“As far as the Fed is concerned, we will not monetize the debt. We will maintain price stability.”

Now, this is generally the point in the conversation where the inflationistas begin talking about the “effective default” of the USA via dollar devaluation.

The problem is, each time the crisis flares up the price action in markets makes it abundantly clear that there is no inflation, but rather continuing deflationary fears.

Einhorn’s comments regarding inflation are no different than the other inflationistas who continue to scream “fire” in a crowded theater despite no signs of fire. Of course, there has been no inflation because there is none. The inflationistas have made the same error that Mr. Bernanke made when he supposedly “saved the world” in 2008. Mr. Bernanke assumed that banks were reserve constrained while Mr. Einhorn assumes that adding to reserves is inherently inflationary.

But as we see very low levels of borrowing (due to the private sector’s lack of debt demand – caused by the continuing balance sheet recession and de-leveraging) we see zero signs of inflation.

In a world recession, where all banking systems are inherently at risk of bankruptcy and collapse, there has been a run to the US dollar, this is true. That a run to the dollar improves the dollar’s purchasing power of the US dollar relative to other currencies is also true. However when you compare purchasing power of the US dollar against commodities, a different picture emerges.

The CPI:

M2 Money:

So we can so a consistent and determined inflation from the governments own statistics. We can also see that Bernanke has created an inflation within the monetary supply via reserves, to save the banks that had severely overleveraged their Balance Sheets and were all insolvent.

Let’s take a quick look at government expenditures and revenues to see how the deficit is being created.

Expenditures:

Receipts:

This deficit needs to be funded either through debt, in which case the purchaser of the US Treasury debt becomes a creditor of the US and requires interest payments, which incidentally are consuming an increasing share of government tax receipts, or, print more money.

So unfortunately, The Pragmatic Capitalist’s criticisms of Mr Einhorn do not stand up to the data provided by the governments own statisticians.

Advertisements