We can point at other episodes of history where desperate governments did use inflation to get out of a crisis (admittedly creating another).

America has generally been the most debtor-friendly nation on earth, which is one of the reasons we have had high rates of inflation during some wars (Revolutionary, Civil, others?), and occasionally during peacetime (bimetallism, the 1960s-80s).

The biggest down cards in this game are: what will the government/Fed do when it runs out of options? What if we get a real war, with real calls on resources?

Our government is trying to do too much with too little, and we have not faced down the entitlements crisis yet.

I think for Hoisington to be right, and they very well might be, we would have to enter an era of much higher taxes with shared sacrifices on the part of Americans, and somehow in the midst of it, there is still enough demand to drive industry.

We can have deflation in real terms, while facing increased inflation. That’s what I think we are going to get, simply because our Government/Fed will run out of options.

And no, that’s not proof. I’m just one guy. I have long appreciated Hoisington, their view challenges me. As it is, I am talking with some of their staff regarding ideas in the equity premium, where we are in agreement, but for different reasons.

Does that help?

To disprove Hoisington, I think you must explain:

1. Velocity of money is way down. A key driver of velocity, financial innovation, has been revealed as risky or a sham for more than half the instruments created in the past 20 years.

2. Debt bubbles take a long time to correct. They cite 1872-1892, 1928-1948, and Japan 1990-present. Why will this current one be different? Why buy short corporates and TIPS if deflation will be a multi-year phenomenon?

Bernanke and Summers must know this, so the question is, how much inflation? And are they thinking that they can micromanage the level, then stop it?

From an investment standpoint, it looks binary. Either the problems are not as bad as I fear, and the steps taken can right the boat, or we will get serious inflation. But I am skeptical of TIPs — if inflation gets serious, the government will find a way to weasel out, as it did with the gold clauses in the 1930s.

Inflation is a far worse choice for the lower half of the income hierarchy and deflation is a worse choice for the higher half.

In either case, giving money to the banks is worse than both as it just selects directly who gets the benefit (all from the higher half).