Inflation vs deflation XI

I’ll start off this last round in
the debate by pointing out that I have most certainly not claimed that
federal spending somehow doesn’t count as inflation. I was simply
pointing out that the Federal Reserve’s attempt to inject money into
the economy has been effectively limited to one delivery vehicle because
the banks and households have proven to be surprisingly ineffective channels for doing so.
Again, Nate inadvertently shows how his refusal to accept the intrinsic relationship between credit and money renders his analysis
I very much agree that “for the
purposes on inflation it doesn’t matter who’s spending the new
money”. And I agree that “government spending is merely the
delivery method for injecting it into the economy”, but what Nate
is failing to mention here is that government spending isn’t the only, or
even the primary, delivery method used by the Federal Reserve. The
significant thing is that government spending is the only delivery method of the
four the Fed has been attempting to utilize for the past five years
that has worked at all. Despite the larger part of the Fed’s efforts
being directed at the financial sector, that credit sector has
continued to shrink. So has the household sector despite the
attempts to replace the housing sector bubble with an education
bubble. The corporate sector has responded, a little, but the $1.8
trillion increase since 2008 is barely more than half the contraction in
the financial sector.
Nate claims that prices are rising
everywhere across the board and that it doesn’t matter where the
government spends the new money. Both assertions are incorrect. Gold
prices are down 24 percent since the start of the year. Home prices
are up 1.1 percent in that same time frame, but are still down 29
percent from their 2006 peak. Gasoline prices are up from January,
but have been trending down since the spring of 2012. And the
inflated stock market is showing every sign of a steep, long-overdue
price correction. But these are merely symptoms, and short-term
symptoms at that. I see them as reflections of the credit
disinflation, Nate sees them as signs of incipient hyperinflation.
Only time will tell who was correct, so there is no point in further
belaboring the price issue.
Nor do I see any point in providing an
extended explanation of why Ben Bernanke appears to be signaling an
end to the quantitative easing program, or the significance of the
initial indications that Shinzo Abe’s massive attempt to print money
in Japan is failing, because Nate took things in a rather different
direction with his focus on the idea that hyperinflation is a
psychological phenomenon rather than a material one. Those who are
interested can find effective summaries of those two
not-insignificant events on Zerohedge. Nate wrote:
Hyperinflation is what happens when
people decide that the fiat money they have in their pockets and in
their accounts is no longer going to be honored in the future and
start spending it as quickly as possible.  That is the
unstoppable train of inflation.  The printing presses cannot be
stopped because the people will not stop spending the money as soon
as they get it.
But this perspective on hyperinflation again fails to
account for credit, which is how most people are spending most of
their money these days. Even when literal credit cards aren’t
involved, they are paying their bills with direct bank debits and
debit cards that draw from their credit money account. If one
considers the recently reported fact that 68 percent of Americans
possess less than $800 in savings, it should be clear that they
simply don’t have any fiat money in their pockets. To quote the
report: “After paying debts and taking care of housing, car
and child care-related expenses, the respondents said there just
isn’t enough money left over for saving more.” Emphasis added.
Nate’s unstoppable train simply doesn’t have enough of an engine to
leave the station, especially when the credit money that is in those
accounts begins vanishing in the inevitable bail-ins. 
In considering the possibility of hyperinflation versus the likelihood of deflation, it is important to do something we have not yet done in this debate, which is to examine the differences between the present situation and the most famous historical hyperinflation. As has been previously noted, in the USA, L1 total credit has remained very close to flat since 2008, increasing only 11.2 percent in five years. By contrast, in the period leading up to the Weimar hyperinflation, the Reichsbank debt increased from 3 billion to 55 billion marks between 1914 and 1918, and to 110 billion by 1920.  
“Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge “private inflation” caused by the rapid expansion of credit…. By October 1923, 1% of government income came from taxes and 99% from the creation of new money.”
It should be readily apparent that Weimar represented a very different scenario than the one we observe today.  We are not seeing an increase in private borrowing, but rather, a net contraction. This means the only way
hyperinflation can even theoretically begin in the present circumstances is if
the Federal Reserve elects to permit the debtors in the various debt
sectors to pay off their debts rather than encouraging them to default by raising interest rates, and uses the
government to begin electronically injecting dozens of trillions of
dollars into the economy through the mainstream equivalent of food stamp
Is it possible? Theoretically. Is it
improbable. I think so, which brings this entire debate back to the
beginning, which is that one’s opinion on hyperinflation versus
deflation depends entirely on one’s belief that the Federal Reserve
is willing and able to choose the former over the latter. Setting
aside the fact that there are already those who believe that Bernanke
has followed the Depression-era Fed’s lead in choosing the latter on
the basis of his cryptic remarks concerning “tapering”, it is my
contention that the Fed is not only unable to massively inflate, but
that it is totally unwilling to do so.
Nate will have the last word, but since you’ve indulged his
imagination concerning the widespread abandonment of the dollar,
perhaps you’ll indulge mine concerning the motivations and mindset of the Federal Reserve in the present environment. Inflation and hyperinflation benefit
borrowers. Deflation benefits lenders, as they are repaid in
increasingly valuable currency. Default also benefits lenders as long as the collateral backing the loan exceeds the value of the outstanding debt.
So, in closing, I will simply ask you one simple question: at this point in time, is the
Federal Reserve a net borrower or a net lender?
By way of example, let me propose a hypothetical scenario that is perhaps a little outlandish,
if not completely in the zone of economic science fiction. The Ciceronian
political cycle predicts aristocracy, not tyranny, as the post-democratic political system. And what would be a more effective way to legally
establish a wealthy aristocracy with a relative minimum of societal disorder
than to encourage vast indebtedness, then trigger mass defaults by raising interest rates,
which then results in the acquisition of title to all of the defaulted collateral?  Even the most hard core libertarian couldn’t find anything to complain about such an action; (merely the idiocy of the centralized structure that permitted it to happen), and it would be a damn sight more legal than three-quarters of the activities with which the administration’s agencies occupy themselves these days.