Saturday, February 19, 2011

Stoneleigh v. Gonzalo Lira: No Contest

Here's a link to Stoneleigh's summary of her deflation/hyperinflation debate with Gonzalo Lira, which she titled "Inflation for the Innocent, Hyperinflation for the Clueless."  The post includes a link to purchase rights to listen to the debate at the low low price of $30.  (Too rich for my blood; if it were just Stoneleigh talking, maybe I'd pay the money.)

One of the things she points out in her summary is the fact that it is hard to even have the debate when you don't have a common definition of "inflation":

The major hurdle in the debate hinged on the definition of inflation, as such debates often do. Financial analysts who expect deflation typically do so because they recognize the critical role of credit in the effective money supply and the effects of credit implosion. With a natural focus on the money supply, they typically (but not universally) define inflation and deflation as monetary phenomena - as an increase or decrease in the effective money (and credit) supply relative to available goods and services.

Analysts who anticipate inflation or hyperinflation typically focus on nominal prices, which they expect to increase, likely concurrent with a loss of confidence in the currency. As I am in the deflationist camp and Gonzalo is a hyperinflationist we naturally defined inflation/deflation differently, which lead to some awkwardness at the beginning of the debate.
The funny thing is that what Lira typically describes as hyperinflation (falling real estate prices, rising prices for staple commodities, and very high interest rates) is actually deflation.  First, tight credit is inherently deflationary, something that Lira admits with respect to real estate prices.  Second, tight credit can and will translate directly into higher consumer staple commodity prices IF (1) commercial credit is subject to the same high interest rates and (2) businesses pass the increased cost of doing business on to the consumer by raising prices in order to maintain profit margins.  I think  it is a safe bet that both conditions existed in Chile when it experienced "hyperinflation." 

Bottom line: inflation, as Lira understands the term, is easy for banks to create or disappear at whim solely through the severe tightening of credit and without any "money printing" by a central bank.