Recently by Gary North: Questions for Bernanke

Every once in a while, some famous defender of a position switches without warning to the rival position. A famous atheist becomes a believer in God (Antony Flew). A famous Protestant becomes a Catholic (Richard John Neuhaus). A famous Chicago School economist becomes a Keynesian (Richard Posner). These events are unexpected, especially by the people who make the switch. When it happens, the former disciples are left high and dry.

I am not talking about people who go to work for the enemy. Adam Smith, the most famous opponent of tariffs, became the commissioner of customs for Scotland within two years of the publication of The Wealth of Nations. Alan Greenspan, a defender of the gold standard in 1966, became Chairman of the Federal Reserve in 1987. I am talking rather about an unpredictable reversal of an opinion which had defined the person. Such a reversal usually costs the person. He is seen as having betrayed his followers, whose own opinions had been shaped by his. He may lose income if he had been selling his self-defining idea.

The amazing thing is when the followers accept the switch and instantly adopt their guru’s opinion without question. Populist FED-hater Ellen Brown’s switch to full support of Bernanke’s QE2 policies within three weeks of the FED’s announcement in November 2010 is a recent example. She insisted that this was not a switch at all. Her devoted followers went along with her.

Sometimes the person says that he was persuaded by new facts. Yet these supposedly new facts in almost all instances had been around for years. Why had the person not accepted these facts before? He does not offer persuasive reasons.

RICK ACKERMAN’S FLIP-FLOP

Rick Ackerman publicly predicted price deflation – serious, world-shattering price deflation – for 20 years. He believed it for 30 years. Overnight, he has switched.

For two decades, he has been saying I was wrong to predict price inflation. Typical was this: Killer Deflation Eludes Monetarist North. (I am not a monetarist, which was Milton Friedman’s position, which I have always opposed.) For two decades, he was wrong. Yet he did not switch. The relentlessly upward move in consumer prices did not persuade him, decade after decade.

On April 5, he once again threw down a challenge: Big Gap in Logic Weakens Hyperinflation Argument He has been doing this for 20 years. Nothing new here. So, I ignored it. I have responded in the past. Here is an example. It was a waste of my time. In any case, I do not predict hyperinflation, unless Congress intervenes and nationalizes the Federal Reserve System, which I do not think it will do. I do predict rising price inflation, but not the complete destruction of the dollar.

I agree with Charles Hugh Smith. Ackerman began with him.

Basically, he argues that it would not suit the interests of the rich and powerful, who after all are heavily invested in financial assets that would plummet in value. I have argued the same point, albeit from a different angle, by asking the inflationists to explain why the supposed Masters of the Universe would permit hyperinflation when it would effectively allow Joe Sixpack to pay off his mortgage and all other debts held by the rich and powerful with confetti. Smith’s paper is entitled The Mechanics of Hyperinflation: Bankers vs. Politicos, and it can be accessed by clicking here. He provides a further link to an Austrian analysis that explains why Weimar’s money blowout was quite different from anything that might occur in the U.S. The crux of it is that Germany’s money supply was controlled by the political class rather than by such rich and powerful behind-the-scenes players as created and still control the Federal Reserve. I would ask that anyone who joins in the discussion from this point forward be familiar with Smith’s argument, if not necessarily with the Austrian treatise.

Then he went on with an argument about real estate prices.

I predicted here years ago that home prices would eventually fall by at least 70 percent before deflation ran its course, and I am sticking with that forecast. It implies that even after the wholesale price destruction that has occurred over the last three years, the worst is yet to come.

And yet, for the moment, it is understandable that the hyperinflation argument has been enjoying (if you’ll pardon that word) a bold resurgence – one that has caused even me, a hard-core deflationist who has been writing on the topic since the mid-1990s, to second-guess myself. After all, fuel and grocery prices are rising steeply, and Federal debt – $14.270 trillion and counting – has entered a vertical parabola.

He then presented a completely convoluted argument.

