08/16/2010
December 3, 2017
08/08/2010
December 3, 2017

08/12/2010

Robert Prechter had a Barrons article calling for deflation…did you read it and if so was did you agree with it ?

There will only be 2 Ask Kuppy questions today as they both require long answers

I read bits and pieces of the article until i realized it was complete rubbish. My good friend Bill Fleckenstein’s tag line is, “In a social democracy with a fiat currency, all roads lead to inflation.” Every time someone tells you that deflation is coming, just repeat that quote a few times, then try to think of a situation where there actually was deflation in a social democracy. I’m an avid reader of history. I cannot think of one circumstance, especially in a country where the leaders agressively tried to create inflation. Everyone always likes to cite Japan as the exemption to the rule, but I would note that they never really tried to inflate things. They spent themselves broke, but that’s different from monetizing debt which they’ve never done on a large scale. They haven’t/cannot do this because most of the debt is owned by local citizens, so it is a very politically charged issue. Eventually they will do this however. The only other situation is the Great Depression. This was mostly caused by a very dramatic lurch into socialism by our country and most of the world actually. This destroyed the desire to put capital to work, killed off the multiplier effect and generally turned a credit liquidation into a great depression. I guess that could happen again, but it will not be as worldwide as there are plenty of countries out there that want capital now. If a few countries act stupid, capital will just flow to the countries that treat investors well. Asia and most of South America seem to be doing just that right now. In the 1930’s capital was not as mobile, nor were there as many outlets for it.

In summary, people keep writing bombastic articles on deflation because they want to garner public attention. Prechter seems like a genuinely intelligent man, but he uses all his impressive data to come to the exact wrong conclusion. We may eventually get some sort of deflation in this country, but that’s only after we’ve tried massive quantities of inflation and we have no other choice but to reverse course. That’s many steps into the future. Let’s just deal with a few year plan here.


First let me say that I really appreciate your decision to share your knowledge & expertise with us readers–it is very generous of you.

I agree with your call for a flat tax, liquidation of mal-investment, & non-manipulation of the money supply. However your article also left me with 3 questions.

I’ve heard numerous times that today the effective Tariff rate on imports is 2%, and that prior to 1980 the Tariff rate was much higher ranging from 23-50% (Thom Hartmann radio show). Is this tariff policy a big cause of our unemployment (essentially making it economic for corporations & small businesses to outsource much of our work)?

Second, as far as WWII, didn’t WWII cause inflation, and was that inflation partly responsible for pulling us out of a depression?

Three is the problem really that small business is afraid to hire, or that people are not buying products (diminished demand)?

I would like to get your take on these if you have the time. If not, I understand, and forgive me if these questions seem novice. One line answers would be fine as well–though of course I wouldn’t mind a little instruction/explanation :-).

Whoa there’s a lot here, but all good questions.

To start with, I tried to pick a political platform that would appeal to people from both parties. I do not want this website to become any more political than need be. For disclosure, I’m neither a Republican nor a Democrat–I’m disillusioned. I just think that everyone can agree with term limits for instance. Americans are pretty good at trying all options first and then coming to the correct conclusion. However, when politicians focus on their political careers as opposed to the better good, they slow this process down, or even work against it.

1. There are lots of things that impact employment. Tariffs are just one of many. How can a change in tariffs thirty years ago be impacting us now? It doesn’t make sense. Economies adjust to things like this over time. 30 years is enough time. If we raise our tariffs again, so will our trade partners. We will still be uncompetitive. The basic issue is that our workers are no longer competitive because of all the government imposed baggage that comes with them. People don’t talk about it much, but it costs a lot of money to move work overseas. If the costs of were more even, work would flood back here. I know of many businessmen who want to onshore their work again, but proposed regulations are making them hold off on doing that.

2. WW2 caused some inflation in war goods, but overall, there was minimal inflation because so much of the war was financed by war bonds and low interest rates on other paper that was rolled over. This meant that the government did not need to print much. Following the war, the multiplier effects never got out of control because high taxes were used to pay off the government debt that was used to finance the war. This is a very simplistic view of things, but if inflation were the solution, Zimbabwe would be a world banking hub. Look at the UK. They printed a lot more than we did (out of necessity). Their economy had more inflation and their recovery was very uneven. Inflation was not the solution–rather, we moved away from socialism and they went further towards it.

3. I think it’s a bit of both. It’s a bit of a chicken and egg situation. Without good jobs, people buy less stuff. You cannot make people buy stuff, but you can create an environment that makes employers want to hire people–even if there’s a short period where there isn’t sufficient work to be done. Good employees are tough to find. Employers try to lock down the best people at the start of a recovery and figure out what to do after that.

I think these are good questions. 1 line wouldn’t do it, VBG