Inflation, Deflation, and the Future

0:00The topic of my discussion today is inflation, deflation and future, of all that, and I'll argue today that despite the accepted view that deflation is a bad news, and the reason why most economists regard deflation as bad news, because it's been perceived as associated with depression, terrible recessions, I'll argue in fact that the bad news should be be considered not deflation as such, but rather inflation. And the reason, I will argue, why most economies regard deflation as bad news, as a result of misconception as to what inflation is. Now, it's well accepted today by most economies that inflation basically arises in various prices.

0:49Let's confine ourselves to so-called consumer price index, the CPI. Arises in the CPI is regarded as inflation. or if we take the producer price index, the PPI, the same story. Now, most economies unanimously accept that that's what inflation is all about, increases in prices. And there is only a slight difference now among economies. There are two camps. One is the ones that follow Professor Friedman, Friedmanite or monetaries. They argue that inflation is caused by money, and again, emphasis here on cost. Post, the increase in money supply causes rises in prices. On the other camp, the other camp we got the so-called Kansans, Neo-Kansans and other species which argue that inflation is basically caused by various real shocks.

1:39Weather shocks, political shocks, whatever, they're causing a rise in prices. And so if inflation is really increasing prices, why there is a problem? Why it's considered as a problem in fact? After all, if it's just rising prices, then surely one can adjust for all that by giving all these people who suffer as a result of increasing prices, that's underprivileged, raise their incomes and everything should be okay. And also Professor Friedman in various writings has suggested that if inflation is not suppressed, then it doesn't cause any problem. There's no need to worry about it. Unsuppressed inflation is a good thing. In fact, we can tolerate it. Now, what Austrians are saying about inflation as such, and I'll bring here the view of Ludwig von Mises. Ludwig von Mises states very explicitly that inflation is not rising prices. In fact, inflation is increasing money.

2:40and pay attention to what we are saying here, or what Austrians are saying, and specifically Ludwig von Mises. It doesn't say, as monetaries are saying, that inflation is caused by money, it says inflation is increase in money. And that's very important distinction here. Now, inflation is increase in money. Now, once we accept that inflation is not increase in money, but rather rise in prices, which Mises called actually just the possible symptoms of inflation, Inflation. Then all kinds of things could happen. For instance, the inflation institution, Central Bank, all of a sudden becomes an inflation fighter. That's really what they call today that the Central Bank, the Fed, is an inflation fighter. The reason being why? Because inflation is seen as rising in prices. However, if inflation is just pure rising money, then of course The implication of all that and why it's bad can be easily understood and explained.

3:39And how we can present what inflation is all about? By just looking at the balloon called inflation. Straight forward, that's really what inflation is all about. A monetary balloon, expanding balloon. And the larger the balloon is, the higher the inflation is. Now, to understand the damage inflation causes, we have to look at the implication of what money does under conditions of a healthy economy, a healthy environment, and under conditions when money is abused and printed. Now, in the honest world, namely when money is not printed, money has to be earned. And what you see here is the following. Somebody works for money, he has to earn those dollars, and only then he can buy food.

4:26In other words, with the help of honest money, you don't print money, you exchange something for something. So before you can consume, you have to produce something. If you want to eat, you have to work first. That's really the principle of honest money. You cannot really get just like that food before you have produced something. And the role of money in the honest world is just to be a medium of exchange, to help you to exchange something for something else. Now what happens in the world of dishonesty? And we can start with an interesting case, a simple case of a counterfeiter. Now, what a counterfeiter does for a living? It does absolutely nothing. It has printed money, perhaps, right? But it does absolutely nothing, right? Nothing useful. And what has it done? It has exchanged this idleness, there's nothing for its counterfeit money, which masquerades as proper money, otherwise it wouldn't be sort of accepted as money, and uses this counterfeit money to exchange it for something else, for food here, right?

5:24In other words, with the help of counterfeit money, exchanges nothing for something. Now, ladies and gentlemen, what does it mean nothing for something? It's a very important concept here. It means that the counterfeiter consumes without producing first. Now, recall what we said should happen in the world of honesty. You have to have first of all to produce before it can consume. In other words, production has to precede consumption, cannot be otherwise in the world of honesty. Here we have a situation where it can consume without producing first, And what do we call such a situation? This is called theft, embezzlement if you want, another word in English, highway robbery, right? And that's really what the reason why to be counterfeiter is illegal. But I have got a news for you, and you probably know about it, that there are some much greater counterfeiters today, and the largest of them all is the central bank.

