first majestic silver

Export Inflation, Import Deflation

March 15, 2005


Inflation remains the principal object of misunderstanding in the investment world. The criticism extends to the gold community. Massive US money supply growth in no way ensures a rampup in the gold price. We certainly do not measure inflation properly, as most give little credence to the joke CPI statistic. The banking system leaders have intentionally caused confusion on the inflation subject. We see a price rise in sectors where money flow travels or is directed, since bubbles come from applied monetary force in a bounded arena. THE USA IS LUCKY THAT CHINA CANNOT SHIP HOUSES TO OUR ECONOMY. On the other hand, we see a price decline in sectors where money flow is denied or neglected, since Asia floods our markets after exploiting its unlimited labor surplus. Federal Reserve spokesmen continue to spew nonsense about how "inflation is gaining" or "threat of deflation must be contained," as though they are mutually exclusive, one occurring but not both. The Fed's method of dysfunction, corrupted by Fed loyalty and collusion with the USGovt, is to take indicator cues from the real economy (battling with severe recession) and use distress signals as justification for evermore free-flowing liquidity and easy money stimulative policy for the financial sector (in near constant steroid supply).

My pen enjoys metaphors and imagery. They are effective to drive home a difficult point. Greenspan has a pack of relentless pit bull dogs biting his arse with secular deflation, seen with busted bubbles in the past, lost jobs to Asia, and steroid-driven bond speculation. He responds to soft prices in certain arenas and the onset of slower money flow (liquidity). Greenspan at the same time has a pack of vicious doberman dogs biting his genitalia with a systemic rising cost structure in concert with asset inflation. Action taken to protect his hind end jeopardizes his frontal jewel box. Actions taken to protect his exposed cod piece jeopardize his rear flank. The US Economy is victimized by the two packs of vicious dogs. In time, my expectation is that our corrupted, myopic, bewildered Fed Chairman will lose both his seat and his seed, rendered a pathetic shell of a man with only legs and a head. He will run away from his past, and speak more in rationalization and alibis, blaming others. In the end, like the middle class, his entire midsection will be ravaged front and back by both dogpacks. A grand middle class squeeze has accelerated, which has become asset rich with their homes but cash poor with income and cash flow.

This article will not address whether secular deflation has the upper hand, confirmed by the continuing 25-year bond bull market. Reporting on that titanic struggle is for another day, a frequent topic in my Hat Trick Letter. My view is a bond top, marked by bottoming yields, has surely begun to be evident. However, the jury is still out on whether the US long-term decline in interest rates (10-yr TNote) will resume, and will work to converge with Japanese long-term rates. Hedge funds seem to apply leverage in that direction. See how the recent rise in our TENS yield is still beneath the downtrend.


The US Economy is NOT a closed system, surely not since globalization. As a nation, we choose to contain our inflation for the benefit of assets, since we cave in to human laziness, drawn arrogantly to intellectual pursuits and toward a cleaner environment in the process. The mushroom price effect in stocks, bonds, housing all fits like a glove with the "American Dream." We choose to permit foreigners to perform our spadework, but the rub is that such a choice (passive or active) kills our economy. Destructive, incompetent, heretical economic policy and leadership has backfired to squeeze the US middle class beyond the field of vision from our financial press. We actually believe we can run monetary presses (counterfeit money printing operation) with impunity as we export our debts abroad. With "flexibility" comes a heavy cost of erosion in job quality and quantity.

The US Economy endures a roundtrip for inflation, and must overcome the deception that we avoid effects of rampaging hyper-inflation. By that is meant an explosion of money supply (inflation in pure form). Monetary expansion typically goes to asset groups, to industrial buildup, or to consumption. In the USA it tends to go domestically into assets (stocks, bonds, housing) and into wasteful spending. We export much debt to Asia, where they build factories and ship their output to our shores. See our big-box superstores, an endless chain of retail chains which sells Asian finished products. Try running a small business with any of these guys within your 5-mile trade zone. That is bigtime pricing power stress and a crimp on either hiring or expansion. The ugly hidden cost of exporting inflation and importing Asian output is that we in the USA lose wages and replace them with debt. We miss out on the entire trickle down multiplier effect, from all the supply industries. Those benefits reside in Asia. The "Orwellian spin" by the USGovt is that we retain higher grade jobs, when the truth is that we arrange lower grade jobs in their replacement.

