Inflationists and deflationists remain locked in constant battle with each other, each with a litany of reasonable sounding arguments and convincing stats.
The Fed is printing, true! Demanding is collapsing. Also true! Housing prices are still going down. True again! Oil prices are resuming upwards. Gold is going nowhere. And on and on it goes.
But rather than seeing it as an either/or thing, why can’t there be both. Gregor MacDonald has some very smart thoughts on the matter, as he draws an interesting comparison between oil volatility and changes in the supply of credit.
On commodities he notes:
A concept that’s key to resource depletion is the higher volatility phase, in which both price and supply start to hit ceilings and floors in accelerated fashion. This tends to appear first during the actual peak supply period, or peak plateau period. The pattern has been seen in previous eras in such things as wood, fish, and whale oil. When the post-peak phase gets underway the price amplitude increases even further, playing havoc with supply and demand. As demand gets killed, and then finally collapses, it causes confusion about supply. But then, as demand returns, any questions about supply are soon answered as demand once again bumps up against the supply ceiling.
The collapse in oil prices we saw at the tail end of last year was not inconsistent with significant oil depletion. In fact, it’s a sign of it.
Thus, too, could be the strange signals we’re getting from the financial markets:
Now, what’s interesting about this pattern in oil is that it appears to have arrived in conjunction with the bursting of an epic sized credit bubble in the West, a quarter century in the making. Leaving aside causality–and yes, there are many who have strong views about causality here–the two forces have now clearly joined. And so what we are dealing with presently is a very nasty ceiling. A unified ceiling, if you will. One made of both interest rates (as an expression of credit availability in a time of depressed economic activity) and energy.
Could this limitation finally resolve the dispute between inflationists and deflationists? I think it could. As I was laying out earlier this winter in Recession vs. Collapse, we are experiencing a deflation that appears to trigger both reflationary policy and reflationary responses in the dollar and commodities–which then leads to more deflation.
One thing to bear in mind is that inflation is a policy of expanding the money supply so as to preserve the status quo. Trying to find it in the CPI, which was pretty tame on the way up and on the way down is pretty foolish. And getting lost in this or that price moving in one way or another will also cause you to miss the big picture.