6:14The central bank also plays the role of a large counterfeiter and produces exactly the same effect as this particular counterfeiter here. The only difference between this counterfeiter here and the central bank or the fractional reserve banking is that the central bank counterfeiter called legal tender, while the true counterfeiter called illegal tender basically. But as far as the economic effect is concerned, they both produce the same results. Both causing massive destruction, impoverishment if you want, or consumption without a previous production. Now, ladies and gentlemen, in the world of reality, and that's what Austrian economics is all about, we try to present the world the way it is, not some kind of illusory world, pie in the sky.

7:06and those charts are here just meant to illustrate the fact of reality. Everything in the real world has to be funded. In other words, you cannot just like that engage in production without having a funding and as businessmen you do know that first of all when you are engaged in certain activity you ask yourself and where the funding will come from. Now what does it mean funding? Funding basically according to Austrian economics in particular a famous gentleman, and von Striegel, who wrote about it extensively. This book was translated by Professor Hans Hoppe. And according to this way of looking at things, at any point in time, everybody has to be sustained. In other words, and that's quite obvious, in order to stay alive, you have to eat, you have to be sustained, supported.

7:55And that's what we call means of sustenance or pool of funding. Those means of sustenance support us, support first of all our life and our well-being. And given pool of funding, or given food plate in this game, just to illustrate the point, supports a certain amount of working hours. And this in turn enables us to produce tools and machinery, and with the help of better tools and machinery, which also embodies specific technology, we can now produce a greater food plate, and that's really what economic growth is all about. Economic growth is basically expansion of the food plate. The more of the food plates we've got, in other words, the larger the pool of sustenance is, the greater the economic growth. It's got nothing to do with GDP, which we'll see in a moment, what it's all about.

8:42That's really what economic growth is all about, and that's the means of sustenance. And the larger the food plate, the better we're all. And the question now is, how all this can be improved? Obviously, if people save more, they allocate more towards production of tools and machinery, We'll have much greater food plate and everything will be good. However, in the real world, we have a problem. And the problem is that we've got central governments, central banks. And what do they do? Central government says, well, we can improve on economic growth. And how can it be done? We can improve it by building a pyramid. Ladies and gentlemen, building a pyramid is an interesting exercise. But in this case, it produces absolutely nothing.

9:28Pay attention, there is no arrow to creation of food. A pyramid does not produce food. It produces nothing. It's a waste. It's useless stuff. However, to build a pyramid, you need people. Of course you have to have people. And those people have to eat. So how do we fund them? Well, the government says we've got a solution. We print money. And here we see how the printing goes. We create a balloon, monetary inflation. But how money creates more food, it does not create more food. Money being given to those workers here, and as the case of the counterfeiter, it sets in motion exchange of nothing for something, means it shifts food from this place towards those workers to build a pyramid. And obviously, all those guys who are creating wells, building tools and machinery to create more wells, are having a problem now.

10:19They actually got less food. They'll be denied the necessary food to function. However, economies are excited. Why? Because all of a sudden, the so-called gross domestic product now, that's really what is measured, but this part is starting to grow and everybody says, well, things are fantastic. Look how clever the government is. They can create a lot of activity, a lot of prosperity and things are good. Well, central bank gets encouraged with all that and says, well, why not? Why not to create a much larger inflation? And the balloon is getting much greater and now they're building more pyramids. and employing more workers and of course what happens GDP looks very fantastic looks very good everybody's getting excited CNN CNBC Bloomberg all of them are telling us the economy is doing so well we never had so good Mr. Greenspan is genius everybody is fantastic right and and everything is hunky-dory however there's something happened here now if you intensify this process of inflation to make this balloon massive, massive, all of a sudden you will start to observe, and that's really, you need a hell of an, a hell of an abusement for that, that the food plate begins to shrink or even stagnate.

11:33Now, once this happens, obviously, none of those activities on a large scale can be sustained. Why? Because those people have to eat, right? Those people have to eat, and you don't have enough, any longer of this food. Now, the constraint that the food plate imposes is the following. Now, if for instance, one would like to introduce high technology and special equipment, which requires one year of man hours, and if there is enough food only for six months, obviously this equipment cannot be introduced. And that really applies to all the other activities. If all of a sudden the food plate begins to shrink, then all those large activities cannot be sustained and they're starting to crumble gradually. Now, obviously, the banks will have accommodated those activities through fractional reserve lending, starting to withdraw money.

