones clamoring loudest for cuts and stimulus.

    Funny how that works.

  36. Jim Haywood commented on Jan 31

    “Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project.” – Ludwig M.

    True, true, my dear Ludwig. But inflation can sure help cut $9 billion in government debt down to size (in real terms). Then it can borrow some more.

    Borrowing is the only game in town, in a speculative financial economy. We’ve all got to pitch in, to borrow Bubble III into existence.

    Borrow and spend. Let inflation rip. By invoking the potent magic of compounding, we can all be millionaires … just as the Zimbabweans are.

    Apply for your Federal Reserve platinum VISA card today, and write yourself a generous check.

  37. Estragon commented on Jan 31

    Jim Haywood,

    $9 billion in government debt? I wish. They probably added that much today.

  38. Shawn H commented on Jan 31

    Cummulatively, the depository institutions in the U.S. have negative non-borrowed reserves. These reserves have been between 30 and 50 billion for at least the past 10 years, but have dropped $50B in the past 6 weeks.

    Got Gold? Got Yen? Got Loonie? Got anything other USD? You better.

  39. crg commented on Jan 31

    the stock markets are up. the stock markets = ‘the economy’, so thus, the economy is back on track. End of story.

  40. WhatInflation commented on Jan 31

    OK, thanks for clarifying Estragon. Who needs the average American consumer anyway. Screw them all as long as we can afford our Lambo’s and waterfront properties.

  41. WhatInflation commented on Jan 31

    the stock markets are up. the stock markets = ‘the economy’, so thus, the economy is back on track. End of story.

    Yeah, isn’t it awesome how we can determine the health of the economy just by looking at a single number like the NYSE index? Why can’t they make everything that simple? Simple like CheeseWiz!

  42. chad commented on Jan 31

    this must be an endorsement of Eugene Meyer

  43. rickrude commented on Jan 31

    why worry about inflation now ??
    we’ve had it since Volcker left the Fed.
    Its too late to do anything about it, but
    complete the inflationary cycle by printing more USD until the world abandons it

  44. ken h commented on Jan 31


    Read up on Benny’s understanding of Japan and the depression and it’s pretty easy to see what he is doing.

    He WANTS inflation to fight deflation which we will have. Already seeing it in housing, cars, and Walmart cut 30%. Sure we have energy inflation because of a couple of reasons which is increasing food costs as well. F’king ethanol??? What a joke! So corn is up!

    I seriously think a lot of execs took a look at Enron and how they controlled electricity to push profits. Now all these NEEDS are inflating. You know, a moose farted in South America and a pipe line broke. Sure?
    Certainly the collapsing dollar creates some of that but that is only one of the variables.

    So we have Biflation.

    In the end, nothing makes the fundamentals of most American companies any better(IMO) now that Benny lowered rates. The consumer ain’t coming back! Deflation!

    In the middle of the night when your scared,…you can talk yourself to death but it won’t make day come any faster!

  45. Ross commented on Jan 31

    Ken h,
    Where you been. Dollar has been trashed since before they sank the Lusitania.

    Watch some old 1930’s and 40’s movies and notice prices.

    At the turn of the century (1899-1900) a good mans custom suite cost an ounce of gold. That relationship still holds.

  46. mags commented on Jan 31

    Credit conditions continued to decline today even as equities exhaled. London Banker had an excellent interpretation of the rally on Roubini’s blog today:

    “I’ve been seeing similar spikes in other markets today without positive news. I’m just guessing here, but there may be a lot of off-exchange equity derivatives contracts with monthly resettlement (margin) based on the closing prices in markets on the last trading day of the month. I’ve noted the pattern before.

    Another problem with ill-transparent, fragmented markets. Invisible tails wag the visible dog.”

    Please be careful.


  47. C.L. Dean commented on Jan 31

    Well, my call on the Fed was wrong, i.e., I expected 25bsp, and we got 50bsp. I guess I got all caught up in what “I” would do.

    I could be wrong (and I hope I am), but I am afraid that the 75bsp cut, then 50bsp cuts we just got might come back to bite all of us – big time – with inflation ramping like it is.

    I would have like to have seen 50bps emergency cut, and 25bsp cut yesterday. And, a resulting ringing out of market excesses.

