Stoneleigh of The Automatic Earth has a delightfully clear comparison of his deflationary (for a while longer now) depression view versus John Williams' (of Shadowstats.com fame) Fed money printing and commodity price inflation sooner view. The article can be found at Stoneleigh takes on John Williams: Deflation it is.

Stoneleigh presents both his and Williams' positions with sympathetic clarity, and illuminates what he (Stoneleigh) considers to be the fundamental reasons the two of them come to different conclusions.

Stoneleigh concludes this article with:
Williams does not appear to accord sufficient significance to the role of credit and the effect of its evaporation during a Ponzi implosion. He also, in our view, chronically over-estimates the power of governments to control the way that events unfold. Outcomes are possible, indeed probable, that no one would choose. We simply do not have that choice to make. We will be at the mercy of the underlying logic of the system we have built during the expansion years, and that logic leads directly to a deflationary depression.
When I combine Stoneleigh's comments with the "Modern Money Theory" (MMT) (discussed last week in several posts on the CBO: Federal Debt and the Risk of a Fiscal Crisis thread), it seems to me that we do not have a crisis of default risk in all debt, rather just in debt that is not issued by sovereign governments in their own floating exchange rate currencies. Let me use the terms "Sovereign Debt" and "Other Debt" to distinguish these here (leaving out for the sake of brevity the essential conditions on currency.)

Then in those terms, Other Debt risks default, and until a substantial portion of it has defaulted, we are still in the debt collapse portion of this major cycle. The collapse of Other Debt actually strengthens Sovereign Debt and strengthens the dominant currency, the Dollar. Individuals, corporations and lessor governments (anyone issuing debt in or convertible to someone else's currency) become desperate for cash, whether
  • to pay some debt off and maintain title to the corresponding collateral or
  • on the other side to fund some gapping hole in their balance sheet devastated by debt default or collapsing asset prices or
  • to fund another sort of gapping hole in their cash flow caused by declining wages (for the laid off worker), rents, or taxes.


This last year we've been taking a breather from this debt collapse, but we're no where near done.

Stoneleigh quotes and agrees with Williams' metaphor for this:
"I expect an accelerating pace of downturn in the next couple of months. The numbers will turn sharply worse....

....By then we'll find the consensus pretty much in the camp that we're in a double-dip recession. The popular press will describe it as a double dip, but we never had a recovery. Actually, this is just a very protracted, very deep downturn that has had a pattern of falling off a cliff, bottoming out, having a little bit of bump due to stimulus and then turning down again. Sort of shaped like the path of a novice skier going down a jump for the first time. Speeding sharply down the hill, he goes up in the air and starts spinning wildly as he tries to figure out which end is up with his skis. Then he takes a pretty bad tumble. We're beginning to spin in the air.
"
As Stoneleigh points out, he and Williams are using different definitions of inflation and deflation. Williams definition seems to me to be rather like the official iTulip definition: price increases and decreases. Stoneleigh's definition is an increase or decrease of the money supply.

I agree with Stoneleigh's critique of the "price increases and decreases" definitions of inflation and deflation:
We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept.
We may continue to see mixed price increases, mostly in imported goods. This will not be just because of the price of oil (which price might actually decline due to less demand, as Stoneleigh predicts,) but also because:
  1. long supply chains depend on a healthy global debit and credit system, which system is now failing us, and
  2. businesses tuned for higher sales volumes have to raise prices to remain solvent at lower volumes.


The Fed and Treasury can increase their balance sheets pretty much as they will without fear of forced default, but (to quote Stoneleigh quoting Williams) it's "pushing on a string" to get individuals, corporations and lessor governments to continue to increase their debt load. In a debt-based monetary system, you can't increase the money supply in circulation if you can't get the participants in the economy to borrow more.