Kevin Depew’s post on Inflastagdeflation in Wednesday’s Five Things got me to thinking about how everything is in the eye of the beholder. Here is quick recap of inflastagdeflation.

If you spend any meaningful time reading up on today’s economic views, you will find three prevailing idées fixes. Here they are, in order of dominance:

A. Inflation is understated. General price level measurements are being manipulated, or are failing, or are simply false; we are facing a dramatic buildup in inflationary pressures. …..

B. Inflation is yesterday’s story. What we are experiencing now is stagflation. Wages and incomes are stagnant, housing is slowing, the consumer is on the brink, and growth is slowing by virtue of the fact that producers have no pricing power in a credit-fueled growth environment. …..

C. Inflation? What inflation? Housing prices are deflating. Consumers are cutting back. Producers have no pricing power. …..

So, are we experiencing inflation, stagflation, or deflation?

The truest answer is, “Yes, we are.” …. smack in the middle of inflastagdeflation… with only the last remaining vestiges of this credit cycle allowing us to cling, somewhat desperately, precariously, to the “inflastag” part of the story.

It occurred to me that inquiring minds might be wondering “Is it possible to chart inflastagdeflation?” Believe it or not I think it can be done. For that I turn to a series of charts that “Bart” at NowAndFutures updates monthly for me. Here they are in Kevin’s order of importance.

Infla

Inflationists like to point to M3. Is it any wonder? Pick your poison. Not only is the actual number soaring, the rate of change is soaring as well. Clearly the Fed has lost control of monetary expansion the inflationists say. Here is a chart to prove it.

Stagfla

Stagflationists point to any number of things to prove their point. They think this is a repeat of the 70’s and typically point to oil. That won’t work for true inflastagdeflationists who will want to see the case state the case based on money supply. Given that the Fed has conveniently tossed aside M3, let’s turn our attention to M2.

There you have it. M2 is clearly soaring but the rate of change is either falling or rising depending on where you want to draw the trendline. And what are we getting out of it? Certainly not jobs or houses but we are seeing rising interest rates in spite of miserably weak housing. If that combination does not describe “Stagfla” what does?

Defla

Deflationists like to state the case based on the upcoming monetary collapse of credit. Once again that will not cut the mustard with true inflastagdeflationists who want to see it in pictures right here right now. Tomorrow is not good enough.

For that we have to look at base money supply or better yet M’ (pronounced M Prime) which is based on an Austrian definition of money. Typically (but not necessarily) deflationists come from an Austrian school of thinking. Please see Money Supply and Recessions for the theory behind M’.

Here are two charts of M’ (with a third bonus chart following).

The chart shows that M’ is barely growing. A chart of base money supply would look similar. This contradicts what the inflationists are saying about money supply soaring. Heck it’s barely budging. And the rate of growth has been falling like a rock since mid-2004. Inflationary? Hardly… at least not to deflationists.

But lets dig deeper and take a look at inflation adjusted M’ (Real M’).

Well how about that? Real M’ has been falling and the rate of growth has been under or near 0% since mid-2005.

Bear in mind that most inflationists (and many deflationists) think that the CPI is horrendously understated. For those folks, John Williams offers an alternative measure of the CPI on Shadow Government Statistics.

The third (bonus chart) deflates M’ by that alternate measure of CPI.

That last chart shows “Williams’ Real” M’ growing at negative 5%. Thus creative deflationists can use creative inflationists own measures of the CPI to state the case for “defla“.

Eyes of the Beholder

Well there you have it: Inflastagdeflationists can all use money supply charts to state their case. The only problem I have in all of this is the name inflastagdeflation.

I think inflastagfladefla is a much catchier name with an additional huge advantage of sounding more like a disease. You have to admit, this economy sure seems sick no matter which “fla” (or combination thereof) it has.

So where are we and where are we headed? To paraphrase Kevin: “Here we are …. smack in the middle of inflastagfladefla… with only the last remaining vestiges of this credit cycle allowing us to cling, somewhat desperately, precariously, to the inflastagfla part of the story.”

Announcement:

I am please to announce that starting next week Trotsky will be making a series of posts on this blog about gold. The first two posts in the series will be

  • Misconceptions about Gold
  • Why does fiat money seemingly work at all?

Dates can change but they are tentatively scheduled for Tuesday and Wednesday of next week. I am working right now on editing drafts.

Mike Shedlock / Mish/