    I guess you could call me an inflation hawk, but I believe it is the Feds job #1 to fight inflation, job #2 to create financial liquidity, and job #3, to stay the hell out of gaming the stock market.

    I have a switching rule that I have to follow (as part of my investment plan) that only allows me to move allocations around only every 30 days. At first, I chaffed at this rule, but actually it has worked well… it forces me to focus, and think deeper before making any move… on Jan. 4, of this year, I went 70% inflation-protected bonds and 30% equities (heavy foreign emphasis). In retrospect, good move. Not great, but good, given the carnage that was soon to ensue.

    Now, 30 days are approaching an end… hmm… what to do, if anything RE: allocations… if I do nothing, I have still made a choice, so a choice has to be made.

    I am leaning 90% towards 90% equities/10% inflation-protected bonds (reverse current allocations) around first of February. Why? VIX reading (trend), investor sentiment readings (read inversely), and market action since initial 75bsp emergency cut.

    I would be interested in any chart(s) locations of data I could access RE: investor sentiment readings… I access several different sources, but have heard (read) several conflicting things regarding current readings lately. So, if anyone could post their favorites, I would appreciate it.

    Best of luck to all.


  48. Ross commented on Jan 31

    I hate Von Mises to pieces. His “Human Action” was one of the worst reads ever. I know he is revered much the same way as Ayn Rand and his creds were much better but I fail to see much difference between the two.

    Western economic system is a function of Western Mathmatics. One need only look at the early cathederals to see the force and mass of our system. That relationship broke down (exacting calculas) with the coming of probability/chaos theory. Yet it was-is the natural evolution of the ‘system.’

    Von Miseans misunderstand our economic reality. The rest (non Western) of the world also do not and will never understand our system but they can learn to play because we are the only game in town.

    A great example of a successful non western society who boofed it in the end is Japan post 1989.

  49. Shane commented on Jan 31

    ken h,
    “He WANTS inflation to fight deflation which we will have. Already seeing it in housing, cars, and Walmart cut 30%.”

    I don’t necessarily disagree with the first part of that statement. My point: since 2003, M3 has grown from 6-15% a year. So over the past 5 years M3 has cumulatively grown probably close to 50%. The fallacy is in thinking that deflation is worse than inflation!

    So what if M3 goes down 10% in one year, it’s still up 30% over 5 years!

    I for one am happy as a jaybird housing prices are crashing like a rock. (Showing some of my youth) I took a job in DC in 2005, making over 80k+. For my 1st engineering job out of school, I thought it was great. I got married and took a look at housing, I thought good heavens. If I tried to buy in DC, I would have had to buy a dump (and I do mean dump-800sq, 1950s), for 250k. I had a friend buy a condo (who made 60k), a CONDO 50 miles west of DC for 320k! I would have paid half my income for a crackerjack box. That’s insane considering that I make more than the median household income in the area. So I saved, and saved, and saved some more. Finally with prices coming down, I will probably buy next year. Deflation in housing is a good thing!! It allows younger buyers to enter the market without a huge risk, thereby saving some of their income for other purchases.

    I mean, my goodness, price deflation can be wonderful! Think about it, I earn money today and it’s worth more tomorrow, I don’t even have to put it in a savings account. Like buying a plasma screen today or in 5 years, I will get a heck of a lot better one in five years vs. today.

    Just like inflation kills savers, deflation kills debtors.

    I believe that in an ideal world you want neither high inflation or high deflation, you want a stable money supply, that stays relatively constant in proportion to the population–(hmm, funny how gold is actually mined at about the same as population increase, see http://www.goldsheetlinks.com/production2.htm)

    I mean really, the people who scream deflation is going to kill us, seem to be a little out of kilter. We haven’t had CPI deflation in over 50 years! and we’re worried about deflation now! The monetary system we currently have only exists to inflate. Ah but wait, what about the Great Depression, that was b/c of deflation. Nope, sorry. M3 contraction was the natural consequence of the inflationary 1910s and 20s, eventually the system collapsed, it couldn’t be propped up anymore by a system designed to inflate. They actually tried to reflate the economy, it couldn’t work. You cannot solve the problem of inflation with more inflation!

