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Inflation or Deflation? "It's Definitely Deflation," Mish Says

Posted Oct 15, 2009 09:15am EDT by Aaron Task
Related: TBT, TIP, TLT, GLD, SPY, DIA, XLF
Ask an economist about their biggest concern about the U.S. economy and you're likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation.

Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationistas.

While some consumer prices are rising and the Fed is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation.

People looking at prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren't lending, and we've got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression."

Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.

One reason Ben Bernanke has the Fed in such an ultra-easy state is he's trying to offset those deflationary force and generate some inflation, which is seen as a better alternative.

Shedlock, who writes the popular Mish's Global Economic Trend Analysis blog, doesn't seem to have a lot of faith in Bernanke's ability to prevent a Japan-like deflationary cycle, especially given the mounting pressures on the central bank to reign in its accommodation.

"When credit is not expanding, businesses are not expanding, businesses aren't hiring [and] the unemployment rate starts soaring," Shedlock says. "That's the really important thing here. When you look at [consumer] prices, that's putting the cart before the horse."

Or perhaps both camps will prove right and we'll end up with a stagflationary environment, i.e. weak economic growth, a stagnant jobs market and rising prices, otherwise known as "the worst of both worlds."

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