It’s Inflation! Case Closed...

Inflation or deflation? I'm pretty sure just about everyone reading this has heard this debate in one form or another in recent weeks. Well which is it...? There are points to be made for either side of this debate and today we will hear a good friend of ours James McClung of Stock, state his case for inflation. What do you think? Leave us a comment and let us know and be sure to stop by Stock Shotz for more on the great debate and interviews with some of the most respected names in the trading world.


We have been exploring the inflation vs. deflation debate on our show for several months and while we have heard compelling arguments on both sides---we believe that we are headed for a period of massive inflation. Will most be surprised? Yes. Most of you know that at Stock Shotz, we take a common sense approach to the markets. So as we explored this debate we did a little unsophisticated research to assist with our analysis. We started by heading down to the local grocery store to see if the price of a gallon of milk, which was marked up almost daily as the price of oil increased last summer, had gone down in the same proportion as had a barrel of oil. Answer--NO.
What? No, but what about the argument that we are in a period of deflation? Isn't the demand for milk so sparse that they are dropping the price with each gallon? Not hardly.

This recession/depression has been one of "pockets". While many have lost their jobs, homes and more---there are segments of the population that have not had to make many adjustments in their purchasing habits. Many have argued on our show that all of the money being pumped into the system could not cause inflation because it was simply rebuilding the balance sheets of the banks--which had been decimated. But is that totally the case? I would argue no!!! Economist John Williams of argued this time last year (as oil prices were rising and many were talking inflation) that we had not seen the true effects of monetary inflation. He contended that we were seeing inflation caused by energy prices and not the first government stimulus or the dovish Federal Reserve Policy. I agree with Williams that the true effects of the increase in money supply have not surfaced yet. Lets look at this recession/depression a little deeper. This period has seen fear strike consumers like none other in my lifetime. Simply put, everybody is scared as they have seen their 401K's cut in half or more. People feel less wealthy. All of this action has the money multiplier at HISTORIC LOWS.

How can tax and spend, borrow and spend be anything but inflationary? What we are seeing now is not the rebuilding of the banks balance sheets, it is only a timing headfake. Inflation is just around the corner. The money that has been pumped into and is being pumped into the economy is STILL THERE. We are not seeing the massive inflationary effects because the money multiplier is so low---it has been below 1 and is now hovering right around the 1 level. These spending programs will cause the multiplier to rise and when it does--look out. Sadly enough--the inevitability of the increase in the money multiplier is not the only risk factor that we have for inflation. Most every economist will agree that Fed Funds rates of zero combined with MASSIVE GOVERNMENT BORROWING cannot result in anything but a weaker dollar over time. Yes, during this downturn, the dollar held its position as the world's reserve currency. It performed surprisingly well, but the ingredients are in the mix for a weaker dollar in the future. What happens when the dollar starts to decline? Oil will rise quickly. Throw in the fact that OPEC has been cutting production for quite sometime and there has been worldwide stimulus designed to get consumers spending again and we have a triple threat on the oil front--the weak dollar, production cuts, and demand that will most certainly increase.

Yes a GM bankruptcy will most likely press the pause button on the money multiplier increase, but it will not get anywhere near the stop button. When the fire of inflation is lit, it will be virtually impossible to extinguish. Does anyone believe that it will be politically popular to push for contractionary policy anytime soon on the heels of the worst recession that most of us have ever seen? No way, and if we don't get on top of inflation it will spiral out of control.

James McClung


Stock Shotz brings Wall Street To Main Street, by interviewing some of the best players in the financial markets. They're individual investors seeking to learn more from each and every conversation that they have with other traders.

39 thoughts on “It’s Inflation! Case Closed...

  1. Too many dollars(in the hands of the consumer)chasing too few goods. Remenber the US is a consumer based country.US has to types of consumers;those who are tapped out and those with money who have a job.The latter group is saving not consuming. The former group are stagnent because they are unemployed and presently insolvent.It is supply inflation that will hit first because companies that survive will have had to cut back capacity on a skeleton work force with a limited supply of input goods and thereby unable to ramp up capacity. The other supply comes from off shore where those goods will demand higher prices because of currency differentials and their own input costs for industries from having had to ramp back to survive leaving them unable an inability to increase capacity because of lack of material.This shouldn't take more than a couple of quarters before you start to see some significant shortgages.