12:21And once they start starting to withdraw money and not renew the loans, a certain thing emerges. And what this thing is? Money begins to shrink, and that's what Murray Rothbard also observed took place during the Great Depression. Deflation emerges, the balloon starting to shrink. Now, once the balloon is starting to shrink, many so-called do-gooders, good economists, Professor Krugman, Professor Friedman and various other guys, are starting to scream, something has to be done, something has to be done, we cannot allow these things to proceed, because those people are suffering. However, when Austrian economists look at all that, they're saying, well, there's nothing that can be done. On the contrary, deflation of the bubble The trouble is a great thing. Why? Not because we are against those people and we want them to suffer. Not at all.

13:14Because if we will proceed with the expansion of the balloon, this whole food plate will disappear altogether, right? And then everything will collapse. So what Austrians are saying, well, stop right now here, right? Don't do anything any longer. And gradually, once we'll stop the supply of fraudulent money to those people, the food plate will not gravitate any longer towards pyramids. And then there will be gradual build-up, gradual build-up of this food plate. and that's really how natural recovery will emerge. However, Friedman and Krugman and all the Kansans, all the guys argue, no, no, we have to print money, we have to print more and more and more and more and what Austrians are suggesting is totally inhumane, it's sadistic, it's bad news. Now obviously, if Friedman would be right on his logic, then it would imply that printing money creates more food.

14:03But, ladies and gentlemen, you can see that printing money cannot create more food. Food can only be created by producing things, not by demanding things. That's another irony of the mainstream economics. They believe that if you demand, all of a sudden you will have more. Not at all. Austrian is saying that if you want to eat, you have to produce. Demand, everybody knows how to demand. How to produce? Not everybody knows it. And so what happens then? What happens then? According to the Austrians, the entire plea by Friedman and Krugman is totally out of context, fallacious, and doesn't make any sense. And on this score, Professor von Mises said the following when he was asked, what has to be done during the Great Depression?

14:49Well, he said the government should be doing as soon as possible nothing. But he said, as soon as possible nothing. which means basically, don't tamper here, don't print money, don't expand the balloon and allow this food plate to expand and once this will happen, obviously, then things will start to improve. Now, as far as those workers are concerned, obviously they're going to suffer, there's no doubt about it, but they have to readjust themselves and find employment in this area, area of wealth creation, right? That's really the idea of deflation, which, contrary to inflation, does not destroy things, does not make things terrible, but on the contrary, improves less foundation for the future, improves the distortions which were caused by the prior inflation.

15:37Now, the question that arises now, how it's possible that for the last 60 years, we have seen that the government and central banks were pumping money on a large scale, And somehow they created the impression that they can move the economy. How it worked? Well, the reason why it was successful, there are only one reason as I see it, because the pool of funding has been growing. As long as pool of funding is expanding, notwithstanding the fact that the policies are of abusive nature, the economy can continue to grow and will grow. Only once the food plate begins to shrink or stagnate, only then things are starting to fall apart and doesn't matter what the government will do, doesn't matter what the central bank does, they can print money as much as they like, nothing will happen because the food plate is shrinking.

16:27And I believe that's the situation currently in Japan. In Japan, they managed to create a massive monetary bubble. And what you see on this chart I present here, a statistical presentation, a depiction of the monetary bubble in Japan on a massive scale they have created. And obviously this bubble, as you have seen in my previous charts, has basically diverted on a massive scale from the footplate of the head towards various pyramids and the current situation in Japan that they are pushing on a string, in other words, the central bank tries to revive the economy, however, nothing is happening because the pool of funding is not there, the food plate is not large enough to support all the structures that have created useless structures, useless pyramids, which in terms of GDP might look very well, however, in terms of reality, they are useless pyramids. And if you look at the other part of the monetary policy in Japan, In the early 80s, they were engaged, with exception here, at a relentless lowering of interest rates, at one stage interest rates in the early 80s was around 9%, currently the discount rate is around half a percent, some other interest rates close to nil.

