Jim Rickards: What’s So Wrong With Deflation?

Jim Rickards is the Senior Managing Director for Market Intelligence at Omnis, Incorporated, and was interviewed recently by Eric King to discuss the US quantitative easing push proposed by Dr James Bullard, the President of the Federal Reserve Bank of St. Louis.

In this refreshing 18 minute interview, Mr Rickards produced some forthright views of what this new plan may mean in the Politburo machinations at the Federal Reserve, plus he provides an excellent technical analysis of the Bullard plan to both raise interest rates and fire the bazooka of quantitative easing at the same time, to stimulate the US economy. Does this sound like a monetary description of a painting by Escher?

If you are as intrigued as I was, then the radio interview is available below:

According to Rickards, the following is how the Keynesian puppet controllers at the Federal Reserve think they can deceive the US population into obeying their strictures on spending more:

[Austrian readers of a nervous disposition may feel the need to grab hold of something firm before continuing, because we have to enter a Keynesian/Monetarist mental mindset to reach the other side of this chain of ideas, without otherwise turning into gibbering slavering lunatics.  At no point are you allowed to ask ‘Why is this true?’, or ‘How did you work that out?’, or ‘Why don’t we just get rid of the Fed?’]
  • Interest rates at 0% have failed, therefore something new needs to be tried
  • There is a danger of the US flipping into a Japanese-style deflation
  • General investors want to receive inflation, as measured by the CPI, plus at least 50 basis points, to compensate them for tying their money up for any period of time
  • The Fed targets 2.3% inflation as being optimal for a successful economy
  • Therefore interest rates should be 2.8% to create an optimal economy
  • Unfortunately, with interest rates at 0%, the expectation is that inflation is negative, at minus 0.5%, and in deflation territory
  • Therefore behaviour patterns have set in which expect deflation and which have stopped spending and investment
  • To combat this, the Fed must raise interest rates to increase expectations of ‘good inflation’ at 2.3%
  • So interest rates must go to 2.8%
  • This will stop deflationary fears and get people investing again to prevent a Japanese style denouement for the US economy
  • Unfortunately, these higher interest rates will dry up credit for many US businesses
  • Therefore we need to flood the US with a second round of quantitative easing, and put the pedal to the printing press metal, and do whatever it takes to provide this credit
  • Hence, behavioural expectations about inflation will be optimal and credit levels will be optimal
  • All will then be sweetness and light

You can let go now.

[I don’t know about you, but if you thought reading that was bad, you ought to have tried writing it. For the brave at heart, you can download Dr Bullard’s paper yourself, ‘The Seven Faces of Peril’, at Scribd. For a discussion on deflation, try the recent piece by Dr Frank Shostak. For a tangential piece on how all of this may be an attempt to push us towards a global paper currency, try the recent article by Lew Rockwell.]

Getting back to Jim Rickards, he was as unimpressed by Dr Bullard’s comments as Peter Schiff was, in his recent response.

Here’s a synopsis of the radio interview above:

Bullard and Bernanke may disagree on the tools that the Fed should use, but they do agree that deflation must be combatted with inflation. ‘But what is so wrong with deflation?’ asks Rickards.

The greatest period in US economic history was perhaps 1870 to 1900, an entirely deflationary period, in which the US shifted from being a Jeffersonian agrarian power to becoming a world-girdling industrial giant, even displacing Great Britain, which itself was going through its own enormous boom in industrial output, within its own deflationary monetary system.

Rickards contends that if prices go down, standards of living go up, because the same amount of money goes further, as it has with personal computers over the last three decades. However, the US Treasury hates this, because they have no way of taxing a rise in the standard of living caused by the price level going down.

[Which is why they perhaps solved this ‘terrible problem’ by instituting inflation in the first place, from 1913 onwards, with the creation of the Federal Reserve, a.k.a., The Creature from Jekyll Island.]

Deflation also increases the real value of debt, and although at first this may seem good for the banks, who hold debts on their books as assets, in the medium term it is bad for banks because the level of defaults rises as people walk away from debts they should never have taken on in the first place, and never would have taken on in a constant deflationary environment [and as the assets they have collateralised against these debts go down in monetary value].

When Bernanke et al therefore try to stop deflation, what they are actually doing is helping the banks collect every penny on their loans and punishing the people by keeping them nailed under increasing tax and debt burdens.

In short, Rickards thinks the Fed are fronting for the US Treasury and the banks in their monetary exploitation of the American people.

[I know. You’re staggered and amazed.]

Rickards then moves away from the broader canvas and steps down a gear into more technical detail. He challenges Bullard on how the St. Louis Fed President thinks inflation can so easily be fine-tuned and dialled up and down as the Politburo controllers at the Federal Reserve dictate. ‘Who says this dynamically unstable process can be so easily controlled?’ asks Rickards.

In the Weimar Republic in 1920, the Reichsbank increased the money supply significantly, though nothing dramatically life-threatening happened for two years.  However, in 1922, the German economy moved from serious inflation, in June, to hyperinflation, in the matter of a month [with the price level rising 16 times between June and December of 1922].

Weimar Republic Hyperinflation

Rickards contends that the velocity of money is the crucial thing and that the volatility of velocity is consistently underestimated by the Keynesian/Monetarist school.

Although nothing is ever certain in a volatile Black Swan world, Rickards thinks the Bullard money printing plan could tip an inflationary situation into one of hyperinflation, and that if this should occur, then it will be a relatively overnight event.

He goes on to predict that if this monetary collapse does ensue in the US, then each consumer business will run an electronic billboard for its customers, at their tills, which will provide a second-by-second update on the Dollar price against a gold weight unit.