  2. This is absolutely hilarous. Inflation? Good luck with that. I could tell you exactly why you are wrong but instead let you learn the hard way. Because the debate isn't really about inflation or deflation. The debate is where to put your money. That is really what is behind the inflation and deflation debate. And, if your balls were as big as your mouth, you'd get your arse handed to you.

    1. No, the debate is inflation and deflation. Another useless response. EQ, explain your position to the rest of us then. You show why your username is EQ and not IQ. Go to and read the new post and also check out the interviews to get educated.

      1. And I suppose you are going to educate me doug? I've been short the Nas and S&P for two years. When I see idiots like you pumping web sites on how to become educated..........I have to laugh.

        1. I am not saying that I do not believe you but it is a blog and you can say that you have been right in the market without proving it. I am not pumping the site saying that the site is going to educate you. I am saying that some may gain some knowledge from the interviews that are posted on the site. But of course you already have all the answers and are so successful that you have so much spare time to tell everybody you know the answers,here is your quote, "This is absolutely hilarous (use spell check next time EQ). Inflation? Good luck with that. I could tell you exactly why you are wrong but instead let you learn the hard way." Why don't you share your all knowing wisdom. So you are telling me that you have never gained any helpful information from a website. Do you not find this blog helpful in some ways or do you just post to tell others that they are wrong and you are right because you have been short for the past two years. Disagreeing is great, it offers the chance to learn. Of all the posts on this topic yours has to be one of the most uneducated. Especially with the name calling. Proving again why it is EQ and not IQ.

  3. The fundamental problem underlying it all, even inflation, is MONOPOLY. Better yet is the failure of the ones entrusted to enforce the monopoly laws.
    Personally, I don't know if these laws are still in force or if President Clinton did away with them, but there lies the cause of it all.
    That and democracy which contrary to general opinion is not how this country started or was prior to 1900. All this is my humble opinion.

  4. "If there is inflation, it will show up as bullish patterns in the commodity charts."

    They might also show a technical rebound, which I think they will for a while; not a LT trend.

    As for Jim Rogers and Peter Schiff, they both got it wrong about the collapse of the dollar and the emerging markets.

    Gloomy, the problem today is nobody is chasing anything. The FED can't balance anything; they will either scare investors and create a general panic if they don't stop this illusion of economy inflated by credit, or the deflation will run its course (a more rational and less painful way). Deflation must be embraced actually and not rejected. Inflation is worse as it's stealing from people savings.

  5. This is the first time I have read these blogs and I am very impressed with the financial knowledge here.

    For what it is worth, I think we are in a near term, (12-18 mos) DEFLATIONARY environment, followed by strong inflation. Why do I say this? I have been recently re-bidding my work for a major retailer for a product I manufacture domestically. Even though we have been sucessfully retailing this product at MSRP xx, they insist on reducing the price by 30%. They are ANTICIPATING the value component. They are demanding price concessions in a difficult economic environment. Isn't that the defenition of deflation?. I am left with the choice of reducing prices to "cover costs", or loosing the business. I am choosing to cover costs. Any other business people out there feel the same way?
    As a result, I will bid the business to low and then get caught in the shera as material costs rise.

    1. "They are demanding price concessions in a difficult economic environment. Isn’t that the def[i]nition of deflation?"

      It might be if they had solid evidence that they have lost market share or total volume because they are priced higher than the traffioc will bear. But I wonder how sincere they are in telling you they are going to cut prices, or whether it isn't simply a "Greedy Grabbit" ploy to get you to cut yours unilaterally. Call their bluff and tell them you will sell them for what they're worth and if they don't like it they can go and try to buy them on the cheap somewhere else; if your product was fairly but not excessively proiced to begin with they won't be able to do better from anyone else. (If, on the other hand, you're currently making a thirty-five percent profit and they're operating on a margin of an eighth or tenth of that, then maybe you will want to play ball on their terms, unpalatable as they may be; and in that case it will indeed be a case of classic deflation, at the wholesale level at least.)

      This said, and speaking as a 40-year maker of silver jewelry that I wholesale to retail stores (the reason I read the INO metals charts assiduously in the first place), I adjusted my prices upward last year for only the second time in a quarter-centurys, and then only very modestly so. That I was subsequently able to buy my metal at half my worst-case scenario figure has not changed that, nor do my clients seem particularly concerned -- not one of them has asked, "Now that silver is $12-13, why are you charging the prices you set when it hit $21?" On the other hand, where there have been true bubbles, one can indeed expect classic deflation where they have burst: As one other correspondent noted above, this is a great time to buy real estate, providing you're keen to hang onto it for a while -- especially in Florida, I should think.