To repeat: Hyperinflation would require the shifting of cash money into physical goods and assets. But other than mattress money and the relatively paltry sums of cash on hand at branch banks, there would be precious little cash to shift. And if the panicked money is assumed to come out of Treasurys and other paper assets, it begs the question of how much the paper assets will fetch on the day when there are no buyers other than the Federal Reserve. . . .

I invite readers to attempt to rebut my argument in the Rick’s Picks forum – – to tell me exactly where the cash will come from that would allow Americans to bid the price of hard assets into the ionosphere. In the meantime, I plan to run a guest commentary later this week concerning one asset class that seems likely to outperform all others. Hint: it is not bullion. And, this investment category could conceivably increase in absolute value for the same reason that the pine forests of the Southwest are dying. Under the circumstances, the asset appears to be very undervalued at the moment. It will be out of reach once the system crashes.

I had never seen him more incoherent. As it has turned out, he was at the end of the road. It was a 30-year road. On April 25, he announced:

Hyperinflation vs. Deflation: I Concede

FOFOA blogspot has taken pains to lay out the most cogent, exquisitely nuanced and, ultimately, persuasive argument for hyperinflation that I have read to date. You can access it by clicking here. I’ve responded as follows but plan to write later, in agreement, at greater length.

Sheesh! Where to begin? It’s difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible. I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it I found myself overwhelmed by the clarity of your thoughts. The real power of this essay is that each step of the hyperinflationary endgame you foresee is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out.

Incredible! Three decades of bad assumptions, yet all that it took to persuade his self-defining outlook him was an article on anonymous blog. All of a sudden, hyperinflation is “entirely consistent with human nature.”

Out of the deep freeze and into the fire.

But what of non-hyperinflationary Charles Hugh Smith, who three weeks earlier had been a model for him? Gone!

So, as always, I find that I do not agree with Ackerman. I agree with Smith. Smith wrote this in the article Ackerman recommended on April 5:

My problem with the “hyper-inflation is inevitable” school of thought is that I cannot identify what powerful interests would gain from the destruction of the currency and all financial wealth. A hyper-inflationary wipeout certainly wouldn’t benefit the Financial Power Elites who hold the vast majority of the financial wealth. Yet it is this very Elite which wields the preponderance of political power.

Thus you end up with this untenable conclusion: the politically powerful Financial Elite will consciously choose to self-destruct. I don’t buy that as a likely scenario. If inflation started destroying their wealth, then they would instantly influence political policy to reverse course to preserve their wealth.

I will not be spending time refuting Ackerman. That did me no good over the last 20 years. It will do me no good now.

I am the equivalent of a meat-lover. Ackerman was the equivalent of a vegetarian. He would not hear of meat-eating. Meat-eating made no sense. All of a sudden, he recommends cannibalism. I prefer steaks. I always did.

Here is the April 4 essay that prompted him to write his convoluted article on April 5.

Here is the article that converted him.

It argues that politics will overcome central banking. Hyperinflation will then hit in full force. I believe that such an outcome is possible politically. I think it will not happen. What I have always said is this: there is no deflationary factor in the structure of the capital markets to keep a central bank from destroying the currency unit. There are no deflationary forces that central banking cannot overcome if it chooses to destroy the currency unit.

EVER SINCE 1967

I argued with deflationist Martin Weiss back in a recorded debate in 1982 that price deflation would not come anytime soon. I had been arguing ever since 1967 that his father, J. Irving Weiss, had been wrong in predicting deflation in 1967. Finally in 2009, the son switched. He now predicts price inflation.

Will price deflation ever come? Every inflationist says it will. The question is timing: either before hyperinflation or after, when the economy adopts a replacement currency. What Ludwig von Mises called the crack-up boom (hyperinflation) inevitably cracks up. A new currency replaces the now-extinct one.

I don’t think we are near an era of central bank monetary stability, recession, and depression. Central bankers can still safely inflate, and they will.

With Ackerman gone, this leaves Mish and Robert Prechter as the last famous deflationists still standing. But there were never many of them. They were always vastly outnumbered by hard-money analysts who predicted price inflation. From John Exter and C. V. Myers in the mid-1970s until today, the leaders of the deflationist camp have been few and far between. Today, they are fewer and even farther between.

April 28, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North