    The only, only reason people scream about deflation is b/c we’ve had a huge run-up in credit (total M3), that is unsustainable, and that run-up is ending. So it’s really not deflation, it’s LESS INFLATION. Again if M3 drops 10%, it’s still UP 30% in five years, that to me is hardly deflation.

    And it’s another reason why the stock market doesn’t respond too well to the credit injections, is b/c while the Fed can create more credit, they can’t tell people where to put that money. So first it was housing (b/c housing was already hot–see ’01 and 1%), then it moved to stocks. Now that those are crashing, if the Feds continue to reflate, it will go to commodities. Why commodities? they are in the boom phase, but not blow-off phase yet.

    “The long-run tendency of the free market economy, unhampered by monetary expansion, is a gently falling price level, falling
    as the productivity and output of goods and services continually increase.”
    Murray Rothbard

  50. Winston Munn commented on Jan 31

    WhatInflation wrote, “Can someone tell me what level of inflation we have right now?”

    Simply answered, no. I have brought this concept up before, and that is to determine inflation there first must be a universal definition of inflation.

    The common usage is bandied about on rising prices. Food is higher so it must be inflation. Oil is higher so it must be inflation.

    Oh? So, then, when a stock price doubles that, too, is inflation?

    We see home prices falling – is that deflation? What is the true picture? Is the value of the asset falling, or is the collapse simply the decreasing value of the mortgage, i.e. its debt value?

    Simply put, inflation is a debasement of value of a real currency. It can happen with coin, it can occur with gold-backed currency (by manipulation of the gold price or a simply a devaluation of the currecy), and it can occur with fiat.

    But how do you debase debt? Debt acts like currency, can cause upward price pressure just like currency, but to debase the value of that debt requires an intervention at its collateral base. The only way that debt loses value is if the underlying collateral decreases in value, or in the case of unsecured debt, when the borrower becomes insolvent.

    Of course, the classic problem arises when the Fed creates new debt to replace the devalued debt, as the pressure from the new debt cannot be directed at the falling collateral – the new debt is just as likely to apply its pricing pressure to commodities as housing.

    And since the the vast majority of debt has been created outside Fed regulations, unhampered by reserve requirements, who knows how much there is and where it is.

    So how can we measure inflation caused by debt?

    I believe the classical definition of inflation is mute; a better term is needed, perhaps atypical inflation or shadow inflation.

    Whatever it is, its size dwarfs the Fed’s ability to intervene with it rise or its collapse.

  51. ken h commented on Jan 31


    I really don’t disagree with much you have said either, just where we are going. All I’m saying is that Ben is Afraid of deflation.

    US GDP consumption was lead by the housing bubble you describe. It’s over. Yes housing will decline but so will all the jobs that were connected to it. It’s a death spiral, that’s what spooked Ben.

    No money velocity=no consumption=no jobs.

    no jobs=even less consumption=deflation

    Ben has a target inflation rate. I guarantee it. He is currently opening up every barrel he has got, and that has ME spooked.

  52. mhm commented on Jan 31

    Winston, perhaps we should coin a new term for what you described.

    The problem with the word “inflation” (and deflation) is that it has already two meanings and most people can’t accept a variation or a third meaning. Not because they won’t but because they can’t, it is too confusing. Specially when you have inflation on some assets (stocks) and deflation on others (houses).

    Otherwise somebody will always ask “but is it inflation or deflation. I can only grasp one”… You’ll have to explain over and over again.

  53. Winston Munn commented on Jan 31


    Good point. Perhaps a reasonable term would be Debt Arbitrage – a speculative position to take advantage of the differences in the cost of debt and presumed debt-induced asset appreciation?

  54. Shane commented on Jan 31

    ken h,
    Fair enough. I disagree with the “death spiral” philosophy, well that and that Ben has the best interest of the nation at heart. But we’ll agree to disagree.

    I really believe the central bank has one interest had heart, bankers (and the “elite” along with it). Everything comes down to power, and money. Those who have power want more and those who have money want more and will do anything they can to get it.

    winston, good comments. The interesting thing is as a country we really haven’t had “hard-money” since the 1890s. Even the “gold-standard” after 1900 wasn’t really hard-money, it was quasi-hard-money. Even the Roman empire debased their hard-money currency by shaving the coins and then minting more coins from the shavings.