17:47The question is Japan ready to recover? I cannot suggest that this is the case, and for me recovery means have they allowed the food plate to expand? Is the food plate now really stagnating or shrinking? We don't know whether the food plate is shrinking or stagnating, but we can only suggest that perhaps that's the case. As far as policies are concerned, they have done everything possible to undermine the expansion in the food plate, in the pool of funding, and therefore I would assign very high likelihood that they the day might continue, continue to stagnate for still a long time to go. In terms of GDP, it means nothing. They can create artificial figures. GDP is basically printing money, nothing more than that. You print more, you get larger GDP. And that's what everybody does today. If you look at one case is the Korean economy, South Korea. Last year and the year earlier, they were in a serious depression. They are still in depression, although in terms of GDP they appear to be doing very well.

18:47of the World. And why they were in the big depression and still going to suffer? Because for many years they were pumping money in excess of 20%. Ladies and gentlemen, pumping at the pace of 20%, it's a massive destruction of things. Massive diversion of food away from wealth creation towards wealth destruction. And after experiencing the worst depression since the Great Depression, given the advice of the wise economists like Krugman, like the treasurer of the US Treasury Secretary and the IMF, they have decided to pump money on a massive scale. And at one stage this year, money growth M2 was expanding at the pace of 37% on a yearly basis.

19:34Now, this is massive. In other words, whatever they managed to save during the Great Depression, they are now undoing it and they are destroying it further. And I believe that at no time, they probably will relapse back to the previous stage and they will continue to suffer. So, as far as I'm concerned, Southeast Asia is still in a disastrous situation. Policies will never arrive to create the pool of funding. And that's the heart of the problem. Anything else is beside the point. Now, let's have a look at the most important economy today in the world, the United States of America. Now, according to various experts, America is the well-balanced, well-adjusted, very healthy, very strong economy. The question is, is it right or not?

20:19Well, first of all, let's ask ourselves, what do the economies mean by economic strengths? For them, economic strength is GDP. And I already told you that GDP is basically printing money. The more you print, the greater the GDP is going to be. Is the American economy well balanced? I'll show within a second that it's not the case. If you look in terms of a bubble, and I have constructed the monetary bubble in the United States of America, that's as bad as in Japan, and I think it's even worse. And what's even more, since 1992, this bubble was accelerating. At least in Japan this is not the case, in America that's the case exactly. In terms of interest rate policy, the federal funds rate, which were close to 18.5% in 1980, in 1992 they fell to around 3% and currently they're around 5.5%.

21:16Now again, a similar pattern that you have seen as far as the Japanese discount rate is concerned. In other words, what the American central bank was doing is not different from what the Japanese and Asian economies' central banks were doing. Americans were creating a massive bubble on a large scale. However, economists are saying, well, don't worry about it, because this is all beside the point. The most important thing is that our prices are stable. And I have got the news for you what stability of prices means. For economists, if prices are stable, then everything is hunky-dory, then everything will be fine. But we heard this story also in the 1920s. A famous gentleman, a famous professor of economics, Irving Fischer, at the time said that price stability is a guarantee that things will be good forever, ever, forever, ever, and America has reached an important plateau.

22:09Now, Murray Rothbard, in his famous book, The Great Depression, has shown that most economies fell victim to this view and because of wrong definition of what inflation is. Now, if they would be focusing on the correct definition of inflation, which is rising money supply, they wouldn't have reached this conclusion that the American economy was stable in the 1920s. And why is that so? Because prices are not indicative, as such, of what inflation is all about. It might be the case, but not necessary. Prices are influenced by two major factors. Monetary factor, monetary inflation, the balloon, which pushes the prices up. And then you have some other offsetting factor. It could be productivity, there is real factors, whatever, right?

22:54And you can have a situation where large monetary balloon is offset by real factors. And therefore the price rises appear to be very moderate. However, what matters here is this part. This part which causes all the damage, this part which diverts the food from the food plate, that's really what matters, that's really what creates depression or recessions, not such a process, just a manifestation of things. And looking at this this way, andividing this balloon, you can reach a very fallacious conclusion, as Mr. Fischer reached in the 1920s. And that's why most economists, with the exception of Ludwig von Mises, have overlooked the fact that America was heading towards a depression.

23:40I'm suggesting, again, I don't want to sound too pessimistic, there are a lot of signs that this could be the possibility also this time around. What America is doing at present is playing with fire. What the propaganda of most of the Keynesian economies are suggesting is basically to shut our eyes and to believe that things are very good. And why is that so? Because the suggestion here, the stock market is so strong and so-called wealth effect, wealth effect will continue to keep the economy going. Again, I have news for you here, stock market does not create any real stuff. Stock market is the place where people value the fact of reality. Facts of reality are the food, food as such, or the food plate, the wealth.

