Deflation semantics are useless - purchasing power pays the bills

I see a lot of people talking about inflation and deflation being "exclusively a monetary phenomenon" The old Milton Friedman line of reasoning has become an extreme exercise in semantics. These dogmatic economic philosophers preach that persistent general price level increases are not inflation unless accompanied by a substantial increase in money supply. This lacks grounding in truth and reality and is a disservice to converts who don't know any better.

I'll say upfront that I actually agree with their conclusion that inflation ( the kind we all know but don't love is apt to surge in a way that can put us in a banana republic sort of conundrum; I just am not convinced the bogeyman is around the corner, because I think the current economic circumstances are likely to suppress demand more and longer than most think, credit has changed dramatically, and there is likely to be a transmission problem with regard to getting that credit into enough hands that can overwhelm the enormous amount of excess capacity in product, service and labor markets that have been created almost overnight.

So there's no telling how long deflation (not the asset kind, but the kind that increases purchasing power meaningfully) is apt to persist because this is anything but a free market economy anymore - ie. the Fed is likely (IMO) to be successful in keeping rates low and the dollar from collapsing in the near term. But some day in the not too distant future inflation will get going and it will inflict pain of the non-theoretical kind - on your and my pocketbook and bank accounts and by extension our quality of life. Its just near impossible to predict when and to what extent but also how far and long deflation goes before it turns.

My guess is that wont happen until the economy here and globally improves - which I doubt happen anytime soon. People looking for a 2nd half recovery are way off; we'll be lucky if happens by year end 2010 IMO. Although I also expect the USD to be under longer term pressure, I'm not sure that triggers immediate rampant inflation because I think it also is likely to hurt global purchasing power. I think we clearly need a lower dollar and reflation if we are to have any hope of avoiding a lost decade economically, I'm not sure that its going to mean oil or gold must go up because gold and oil typically go down in protracted recessions regardless of what M-whatever is doing. People, the IMF, all central banks, the GLD and any other big holder will hope to hit any bid that comes and most will simply not have enough cash (on lower cash flow from un&underemployment, broken balance sheets and reduced purchasing power) to buy much gold. Sorry, but I really doubt that the gold that the guy "is holding in his hands and touching on the table" is likely to go to $166,000.

Folks that reiterate the line about inflation is always and everywhere a monetary phenomenon and then declare that a general, persistent rise in price levels do not constitute inflation if not accompanied by a simultaneous increase in M2, M3 or modified M whatever miss the point that the real world does not care about that type of deflation is their purchasing power (ability to buy food, shelter, fuel, healthcare and other service is not compromised. These "what is is" deflation rants are cute but not very useful.

I have actually been looking at buying a little Gold Corp again on the next pullback because I want to have a little skin in the game when gold surges. Problem is I'm very reluctant to go all in yet because I honestly have little conviction regarding the timing of a move. I've been an on and off mini gold bug (trading the long side since 2002 in and out of Barrick, Gold Corp, Desert Sun, Yamana, NEM and the GLD) and also dabbled in a few silver names. I might even pair a Barrick or Mewmont short against GG long. I'll follow up when the whole situation is a little clearer to me.