A constant complaint and criticism from me in public and newsletter writing is the abysmal comprehension and total lack of proper teaching on the subject of "inflation." We tend to incorrectly regard any price rise as inflation. If the item being priced suffers a sudden jump, like say with orange juice after the shock of a damaging crop freeze to the groves, that is not price inflation. Rather, it is a price adjustment to address a shortage of products in inventory. If a flood of automobiles rolls to dealer lots as a result of forced job continuation and labor contracts to block worker layoffs, the lower car prices from incentive sales programs is not price deflation. Rather, it is price adjustment to address a surplus of products in inventory. On the other hand, if lower interest rates spawn an enormous speculative frenzy to invest in residential property, even second homes (as occurs now), and housing prices rise, yes, that is indeed evidence of inflation. Too much newly printed money has chased housing property. If easy money Fed stimulus is enables negative real interest rates, and bonds escalate in principal value, yes, that is indeed evidence of inflation. Too much newly printed money has chased bond securities.

The wise fool who heads our Federal Reserve would have you think falling stock prices were the result of deflation. He would have you think falling car prices are the result of deflation. He would have you think falling consumer prices for electronics, cell phone, and computers are the result of deflation. In 2001, Chairman Greenspan ordered a new round of monetary inflation (increased money supply infusions) to combat debt collapse and speculative reversal, which had their root cause in excessive monetary inflation. So the cure for the harmful effects of monetary inflation was to be more ordered monetary inflation? Therein lies the insanity of policy, which is heartily endorsed. It is accepted partly because of ignorance to inflation, partly because of Wall Street eagerness to benefit from directed new money investment into familiar arenas. Those arenas after 2001 were bonds, mortgages, housing, and with stocks, enough to tread water.

Simply stated, inflation is defined as money supply expansion, rising money supply, manifested often from an increase in debt and a flood of liquidity from Fed bond purchases, a basic growth in the monetary base. Take your definition pick. It is not the blister bubble on the bicycle tire, but rather the increased air supply from operating the pump !!! The money can be from new business expansion, from expenses for equipment & training, from mergers & acquisitions, from added margin debt for stocks, from Fed open market purchases with money out of thin air, from foreign central bank interventions to purchase new US Treasurys, from added hedge fund borrowing for speculation, from new consumer debt for household purposes, from large retail item purchase, from new car purchases, from rabid real estate activity, from home remodeling, from vacations, from dream motor boats. Notice only the first two examples pertain to constructive purposes. The remainder pertain to potentially destructive purposes. Cars and homes are surely necessities. But a second home on a lakefront is not. A new car every two years is not, which has crushed used car prices. A bigger house trade-up is not when children have moved out. The tendency has been to go toward bigger cars, including SUV's, toward bigger houses over 3000 square feet affectionately dubbed "MacMansions." Easy money has encouraged waste and speculation.


Since the mid-1990 decade, a phenomenon has shown itself and taken root. The US trade deficit has grown in size, even as the US monetary base (money supply) has also grown. The constant has been that US debts always grow annually. We are the greatest debt abusers in mankind history. A phrase caught my attention over ten years ago. FOR YEARS THE USA HAS EXPORTED INFLATION. New money can be directed to go toward businesses, toward assets, or toward basic consumption. If into businesses to excess, then you tend to see over-production, over-hiring of workers, excess output, and eventual liquidation marked by lower prices. If directed into assets to excess, then you tend to see price bubbles, a boom frenzy in speculation, a trumpeted bull market, and eventual busts. If directed into consumption to excess, then you tend to see abusive size, inefficiency, suffocation, neglected health, debt overload, delinquency, default, and bankruptcy.