[Please let this gold weight unit be called The Rothbard, with one Rothbard equal to one Troy ounce of gold. For those who have yet to read it, there is also a gem of a novel about this potential paper money breakdown scenario by J. Neil Schulman, entitled Alongside Night, which may still be freely available at Google Books]

Getting back on topic, however, businesses will set all prices using this gold numéraire as an exchange price, but will still take dollars in payment [because it will probably be illegal for them to refuse].  However, businesses will use the gold numéraire to set a constant pricing standard on all the goods labels in the store, with the dollars constantly ticking up in red diode terminator-style numbers beside the unitary gold weight denomination at the till.

Nicknaming Bullard ‘Son of Helicopter’, after the famous Bernanke Helicopter Speech, in which the future Chairman of the Federal Reserve Board quoted an earlier Milton Friedman analogy about the dumping of money from helicopters to solve the Keynesian/Monetarist liquidity trap problem, Rickards does state that he finds the Bullard plan more elegant, technical, and refined, than Bernanke’s usual level of output, but no more persuasive for all that.

Eric King breaks into the interview at this point and asks Mr Rickards what he thinks will happen next at the Federal Reserve?

Rickards thinks the FOMC (Federal Open Market Committee) currently has two camps, both of which want to scare people into spending more money:

  • Group One: Keep interest rates at zero percent for a ‘sustained’ period (i.e. indefinitely)
  • Group Two: Use intellectual stalking horses to later raise interest rates sometime in the middle of next year

Unfortunately for the Fed, most people are de-leveraging themselves, while they still can, from high debt levels, plus cutting down their spending on everything else as the continuing spectre of rising unemployment levels eats into the American psyche [see Up In The Air, with George Clooney]. The Fed’s Inner Party response is to threaten the Proles with massive inflation, to get them to do what the Fed wants.

Rickards thinks it is arrogant for the Federal Reserve to treat American citizens like this, as laboratory mice in an experiment imposed upon them by self-declared geniuses. These are the same geniuses, he says, who missed the Dotcom bubble, who missed the housing bubble, and who have devalued the Dollar by over 95% since their federal reserve system was created in 1913.

They have messed up everything they have ever attempted in their entire existence, which includes the super-extended 1930s depression, so why should anyone think their new plan will work now? The Bullard plan, if implemented, will add lighter fuel to a charcoal barbecue. Nothing may happen for a while, but then one day it will all go boom and the US will switch from a low inflation environment to a hyperinflative one, almost overnight.

To summarise, the Rickards’ position is thus:

  • Deflation can be a good thing
  • The more quantitative easing is engaged in, the more likely a hyperinflative shock will occur at some unpredictable Black Swan moment in the future

To keep up with Jim Rickards, you can keep track of his Twitter page, here:

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3 replies on “Jim Rickards: What’s So Wrong With Deflation?”
  1. says: Ron Helwig

    Please let this gold weight unit be called The Rothbard

    No, no, no, no, a thousand times NO!

    While this was otherwise a very good article, and I think a whole heck of a lot of Mr. Rothbard, this is a bad idea.

    Back when the U.S. was forming, those wise but fallible Founding Fathers made what I believe was one of their biggest mistakes: to take the weight of precious metal and give it a name. Naming something makes it more abstract, leading to people thinking the name is the thing. That began the process of people thinking of the “dollar” as the thing, not the silver or gold. Once enough people were thinking “dollar” instead of “amount of silver”, it was easy to remove the backing.

    I also think we should move away from ounces to grams. Once we are using grams, calculations become much easier – maybe even easy enough for public school graduates to make change without using a calculator.

    So I propose (and am implementing as an open source “currency”) that we trade in grams of precious metals, and not try to call them anything but “grams of metal”.

    1. says: Andy Duncan

      Ron, you’ve got to let me dream! :-)

      Actually, despite my wishes, I think the GoldGramme idea of James Turk will win in the end, mainly because 1oz has become such a large amount of currency.

      Though incidentally, I don’t think sticking to a ‘weight’ name will actually do any good if the state is bent enough on corrupting the money.

      it’s the idea that matters, not the name, and getting money out of the hands of the state and de-nationalising its production and control.

      Take the ‘Pound’ for instance. This is a perfectly good weight unit name, even still in England with all of our socialist wannabe quislings and nannies bending over backwards to ingratiate themselves with the EU and to try to ban it, most people in England still know what a pound of butter is.

      But ‘The Pound’, which used to be a Troy Pound of silver, has still been totally corrupted, despite the resounding ‘weight-based’ name, and most people here never associate it with a ‘weight’ of anything, and most either never think about where its name came from, and when you explain it to them, they still remain mystified, even when you point out the pound symbol is a fancy ‘L’, which stands for Libra, the latin pound.

      Plus, GoldGramme or gramme is such an ugly Napoleonic name, and sounds like a kind of stain extract on a Monica Lewinsky dress. A Turk, an ounce, a Ludwig, a Rothbard – all seem better and more organic to me. I’ll even take ‘A Hayek’ if that’s all that’s on offer.

      Though in the end neither of us will be able to impose our views on the matter. The market will decide the name. Perhaps the gold currency that the world eventually adopts will be ‘The Gold Dinar’, ‘The Gold Yuan’, or even the ‘Gold Rouble’?

      My money’s on the Yuan.

    2. May I say gents, a good thread about a good article.

      To Ron Helwig, just for your general info, we use quirky terms here in the UK, so a Public School is actually a fee paying more than likely posh school that will produce the best results V a state school, tax payer funded, that will produce worse results as a general rule. This stems back to the days when the oik’s like us were not educated , the Monarch and the Aristocracy had private tutors and the upwardly mobile paid for their children to go to a “Public” school as opposed to have a private tutor which was more costly.

      Andy, with emotion I am with you. One pound of gold, one gram etc is the way forward.

      Thank you for the comments.

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