Inflation or Deflation? No! Inflation and Deflation!

By Jay Taylor –
We Americans are such simpleminded folks. We think in terms of black or white, never in terms of gray, as if everything has to be either good or bad, on or off, or up or down. This leaves us utterly prone to totalitarian slogans and simple answers to problems. So we have this debate going on—do we have inflation or do we have deflation?
Clearly we have both. We have horrendous inflation in commodity prices. But we also have huge deflationary pressures at the same time that are keeping the consumer price index from coming even close to what we experienced in the 1970s, even though the Fed keeps printing money like mad.

For example, globalization is putting enormous downward pressure on wages and prices of finished manufactured goods. Oil price rises cannot be passed along to consumers because of a growing loss of purchasing power, at least for American consumers. And rising debt servicing loads are also exerting deflationary force on the U.S. economy. The consumer is finally showing signs of this pressure, yet the global economy depends on Americans to spend their fool heads off.
What happens when the American consumer hits the skids? It seems he may now be about to do so. Yet prices, especially for most commodities are exploding. Yet the CPI, manipulated as it is, is not anything like the double digit inflation we suffered through in the 1970’s because there is no wage pressure and there is still very limited pricing power for manufacturers. To top that off, we now have equity markets that are starting on their next and much more ferocious leg down in this multi-year secular bear market that began in 2000.
Arguably, the housing market, which is much more leveraged than the stock market will be next to deflate. At some point, as this process unfolds, there will be less and less demand for commodities, so that eventually even commodities will deflate.
The current condition is far different, now that we are in the Kondratieff winter, than when we experienced our last period of commodity inflation in the 1970’s. That was in the Kondratieff summer (1966-1980), when wages rose dramatically, when America was still a net creditor nation rather than the world’s largest debtor nation, and when debt loads were so small that they could not yet cause a severe drag against the demand side of our economy as they are now doing. What I have become increasingly aware of is how various inflationary forces actually lead up to and help trigger deflation. Again, realize that debt is growing much, much more rapidly than income, so that ultimately the house of cards upon which our phony fiat currency “prosperity” has been built will implode just as surely as this gigantic bubble was expanded.