Preface from dshort: Yesterday's article Inflation, Deflation or Both? prompted an email from Edward Jaffe, President of ENTROPY Investment Advisors, Inc. in Bennington, VT. Regular visitors may recall his previous guest contribution Bubble Dynamics and Dividends. Here is Edward's email from last night.

Second, the cycle of commodity inflation and some other visible cycles, including equities and inflation itself, are highly levered to monetary causes. This is pretty much my point in my previous contribution.

Look at M3 [click here for a quick overview of money supply]:

Now look at the CRB chart — at least for the period of time covered.

Click for a larger image

Back to the 'FLATION debate — inflationary or deflationary — I think the answer is: Distortionary. Creating new symbolic "money" and credit causes ebbs and flows to different sectors through different channels. Right now the channel is:

In the 1970s the flow was out of equities and into commodities. What makes some of these flows function the way they do could no doubt be the subject of 20 lifetimes of discussion.

I think everyone in the 'flation debate is a little bit right and a little bit wrong. We DO have debt deflation, which is strangling the real economy and should pull down equity prices. But too many market participants can borrow for free and speculate.

In Japan, I think the Japan Central Bank *COULD* create inflation if they wanted to destroy the savings of their citizens. But they stop short (maybe), assuming they have a clue. (Problem: their economists were educated at US Ivy League schools). At some point they will stop being able to fund government debt with on-island savings, and then it is game over. One thing the Nikkei bubble tells us is that post-bubble problems border on hopeless.

You cannot put Humpty-Dumpty back together again. Bring back Andrew Mellon!