24:26and that and if people misleadingly misleadingly call wealth GDP call is wealth and therefore the value at hell of a lot then of course it creates a problem for all of us and all of a sudden we observe the stock market is on the moon also if you print so much money in terms of money in terms of money in terms of money the stock market is very high that's not what's what we see today in America is a hyperinflation in terms of financial assets because so much and how much money was created. In fact, I would suggest that we don't really need today missiles, rockets to the moon. We can use the stock market at Dow Jones Industrial Average to climb the stars and everything is fantastic, right? However, even in terms of conventional indicators, which most economies are accepting, like price-earning ratios, which is on the moon, like dividend yield is completely in the ground, there is no justification to be in the stock market present.

25:22Looking at the so-called valuations. Well, some people say, well, what about all the Microsoft, all the technology? After all, they are very good companies. My answer to it is very simple. Now, would you pay, how much would you pay for a Volkswagen car? And everybody knows Volkswagen is a very good car, very robust car. Well, if you will tell me $20,000, $30,000, I'll say, OK. But if somebody tells you $2 million, would you pay for it? Obviously not. And that's the situation we have got today in the American stock market and various other stock markets in the world. As a result of massive monetary printing, the valuations have gone completely crazy. Hey, why? And in fact, it's created a deception as if things are right. However, things are far from being right.

26:09Now, when this balloon might burst, is it on its way to burst? I'm suggesting yes. There are already indicators that things might start falling. Now, the most important indicator is the momentum of money. Now, in order to keep the stock market going, we need ever-growing momentum of money. Ever-growing momentum means the yearly rate of increases in the money supply. And as long as money supply is pumped, you can create higher and higher stock market. However, once the momentum begins to soften, obviously this is not the case any longer.

27:13still very high. However, it's not sufficient to keep these drug addicts according to his old conditions and therefore strangulation beginning to emerge. An important factor which drives this strangulation is the fact that commercial banks' lending begins to slow down. They feel uneasy about certain things. They feel uncomfortable and starting to slow down. And that's where the momentum of possible bursting of the bubble is on its way. So, I cannot give you timing whether it will happen tomorrow after tomorrow, but there are a lot of signs that it might be happening. And finally, if one looks at the data of the government itself, and nobody says we have to trust this data, but it's very interesting the fact that for the first time since the Great Depression, government-owned statistics suggest that personal savings rate is negative.

28:03It's negative for the first time since the Great Depression, the negative. In other words, even government says, well, Americans don't save any longer, they're just eating their own capital on a large scale. Now this cannot proceed, because in order to build up the food plate, you need to save. You need to maintain conservatism, you have to fund things properly, you cannot fund it by means of illusion. And that's the situation today in America, even in terms of government data. Finally, what one does, from my point of view, as an investor. Do we stay away from the stock market? Do we put all our money in bonds? And obviously, the answer to this question could be as following, from my point of view. I don't suggest you should be completely out of the stock market, but if you can identify wealth-creating activities, that's where you should be.

28:56We don't have answers what are the wealth-creating activities. that can be only discovered after the event, after the Great Depression or Recession will emerge, only then we could see which activities are false and which are right. But that's where the entrepreneurship skills are coming. Austrian economists cannot teach you. Mises said in his Human Action book, you have to acquire it yourself somehow without telling us how to do it, right? And I definitely cannot give you the answer, but if you could identify whilst creating activities, that's where you should be staying, regardless of the situation as far as the recession, depression is concerned. Are we heading for a depression? It all hinges on whether the food plate is shrinking or stagnating or growing.

29:41It's quite possible that the food plate is still growing. Now, if it's still growing and the Fed will stop the supply of fraudulent money towards building of pyramids, then we'll have a recession, not depression. There's still an increase in the food plate. If however, if however, the food plate is shrinking or stagnating, doesn't matter what the Fed is doing, what is it going to do, regardless, then the American economy might march into a depression. I do not exclude the possibility that the American pool of funding or food plate might be already stagnating. It's quite likely. I don't really have time now to discuss why, but it's quite possible. And finally, bonds. If we're heading for just so-called normal recession or cyclical recession, as the mainstream economists are using the word, then bonds could be a good proposition. In a depression, bonds could be bad news because their liquidity will evaporate and both stocks and bonds will suffer.

30:41So on this note, I will stop and thank you very much for listening.

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