The Cornered Rat Defense Of Inflationary Collapse


There is a line of argument which says that because money will be literally disappearing as loans default and new loans are not taken out, inflation in the money supply will fall, which means that prices will fall, and thus this proves that we are going to suffer a deflationary collapse instead of an inflationary collapse, where prices go up and up.

You gotta admit; it seems to be a compelling argument; the money supply will fall as loans go bad, which means consumer prices will fall. And with loans going bad, nobody is going to either make a loan or take one, and so the money supply will not grow.

This presents a real difficulty for me, as it means that when people demand that I defend my thesis that we will, instead, see an inflationary collapse, I can’t. The fall in the money supply seems so compelling!

So I nervously hem and haw, desperately looking for some plausible reason, and I can’t think of one, and pretty soon I am resorting to personal attacks against the person questioning me (“Did your stupid kids dream up that question, or is that your own stupid question?) and all-in-all I get to feeling like a cornered rat, which usually leads to the Attack Without Mercy (AWM), which is, actually a “surprise attack” even if the enemy knows right where you are, is looking at you, and is actually laying in ambush for you! I get this little-known tactical nugget from General Armstrong Custer himself in the movie “Little Big Man”, where he said, in this very “they know we’re here!” circumstance, “Nothing is more surprising than the attack without mercy!”

So imagine my great relief to have an ally in Peter Schiff of Euro Pacific Capital, who writes, “Many mistakenly believe that when the U.S. economy falls into recession, reduced domestic demand will lead to falling consumer prices. However, what is often overlooked is the fact that as the dollar loses value, the rising relative values of foreign currencies will increase consumer demand abroad. As fewer foreign-made products are imported and more domestic-made products are exported, the result will be far fewer products available for Americans to consume. So even if the domestic money supply were to contract, the supply of goods for sale would contract even faster. Shrinking supply will be a major factor in pushing consumer prices higher in America.”

Hey! I love it when math works in my favor for a change, instead of the bank showing me the math of where I had screwed up my checking account, and the math about how I owe them money for overdrafts and bounced checks. Now it would be the other way around, for a welcome and long overdue change! Now I would get right in THEIR stupid little faces and demand that THEY come up with some cash, you deadbeat losers, and right now, or I’m calling the cops! Oooh! I tingle at the anticipation!

I was enjoying this little tingle and almost missed the whole point, which is that, “The big problem politically is that hyper-inflation may superficially appear to be the lesser evil. If asset prices are allowed to collapse, ownership of those assets will pass to our creditors. If instead we repay our debts with debased currency, we retain ownership of our assets and shift the losses to our creditors.”

That’s the way it shapes up, and the deciding factor is, so he says, “Since American debtors can vote in U.S. elections and foreign creditors can not, the choice seems obvious. Of course there are some American creditors as well, but since they comprise such a small percentage of the electorate, my guess is that their losses will be seen as acceptable collateral damage.”

Exactly so! That is the depth to which the American government has sunk; the “good of the majority” is paramount over the desires of the minority, which is proved when something like the bottom half of taxpayers ranked by income pay no income tax at all, while the top 1% pays more than half of all income taxes, and the fact that almost half of the people in the USA receive money directly, or indirectly, from the federal government each and every month! Hahaha! What a system! The “Good of the Majority” run amok! Ugh.

Until next time,

The Mogambo Guru
for The Daily Reckoning

Mogambo Guru
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.


  1. The world economic outcome is now dependent on the extent of upcoming commercial loan defaults.

    Coffee Addict
    January 8, 2008
  2. Guru, stay nervous because Schiff’s argument is not borne out in the real world. You only have to look to the land of the rising sun to see that the government is really quite limited in what it can do to ward off deflation.

  3. Guru Mogambo has got the facts right in this case. {imho}

  4. What we’re going to experience I believe is stagflation. Reduced asset prices (bonds, housing, stocks) coupled with increasing commodities prices.

    The economic contraction will be caused by lower collateral (mostly housing prices) to further borrowing and keep demand going. Higher inflation due to the downstream effects of higher commodities prices and also higher interest rates by central and commercial banks due to inflation. Interest rates will also rise because inflation will bring up treasury yields especially 10 and 30 year which also affect other market rates.

    All the monetising the fed and other cb’s have egaged in should truly unwind over the coming quarters and years I believe. With enormous amounts of capital leaving the stock and bond markets and going to commodities. Further exacerbating the stagflation.

    Credit defaults will drain capital but mostly to the effect of compromising the financial sector and depressing asset prices. This should further scare investors from stocks, housing and draw more capital towards the commodities I believe.

    I think the lowering of the US dollar will not significantly cause inflation. Higher demand for US products due to the weak dollar may be tempered by a slowing world economy and the fact that America dosn’t have a huge industrial base anyway. Also decreased domestic demand will also offset any increases in foreign demand for US goods.

    The main cause of inflation I believe is the commodities, base metals, energies, grains. Alot of these seeing increases of 100, 200 and 300% in recent years.

    Danny in Perth
    January 9, 2008
  5. To Contrarian Investors Journal & Daltica…

    We do not censor comments based on subject matter, but we have made it a practice to edit or remove comments we feel are abusing the nature of the comment platform. All of your comments have included one to two links that are inserted to A) make google look favourably on your site & B) drive traffic.

    We are fine with people writing as much as they want in our comment section, we are fine with the occasional link to a personal or business site, we absolutely encourage multiple links to 3rd party sources. But in your case, one to two comments a day, each including one to two links back to your own site is a bit much.

    You might notice that we have kept your comments that don’t include links and we have even kept quite a few that contain one link. But all of your comments containing two links have been removed.

    All the best

    The DR

  6. Fear not, oh temporarily confused one, for there is the compelling argument made by Dan Amerman in his ongoing series “Why Inflation Will Trump Deflation” that only a “weenie” like the Japanese central bank would stop at simply lowering interest rates and hoping people borrowed:

    “There is an alternative for a government that is sufficiently determined to break incipient deflation (perhaps in the housing sector), and that is to pro-actively apply blunt force and hit the economy with a sledgehammer. Yes, slash interest rates so people have the option of creating new money for themselves, but in tandem with the interest rate cuts, just flat-out make up a huge sum of new money out of thin air and give it away. Remove the decision from the consumer, and just send them the checks.” —

    After all, isn’t that what the US government is now doing under the guise of “tax rebates?” And can it not “rebate” as much “money” as it wants, at least until its debts and future liabilities are inflated away, this being the only way that it can “repay” and “fund” them?

    Or to quote you, “Hahahahaha!”

    David White
    March 6, 2008

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