What kind of 'flation?

Deflationists says that inflation can't occur with 8%+ unemployment. Deflationists say that the debt deflation occurring now is wiping trillions off the private sector's balance sheet, and the fed hasn't thrown enough money at it yet.

Inflationists say that deflation can't occur with monetary stimulus the likes of which we have never seen. Inflationists say that the doubling of the Fed's balance sheet in the last year and the quadrupling of it by the end of this year can't help but lead to inflation. They are both wrong, and they are both right.


The US government has succeeded in preventing a deflationary depression. They have not succeeded yet in preventing a hyperinflationary depression.

A deflationary depression occurs when the money supply is contracting and growth is contracting simultaneously. A hyperinflationary depression occurs when the money supply is expanding and growth is contracting simultaneously.

We witnessed a mini "deflationary depression" for the past six months. I believe on Wednesday we witnessed the beginning of a mini "hyperinflationary depression".

Take a look at the chart above. The dollar began its rapid ascent with the deflationary episode beginning with the crack in crude prices in July 2008, which is expected in a deflationary episode (fiat currencies become more valuable). Now, last week, the dollar began its descent, which is expected in inflationary episodes. The dollar is currently resting near its ascending trendline, depending on which trendline you use. Should the dollar break this trendline, it will confirm the beginning of the inflationary episode, which may eventually become a "hyperinflationary depression".

While $4 trillion may not be enough to really get hyperinflation going, the fed has signaled that it will continue to inflate the money supply to counteract the forces of deflation. They will not be able to pull the plug once they release the hyperinflationary genie in earnest. This too is also a feedback loop -- as more defaults occur, more money inflation will be required to makeup the difference. This is where the "hyperinflationary spiral" may occur.

I realize that the dollar is the "reserve currency", and that will not be changing. That doesn't mean that the US can't experience 15% nominal inflation rates coupled with 8% unemployment. Just look at what happened in the late 70s and early 80s.

I am long lots of crude, and I want to be long Gold on a pullback.