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Staying Neutral on Inflation vs. Deflaton

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Use the core CPI as your guide.

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There's been a heated debate in the financial press regarding the prospects for hyperinflation or deflation, with most pundits usually siding strongly with one camp or the other. Nowhere has this debate been more intense than within Minyanville.

I want to go on record saying that I definitely side with… neither.

I've been on record several times debunking the notion of hyperinflation or a dollar collapse anytime in the near future. However, I've also been on record many times rejecting the doomsday scenarios of the deflationists.

Framing the Debate

Part of the problem with this debate rests in defining what these various terms mean. For example, I can't recall a single prophet of dollar doom or hyperinflation maven make a specific prediction citing a number or numerical range.

Thus, if the CPI were to rise above 10% per annum, I have little doubt that the mavens of hyperinflation will be declaring victory. And if the US dollar index were to decline another 10% or so, I have little doubt that the prophets of dollar doom with be loudly celebrating.

Similarly, the doomsday deflationists are equally vague in their forecasts. As long as the headline CPI stays below 0%, the doomsday deflationists will likely continue to declare victory.

This will not do. Forecasters need to define what they're forecasting and be specific about their predictions. For example, the term "hyperinflation" doesn't have a specific numeric definition. However, various textbooks and other authoritative sources state that the minimum inflation rate that would qualify as hyperinflation would be over 100% per annum. Indeed, most sources that attempt to define hyperinflation cite monthly rates of 20% at minimum.

Similarly, to speak of a 10% or even 20% decline in the value of the US dollar -- relative to a particular currency or a basket of currencies -- as a "collapse" is nonsense.

Because the vast majority of the US economy is made up services and other non-tradeables, such a decline in the value of the US dollar would hardly be felt at all at the consumer price level.

Furthermore, such a decline would actually be quite positive for the US economy, as it would contribute to the lowering of the current account deficit -- a problem that is at the heart of many important economic problems that the US faces, including excess indebtedness, sluggish job growth, and income inequality.

So a 10% to 20% decline in the foreign exchange value of the US dollar is hardly something that should generate the sort of panic that prophets of dollar doom have been attempting to incite -- rather it would be something to be welcomed.

What about the doomsday deflationists? They're similarly vague in their predictions.

Admittedly, I've heard few speak of "hyper-deflation." So presumably, any inflation rate below 0% would satisfy their criteria.
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