Professor Depew is talking about the Rise of the Deflationistas in point number 4 of Tuesday’s Five Things.

Having recently been labeled a “Deflationista,” we want to reiterate something we believe is very important to understand in this economic cycle: inflation does not cause more inflation. This is a consumer-led recession. Consequently, all that “commodities demand” that Inflationistas point to as evidence of still more inflation ahead of us will recede with stunning swiftness once the slowdown in the velocity of money in our economy becomes truly apparent.

Clorox (CLX) yesterday in the company’s earnings conference call provided what might seem like ready-made fuel for the Inflationista fire on the surface – they are raising prices an average of 7% on glad trash bags and Gladware disposable containers – but the reality requires seeing through to the other side.

As CLX Chief Operating Officer Lawrence Peiros pointed out, “We are closely attuned to concerns about the U.S. economy and consumer spending. However, we do not believe that our categories will be dramatically impacted, as people tend to buy bleach and household staples even in difficult times.”

True enough. In weak versions of the recession we experienced in 2001, consumer spending actually increased. That will not be the case this time around because the single largest factor influencing consumer perceptions of financial safety and wealth – their homes – are deflating.

But what about all that demand for raw materials from China and India? Surely that will pressure prices. And in fact, some central banks, such as the Reserve Bank of Australia, are raising rates. What gives?

There is no question that demand for raw materials in some emerging markets has created the feeling there is a floor under certain commodities markets, but we’ll simply out that those countries are still far more dependent on U.S. consumption that the Inflationistas would have us believe.

American consumers spent more than $9.5 trillion last year. China’s booming domestic economy accounted for about $1 trillion in consumer spending. India’s was $650 billion. Our largest bank by market cap, Bank of America (BAC), may be a close second place to the Industrial & Commercial Bank of China, but our consumers are dominant. They still need us.

At any rate, we’ll add the Deflationista label to our growing T-Shirt collection:

Deflationistas do it for less.

Click Here To Order

Don’t worry. It’s well contained.

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Deflationista T-Shirts

Yesterday in response to Bubble Economy Endgame Kevin pinged me with this comment:

Great read Mish.
I’m proud to be a deflationista!
Maybe I should have some t-shirts printed up.

And there they are. Prices are expected to drop. Delay your order now.

Deflationista Club Membership Is Free

Who can turn an offer down like that? We are proud to report expanding membership every day. We do it the hard way. One member at a time. However, you don’t choose the club, the club chooses you.

Attitudes play a key role in the selection process. Surprisingly, Jim Sinclair willingly or unwillingly joined the Deflationista Club on February 4th with this statement.

All the monetary and fiscal stimulus will not create the circumstances required to heal the underlying problem. The meltdown in credit derivatives and revelation that all derivatives are pieces of cyberspace garbage that will not perform when called upon will become worthless, not simply worth less.

That is an explicit admission that the Fed cannot inflate out of this mess, that a derivatives blowup is coming that will make trillions of dollars in derivatives worthless. A writedown of that much credit/debt would be impossible for the Fed to do anything about. We are particularly fond of the clever distinction between “worth less” and “worthless”.

That’s just the kind of attitude the club is looking for. The Deflationista Club Sponsorship Committee could not possibly agree more. Welcome to the club Jim.

Mike “Mish” Shedlock
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