      Somewhere in between are those things people actually consume and have to consume, barring a truly revolutionary change in American lifestyle: milk, wheat, coal, and all those other things the generally make a commodities trader's life interesting. So far, I see no sign that deflation has set in there, and I doubt that freer money is going to make much of a difference in the opposite direction very soon either.

      I could be wrong, of course, but I think the whole market is still reeling from the shock and all the massive cash coming out of Washington will do is keep it from spiraling into an honest-to-God depression, as it is supposed to do. I have yet to see anyone offer a plausible rebuttal of Keynes, and of those who once believed they had one, many seem to be eating awfully full plates of crow lately.

  6. Inflation - Too few goods chased by too many dollars.
    Deflation - Too many goods chased by too few dollars.
    Inflation and deflation are caused by market/currency imbalances.

    Currency Devaluation - An increasing volume of dollars chasing a relatively stable goods market, aka Stagflation, which is the common designation for devaluation... primarily because devaluation is linked to incompetence in management of money supply and politically unpalatable.

    First, let's get the terms right. Then, will the US Dollar experience greater than "normal" devaluation in the next two to three years? In my view this will only be avoided if the tax burdens are so great as to "wring out" individual and business discressionary spending. Can the Fed and Treasury achieve this balance? Possibly. A big factor will be the planned exchange of Treasury debt held by the Chinese for equity in US infrastructure via the CRF currently under discussion. This will allow the Chinese to continue to buy US Treasury debt and facilitate the orderly liquidation of US infrastructure.

  7. This is a technical charting website. If there is inflation, it will show up as bullish patterns in the commodity charts. Let's leave the analysis and opinions to all the high priced talents in the banks, brokerages and government.

    1. I think you have to have a combination of both. Fundamentals are going to drive certain market behavior along with technicals. I am about 90% technical in my trading decisions but the markets right now are driven by a lot of fundamental junk. I don't think you can deny that. Just go read the technical analysis post and leave the fundamental post alone.

    2. Oh yea, don't forget this one also
      “Do You Think The Government Should Nationalize Banks”
      That was posted for the April contest by the technical analysis site.

  8. For crying out loud. This is a technical charting website. So go look at the commodity charts. If there is inflation, the commodity charts will be bullish. Leave the fundamental analysis and opinions to the high priced talents in the banks, brokerages and the government. Good Grief!

    1. Here is a subject on another traders blog post
      "General Motors Rick Wagoner finally admits his biggest mistake"
      Chart that Pete!

  9. Dennis...You had me until you mentioned unions causing inflation in the seventies. That's BS dude. I was there and unions HAD to get more from employers BECAUSE of the unusual rise in prices, just to maintain living standard. Prices will go up WITHOUT a wage gain.
    In fact we all felt at the time that we were going backwards anyway. A one income family in the 50's/60's, becomes a two income family in the 70's/80' three or more per household into the millenium. ain't the unions. Its the devaluation of our money.

  10. If inflation is around the corner - rather than be driven by economic growth, I would suspect it to be driven by the herd of investment speculators who abandon US Dollars for other favorable assets that are in higher demand. Currently we are experiencing a rapid deflation of assets and income while the cost of energy, food, health care, education and taxes and many other materials and services are holding there price levels or even increasing them. Why? The liquidity problem with assets such as homes, autos, and equities is caused by the lack of control to reduce the excessive inventory on the market - forced by the contraction of credit, extended by the contraction of income. Today in general producers are bigger than ever, globally integrated with far more control over resources and market share, and wealth concentration has graduated to fewer hands. The cost of energy, food, health care, education and taxes are set by the producers, who will cut back its workforce, reduce wages, idle excessive assets, and hold or even raise prices, which in return will cut expenses to help compensate for reduced income. This is deflationary, producers cannot maintain cutting costs while holding prices; this is only a temporary reaction, they are cutting the hand that feed the economic system. Producers have far more control over price collapse simply because they are in business to profit and have to meet costs to continue their function of productivity, where an asset like a home is simply a thing you can burn to the ground. The fear that drives the speculators is a wild card which makes the economic system that much more volatile to temporary inflation shocks, and I doubt borrowers and lenders will have the appetite anytime soon to expose themselves to additional risk. The wealthy want to preserve and the not so wealthy want to have more than they can afford. The economy will probably stagnate or deflate for a several years, wage inflation seems highly unlikely, and asset classes under the most concentrated control will retain much better value than those that are highly competitive. Jobs will continue to flow to more competitive markets and the US economy is going to contract for several years, as it cannot continue consuming more than it produces. The deflation of income vs expenses will be worse off for economies with high trade deficits.

