Deflationary Straw Man

No matter the debates over inflation vs. deflation, increasing employment vs. sound monetary policy or systemic health vs. fragility (and whatever else is flying around in Jackson Hole this week), the CPI marches onward and upward.  That is the system and it is predicated on creating enough money out of thin air while inflation signals are (somehow) held at bay.

The Straw Man* in this argument lives in the idea that inflation is not always destructive, that inflation can be used for good and honed, massaged and targeted just right to achieve positive ends to defeat the curse of deflation that is surely just around the next corner.  Currently, the Straw Man is supported by the reality of the moment, which includes long-term Treasury yields remaining in their long-term secular down trend.

Indeed, right here at this very site was displayed much doubt about the promotion having to do with the “Great Rotation” out of bonds and into stocks (i.e. that the yield would break the red dotted EMA 100 this time).  We noted it right at that last red arrow on the Continuum© below.  Now, with commodity indexes right at critical support and precious metals not far from their own, the time is now if a match is going to be put to that dry old Straw Man and silver is going to out perform gold, inflation expectations barometers (TIPS vs. unprotected T bonds) are going to turn up and the Continuum is going to find support.



People argue over inflation’s effects and the expectations thereof but the CPI, which is the ultimate measure of inflation’s lagging effects, has never stopped to take a breather.  2008′s liquidation of the system?  Child’s play.  Inflation, which is what the Fed has been hysterically promoting since 2007, will always manifest in rising prices somewhere.  As luck would have it, this time it is manifesting in the stock market to a greater degree than the CPI.  ‘All good!’ think our policy makers if the right prices are rising.


30 year yields vs. the CPI show a bond market that refuses to do anything, over decades, as consumer prices rise.


The 10 year is docile as well, apparently seeing deflation right around the next corner.


The 5′s and 2′s also are on high alert for deflation.



This is the response of our majestic Treasury bond market, former home of the legendary Bond Vigilantes, who would rise up against inflation.  The problem is, considering the decades that the Continuum has been in a downtrend while prices rise, rise and rise some more, I think that (the bond vigilantes) was just another Wall Street Promotion in a long and storied line of them; Great Rotation being the latest.

Moving on, despite all of the intellectualizing by various Fed members, media and the best and brightest in the financial services complex alike, the picture below is a view of exactly what the Fed is doing to combat rising prices over the various cycles.


At least Greenspan put up a different kind of Straw Man of his own in 2004, pretending to fight inflationary fire before that whole thing folded in on itself and liquidated in 2008.  No matter what the eggheads in Jackson Hole come up with this week, they are inflating and for the time being, the right assets are benefiting.

But the Fed Funds vs. CPI shows they don’t give a damned about a secular rise in consumer prices per the admittedly dramatic ‘portrait view’ of chart #2 above.  Why?  Find out why the deflation Straw Man has been stood up in the first place over all these years, and we’d probably have the answer to that question.

* From Wikipedia…

A straw man is a common type of argument and is an informal fallacy based on the misrepresentation of an opponent’s argument. To be successful, a straw man argument requires that the audience be ignorant or uninformed of the original argument.

The so-called typical “attacking a straw man” argument creates the illusion of having completely refuted or defeated an opponent’s proposition by covertly replacing it with a different proposition (i.e., “stand up a straw man”) and then to refute or defeat that false argument (“knock down a straw man”) instead of the original proposition.

This technique has been used throughout history in polemical debate, particularly in arguments about highly charged emotional issues where a fiery, entertaining “battle” and the defeat of an “enemy” may be more valued than critical thinking or understanding both sides of the issue. | Notes From the Rabbit Hole | Free eLetter | Twitter

12 thoughts on “Deflationary Straw Man

  1. Does anyone really believe the inflation numbers or unemployment numbers put out by the Gov't.???

    We are told what the gov't wants us to hear. We have stagflation, big time

  2. Per the Dallas Fed Texas Manufacturing Outlook Survey, ". The finished goods price index edged up from 7.3 to 9.1, reaching its highest level in six months." Sounds like inflation to me.

  3. Let me try to explain something to you that you obviously don't understand: nobody cares about a 2% increase in inflation on an annual basis, which is what the CPI data shows over the past 5 years. And consider: that is a highly favorable timeframe on which to focus given that one is using crisis-induced low rates of CPI to start the series. So let me repeat: 2% inflation has never been a problem. Go back in time to 1964, or 1944, or 1904 and ask those people if they would have cared about 2% annual inflation. They would not have cared one bit.

    The bond market is correct, and you are not. The entire developed world from Japan and the EU to the US is either in deflation or just barely escaping deflation. So go ahead, write the next article on inflation, and see if anyone cares except for those who are already believers that inflation is currently a problem.

    When inflation does become a problem--and given the global trends in growth and population it's not likely--you can be sure lots of people will care. In the meantime, you're century long chart of inflation is only going to be convincing to the innumerate.

    1. Don't know what rock you are living on, but normal people experience a whole lot more than 2%. Health care premiums have had double digit increases annually for years. Tuitions, same thing. Auto prices, way up. As well as auto expenses. Clothing, utilities, dental, air fare, cable tv, restaurants, you know, what normal people experience, who go by what they live through on a daily basis vs. what a stat tells them to think. So just...... knock it off, 'k'?

  4. Well, I don't claim to follow your argument, but certainly the WEEKLY TYX is showing divergence on MACDH and short term RSI!

  5. For those of you who profess not to understand this blog--inflation vs. deflation--it's really not that hard to follow. In the same way that there are laws of physics, e.g., the law of gravity, there are economic laws. Here is one of them in two parts. Given a limited supply of goods, wares and services and an unlimited supply of fiat money, the price of said goods, wares and services in terms of that fiat money will increase--WILL INCREASE. And the reverse is also true. Given a limited supply of fiat money and an unlimited supply of goods, wares and services, the price of said goods, wares and services in terms of that fiat money will decrease--WILL DECREASE. All else being equal, in depends on whether fiat money is chasing goods, wares and services [inflationary] or goods, wares and services are chasing money [deflationary].

    1. So what's your point, are you saying you buy the 1% inflation story? You think it's okay to exclude from the stats through adjustments everything that normal people actually consume as in clothing, auto expenses, soaring tuitions, soaring health care premiums, utility/cable costs etc

  6. One has to ask, what class of people suffer most from such flagrant fiat FED frippery? What class of people are not equities investors, are not capitalists, are not usury agents nor have the where-with-all to navigate financial complexities that yields and CPI indexes present?

    Do you own a savings account? Are you retired and living on interest payments or a fixed-benefit pension? Do you slave for a wage and yet dedicatedly save a little for a rainy day (or decade)?

    Yes? Then the FED has failed you miserably. We all know that the cost of living goes up every year -- regardless of what the government tells us. Yet wages remain stagnant and your savings account or retirement interest income are flat and taking you no where.

    Unfortunately this all seems to be part of the plan. Crash the economy; collect the wealth from the failed underclass; support the rich, the top 5%'ers with bailouts and equity investment incentives; wash; rinse; repeat. Imagine what two or three more "global recessions" would do to the bottom 90% of the world's population? It would grind us to our knees. But the wealthiest of the world, would they suffer? Or are such economic shocks simply opportunities to them?

    1. When the middle class is ground up and spit out as lower class, the civil revolts start and grow until the total system collapses

  7. I really didn't understand much of this article, but as for what I see in the economy
    Inflation is here big time in everything except my income.

  8. I've read two other authors saying deflation is "definitely" coming. But all I see presently is inflation which isn't really measured as energy and food are left out of the formula. So what you are saying as well is that "deflation" is the "straw man" and won't happen?

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