The US Economy last saw over-investment in the telecommunications industry with too many cellular towers, too many cell phone carriers, too many long distance phone carriers. We saw over-investment in personal computer makers, and fiber optic supply firms. All suffered liquidations, consolidations, acquisitions, and revamped businesses. Consumers benefited with lower prices. We call it "creative destruction." We regularly and frequently over-invests in assets. We love our stocks, bonds, and housing. What easier way to make money than to anticipate properly the next "trend" which in actuality, such practice is just to discern and anticipate where the next inflationary destination and routes will be. Well, the creative destruction nowadays has the US Economy suffering the destruction, while Asia enjoys the creation.

Our wastefulness, insane economic policy, and desire to gamble rather than work have led to a mountain of debt which has been financed by foreigners. The veritable hemorrhage of trade surplus has been recycled into US Treasury debt, into US agency mortgage debt, and into vendor financed purchases in consumer debt. The USA has eluded rising prices by selling our debt securities to foreigners, outside our boundaries. We pretend we are selling assets in a fair trade. We are instead permitting foreigners to acquire an additional 1% of the entire US asset base each year in exchange for supplying our economy with cheaper goods produced abroad by foreign workers. We force our debt onto the world, which in a sense feels compelled to purchase it. THE USA EXPORTS INFLATION (in a monetary sense). We export debt.


An overlooked statistic is that US consumer debt has been growing in lockstep with the Chinese trade gap (bilateral to USA). Total consumer debt, from both revolving and installment sources, has risen almost 22% since January 2001, from $1711 billion to $2085 billion through November 2004. During the same stretch of time, the Chinese trade deficit accumulated by a commensurate $440 billion. Hmmm, similar magnitude !!! The result of Fed stimulus has been a massive Asian factory buildup. Their central banks have ensured that currency corrections do not interrupt the "grand giveaway" by mindless US officials, which includes technology given by our corporations. Yes, we donate our main comparative advantage to Asia, principally China. The Asian imported product influx has greatly suppressed product prices in the real economy, where things are made. Imports dominate systemically. Whether it be Wal-Mart, KMart, Circuit City, Best Buy, Staples, Office Depot, Home Depot, or Lowe's, our stores are stocked with products made in Asia.

The supply chain stocking of our retail shelves represents a round trip from the exported inflation. We export inflation in the form of trade deficits and foreign purchases of debt. They invest in new factories across Asia, recently in China. Their output is sent to the US Economy, as we import it. WE IMPORT DEFLATION (in a falling product price sense). When money leaves our nation, passes through Asian factories, then returns, it is transformed from excess demand in the form of money to excess supply in the form of products. Inflation eventually pressures demand or pressures supply. Over-investment such as is in progress in China yields excess output and lower prices. It really is not so simple, since Chinese labor costs are 3% to 5% of the US labor costs. They have over-built factories though, and under-built the necessary roadways, electricity generation capacity, port loading docks, and truck & rail facilities. The last time severe over-investment occurred in Asia was 1995 to 1997. Thailand over-built cities. Korea over-built technology supply. The entire PacRim of Asian Tigers over-built in technology supply also. The Asian Meltdown followed. The key to US observers is to note how prices systemically in the finished product arena are kept low because we import deflation from Asia. Americans complete the process by shopping in the malls and bigbox superstores, which rekindles the cycle once more.

The vast recycle of Asian trade surplus into US Treasurys is well-known. Their purchase support, if not intervention, keeps the long-term interest rates low. That is the financial side of the exported inflation equation. However, a pernicious additional force is at work. We as a nation believe we get off scott-free by shoving our factory load to Asia. The White House Council of Economic Advisors and Fed Chairman Greenspan speak openly about the low-cost advantage taken from Asian output. We believe we can export debt without consequence. The US exports inflation, only to see it return in the form of imported cheap products from Asia. We import deflation on the back end. This effectively kills pricing power and kills jobs. So the US consumer is helping to flatten the yield curve also. This is the commercial side of the exported inflation equation. Identified in this article is but one more symptom of the failed Fed Reflation initiative discussed over many months in the Hat Trick Letter, whose March issue was just posted.


From a Hat Trick Letter subscriber:

"I'm a new subscriber. Your analysis of China resource/ Canadian dollar/ deflation and gold is brilliant! We agree with it entirely and it has served us well in recent years."

(Ralph P of Washington)


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

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