    Interesting how things change in 100 years, before 1900-the Democrats were hard-money laissez fare-keep the government out, and the Republicans were soft-money, government intervention. Wow, I’d have been a democrat 100 years ago, scary!

    I apologize for my multiple posts tonight. You see I’m currently in grad school-(I’m 28 and work is paying for it, yes!) working on a master’s in Electrical Engineering, this is what I do to procrastinate my homeworks, projects, and studying for tests.

  55. Norman commented on Jan 31

    A lot of sound and fury, signifing nothing.

    Inflation has been 2.5% over the previous fifteen years and the next fifteen years is being predicted by the T-Bond yield minus the TIP yield at about 2.5%.

    Why the beef (as in a complaint)?

  56. wunsacon commented on Jan 31

    For mhm’s new term, I propose “munnation”. It sounds a little like the first syllable in “money”. But, it borrows Winston’s last name.

    But, I forget again: does it refer to inflation or deflation???

    heh heh heh heh…

  57. Winston Munn commented on Jan 31


    Maybe the rappers and hip-hop artists have been way ahead…perhaps the best term is simply “‘flation” – covers it going either up or down.

    I am also taking this opportunity to correct a misconception – I am not a permabear. At present, I have one average-size long position (biotech), and two smaller short positions (technology).

    So I’m now out of the closet. Yes, it’s true, I go both ways.

  58. Winston Munn commented on Feb 1

    Mish Shedlock reported this tidbit about the danger of debt arbitrage.

    Quote: “Harry Macklowe got a little carried away last year: He bought seven midtown office buildings in ten days. He spent over $7 billion on the deal — but only $50 million of that was his own money.

    Next week, his loans are coming due, and seeing as we’re smack in the middle of a worldwide credit crunch, there’s no way for him to refinance. Which is why this week, The Wall Street Journal has just reported, Harry has made a tentative agreement with his lender, Deutsche Bank, to turn the buildings over to them. No more buildings for Harry.”

    Which means, Deutche Bank is now going to learn the hard lesson of ‘flation – it can go both ways.

  59. TKL commented on Feb 1

    For tonight’s Mises pot luck, here’s another one that’s been making the rounds:

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
    Ludwig von Mises

    In other words:

    “We’re all freakin’ doomed!”
    The Mogambo Guru

  60. Roger Thatchery commented on Feb 1

    Yes, the Republicans want to stave off recession at any cost and kick the can down the road into 2009. But the Fed also is focused on saving their own ass i.e. revive the member banks by steepening the yield curve. So it’s a tag team of vested interests pushing us down the track.

    The biggest lie out there is that the Fed is “independent” or “neutral” in any way. The Fed is a private for-profit enterprise. As Mish Shedlock and others have documented (the “$500 billion Christmas Euro flood” was proven to be an accounting trick), the Fed has been actually draining the system of liquidity in the past 6 months while simultaneously waging a PR campaign that paints the Fed as a caring, responsive backstop. The truth is that they are hoarding cash and issuing new debt to the terminally indebted!

    With friends like that…

  61. Blissex commented on Feb 1

    «The whole crew is pumping this market, why??? Something must really be wrong.»

    What is going wrong is 2 wars and a half being very expensive and being funded entirely with tax cuts.

    Keeping the civilian morale up and distracted from the carnage and cost, the good times must keep rolling.

    Also, in reality the wars are funded by selling financial assets — IOUs. Keeping the value of assets up and interest rates low makes it so much easier.

  62. Blissex commented on Feb 1

    «The problem with the word “inflation” (and deflation) is that it has already two meanings and most people can’t accept a variation or a third meaning. Not because they won’t but because they can’t, it is too confusing. Specially when you have inflation on some assets (stocks) and deflation on others (houses).»

    Well, yes, when talking of inflation I always ask ”inflation of what??”.

    However there is a clear definition of ”inflation” that relates to what common people perceive, and it is the cost of maintaining a certain standard of living, defined by a more or less fixed basket, but not a basket of goods, but a basket of ”features”, or price-points, that make up that standard of living.

    So for example if the living standard of a guy at some point involves a compact car, then how much money that standard of living can be bought over time, involving a compact car, not necessarily the same one across time, because specific models don;t matter.

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