  11. As John rightly said above, inflation and deflation are defined as increases and decreases respectively in the money supply, not in asset prices as most people believe. However, I disagree with John when he claims we are not entering monetary deflation.

    Debt currently makes up approximately 97% of our money supply. So when people take out loans they create money. But in the current financial crisis, personal loan defaults and corporate bankruptcies are rapidly destroying money. Likewise, debt leveraging becomes inverse leveraging when the underlying asset prices collapse (i.e. the property market). All this shrinking money supply is highly deflationary.

    So we will have face deflation for the time being. But long term inflation will probably reappear for the following reasons: The federal reserve is buying bonds so it is effectively printing money and this could lead to the eventual collapse of the U.S. dollar. If this happens, then the U.S. empire could rapidly decline and the U.S.A. would decouple from the rest of the globe. To avoid debt payments to the rest of the world, the printing press would be used flat out and inflation would return with a vengeance.

  12. As John rightly said above, inflation and deflation are defined as increases and decreases respectively in the money supply, not in asset prices as most people believe. However, I disagree with John when he claims we are not entering monetary deflation.

    Debt currently makes up approximately 97% of our money supply. So when people take out loans they create money. But in the current financial crisis, personal loan defaults and corporate bankruptcies are rapidly destroying money. Likewise, debt leveraging becomes inverse leveraging when the underlying asset prices collapse (i.e. the property market). All this shrinking money supply is highly deflationary.

    So we will have face deflation for the time being. But long term inflation will probably reappear for the following reasons: The federal reserve is buying bonds so it is effectively printing money and this could lead to the eventual collapse of the U.S. dollar. If this happens, then the U.S. empire could rapidly decline and the U.S.A. would decouple from the rest of the globe. To avoid paying impossible debts to the rest of the world, printing money would be the only option and voila you have serious inflation.

  13. Bernanke is a reputed expert on the subject of the 1930s depression. He has made it quite clear that he will do “ANYTHING AND EVERYTHING” it takes to avoid a repeat of those deflationary circumstances. Once the money spigots are wide open it is very difficult to shut them back down in time. Excessive money printing may eventually lead to hyperinflation. Don’t bet against the FED.

  14. John, your definition of inflation and deflation is wrong as well.

    The inflation is a rise in money supply AND EXPANSION OF CREDIT! You can't experience money supply alone to induce inflation. mbb mentioned we experience deflation because money velocity is zero; which is true. So even if you increase the monetary base, you still see deflation if those money are not finding their way in the economy.

    You can read it like "credit is destructed and is payed back faster than the FED is printing; as everyone pays their debt, this creates a huge demand for paper money, hence their scarcity".

    In a fiat system, deflation it's rather a matter of social mood than monetary policy; otherwise, the FED can print tens of trillions but can't force people and businesses to borrow (and they won't because the sentiment towards debt changed, it's negative).

  15. charts that talk??

    I ve been following your blog for some time...

    the market gives an answer to your videos...

    you suggest target based trading and at the same time you suggest

    videos of top traders who condemn target based trading cause they are

    trend followers.

    Please thing twice before you stand before the camera next time.

    1. Dimitris,

      So what is your point? That you don't like our show but you keep following our content? Our show is about bringing different perspectives to our viewers. If you had been listening, you would know that it is our intent to present all sides of the equation.

      So how does the market answer our videos?

      Please think twice before you waste keystrokes.

    2. i follow stock shotz and from what i see they do not provide interviews with just one specific type of trader/investor but they cover the entire genre of trader/investor/economist and others. The guy may have his own preference of trading style but i think he does the right thing by providing information from others. and are we discussing the same individual because i have never seen the guy in front of a camera and that is not what this discussion is about.

  16. I am optimistically, pessimistic about inflation. Leverage simple needs to liquidated before we can be reborn again. It simply take awhile.

