There is a moment in every horror movie between the first appearance of a ghost and the pretty lady’s scream. It begins with an unrecognizable shape, a strange color, or the glimpse of a sudden unexpected movement on the periphery of vision. The heart leaps, the adrenaline flows, and the brain begins a wild search for pattern recognition. Our nation’s economy has been stuck in this moment for the better part of two years. (Think Vincent Price on valium). Hollywood will never produce an economic horror movie.
The general public is skittish, as are the markets, and understandably so. The emerging shapes and colors of our present difficulties are vague and mysterious. Like synapses firing, the deflation/inflation debate in the financial opinion pages offer patterns at random, that never quite explain what we are facing. Paul La Monica, of CNN Money, has coined a name for this apparition, “Somethingflation.”
The barrage of conflicting patterns we’ve been subject to, can be lessened by a few rational observations. The increasing or decreasing prices on common items, such as a gallon of gas, a loaf of bread, or a pair of basic shoes can be used to determine inflation or deflation. Note: Any American female, from pre-teen to grandma, is a good source of information on these things.
In his book, The Return of the Great Depression, author Vox Day identifies a more nuanced way to determine what Somethingflation might be:
Econometric Uncertainty Principle… the inevitable pressure on the measuring agency and subsequent bureaucratic manipulation of any statistic identified as a politically significant macroeconomic measure.
Priceless. But, separating politics from political economy is more an art than a science. Of the six possible scenario’s in Day’s book, two of which are relevant here, inflation can be determined by the spot prices of commodities. Gold provides a good benchmark of inflation.
The deflation scenario states that the rising supply of debt will be met with a dwindling demand from buyers. The Greek near-default earlier this year is an example, only in our case, there’s no group large enough to save the U.S. The yield on Treasury Bills is a good indication of demand. With the Fed Funds rate already at zero, the 10 Year T-Bill is our next best option.
Source: Dept of the Treasury
So there is our outline of Somethingflation; a slightly rising gold price indicating inflation, and a slightly falling Treasury yield indicating deflation. These two trends cannot continue together. One must inevitably give way to the other. Whatever this ghost turns out to be, friendly or otherwise, screaming is optional.