  17. People confuse inflation and deflation (which are an increase and decrease, respectively in the money supply) with rising or falling prices. How many times did you hear people say that high oil prices were causing inflation to rise? Wrong, wrong, wrong! What we are experiencing now is asset PRICE deflation due to the unwinding of leveraged positions. So, since inflation is a monetary phenomenon, and the money supply has been increasing exponentially, one cannot argue deflation. You can argue there is price deflation, but you cannot argue that there is monetary deflation.

  18. There is no doubt we wmay see massive crippling inflation at some point in the future from the Feds actions. But at this time, they have had NO effect because the velocity of money in the economy has contracted sharply, along with credit.

    But that is not here now, nor will it be here any time soon.

    We are in deflation currently, and have been for a year. currently many people are having their wages cut by 10% , losing 401k matches, etc. this is common right now, and it is still accelerating. In fact, it cannot be stopped at this point. It will run its course.

    You will know when inflation is here because you will get a pay raise.

  19. Doug, it doesn't happen; that's the problem. Those money are not pumped actually in the economy, they are pumped in banks. And while this will continue, there will be no inflation as banks are black wholes right now. They are so hungry for cash that they keep every dollar the FED is printing. In order to have inflation, you need to have credit working and people and companies willing to borrow. Credit mechanism is broken and people don't want more credit right now, no matter how low the interests. On top of that, the banks are behaving rationally for the first time in the last 2 decades: stop lending when the risk of defaults is so high. And given the bad recession why would a bank lend when there is so much risk of bankruptcy out there. More, there is overcapacity all over (except energy maybe). Why would a company expand production and make new lines of credit as there is no demand for its product and inventories are so high? So you see, there are no fundamentals for inflation to pick up. There might be forced politically, that's another story; the private debt out there is 3 times the GDP; if the FED buys say 30% of it, they can create a general panic among investors and make the dollar collapse. But it will have greater costs imo than trying to reduce the debt (through bankruptcy) in an ordered fashion. It's still not easy and painful, but honestly, there are no miracles in economy.

    1. I would not say that the banks are smarter, they just got busted being stupid. What is going to get the economic situation back to a so called normal environment where there is company growth and people spending? Should the market correct itself without intervention? (I believe it should) When companies and people are willing to spend, what is going to happen to all this money that the banks are holding? This money is trying to force companies to expand and people to spend and heck yea people want more credit. People did not get smarter in this process they just ran out of resources and the government is about to solve that problem.

  20. If inflation is coming, one should by real estate right away; this does very well during inflation. Good luck on that!

    One looking for prices to see whether inflation or deflation is coming is missing the boat. Deflation or inflation is seen in prices after it is well installed. The drop of oil from 140 to 40 speaks a lot about inflation. The rebound in oil is still technical, no demand picking up, no inflation on the horizon; for years. Case closed...

    1. You can't ignore the fact of all the money that is being pumped into the economy that has not spent yet. Explain the effects when this happens.

    2. The idea of inflation is too many dollars chasing too few goods. The inflation shows up from who ever has those dollars. Right now the general public has not gotten any of the trillions of dollars the Feds have created. Until this trickles down to the general public in the form of wage and salary increases no one should expect inflation in everyday things to go up. The way inflation can take off is if the rest of the world recovers first and these wage earners are able to receive wage increases to drive goods up such as food and energy. I do not see that in the near future either. The inflation that can hit the fan will be felt mostly; at first; from the money that was given back to Wall Street and the banks. This can re-inflate the stock market and investments in general. I can see commodities taking off again; esp oil, since the forty dollar a barrel price is too low to encourage further drilling and exploration.Natural gas is way undervalued.
      The difference between now and the 1970's is the union factor. In the 1970's unions were very powerful and forced the companies that were profitable to share the wealth. This had a trickle down effect for everyone else. That lead to the inflation problem we had back then. Now a days unions are very weak and there is no good way to extract money from these same companies. That is one reason for the outrageous salaries and bonuses the top executives have been receiving. I agree that inflation will win over deflation but it will not be as quick; other than commodities, as most expect.

      1. The idea of too many dollars chasing too few goods is hogwash. We have all been brainwashed to believe that in our Keynsian economics classes. Case in point: Zimbabwe.

        Inflation in the sense of rising prices is the effect of a devalued currency period. Currencies can be devalued in any of a number of ways.

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