The whole inflation-deflation debate has always struck me as misbegotten.  People use the terms to mean things so varied that it’s pointless to argue. But such as it is, I’m  a firm believer in the deflationary thesis on the macro level… influenced in this by the economist Antal Fekete , and his theory of how capital is destroyed in a fiat money regime.

Nonetheless, I do see consumer prices rising.

In other words, asset prices fall, industry contracts, and unemployment levels stay high, while the stuff on the shelves costs more, insurance and tuition  rates climb, and living in general becomes more expensive.

When you realize that the economy is dominated by cartels and speculation, then you  see how that’s possible – the market suffers from severe discontinuities.

Here is Adrian Ash predicting exactly this combination of deflation and inflation in the UK – stagnant house prices, cheap money and credit (that wipes out savings), and climbing living costs.

“Monetary policy did nothing for Britain’s housing-market turnover in 2009. The number of new house-buyer loans was unchanged from 2008, holding 60% below the approvals peak of 2006.

But with the rate of inflation jumping last month – and set to jump again after VAT returned to 17.5% on New Year’s Day – the average discount mortgage (if you can get one…which you can’t) is now, at last, cost-free when you account for the cost of living. Tax-free cash ISA accounts, in contrast, have been paying less than zero after inflation since June 2008.

Expect policy to continue favoring home-buyers and spending over retirees and savers…even as home-buyers and spenders suffer net deflation in their incomes. Everyone loses as we revert to all bust and no boom, baked into the crust by parliament’s Keynesian consensus and the Bank of England’s executive faith in the power of money-supply inflation to redeem the economy.

The Old Lady created twice as many Pounds in the last 10 months as the entire UK money-supply grew by in the first 11 months of 2009, the excess going to overseas bond-holders to finance the government’s record peace-time deficit. Naturally, the value of Sterling has dropped as its supply has swollen, both against other currencies and gold bullion. But any hope that the new inflation data might see cash savers benefit from rising interest rates – let alone the end to quantitative easing scheduled for next month – looks premature.

Swap Sterling for gold…? It worked for nine years last decade, and that was before stagflation struck…back before the Bank of England began printing money to finance the state, and looking for all the world like it’s actively bidding to destroy the Pound.”

As if to confirm, from the US comes news of the worst decline on record in airline revenues, 18% in 2009 (versus 14% in 2001), with a 6% drop in passenger volume and a 13% drop in price per mile, according to the Air Transport Association of America.

Meanwhile, on the Japanese front, more evidence of deflation and the trap in which those relying on fixed savings, or in this case, pensions, are caught:

“Consider the plight of JAL, Japan Airlines. The economic slowdown hit travel and cargo traffic hard. Saddled with the equivalent of $15 billion in debt and a massive pension fund deficit, the airline was forced to apply for “mediated debt restructuring” — euphemism for Chapter 11 bankruptcy. Asia’s largest carrier by revenue said in its earnings report that there was a great deal of uncertainty about its ability to continue as a going concern. It has applied for help to the Enterprise Turnaround Initiative Corp., a government-backed fund. However, capital injection or additional financing or additional financing alone would not improve the carrier’s prospects, as asserted by the November 14, 2009, news report of Reuters, because of its severely underfunded pension plans. JAL president Nishimatsu met with the leaders of the airline’s retirees association to seek their approval on pension payout reductions. Media reports say that the leaders have expressed their desire to cooperate in some ways with management to save the airline, but many retirees are expected to oppose strongly the proposed pension cuts.

The cancer of depression has been metastasizing across the Pacific through the yen-carry trade foolishly encouraged by the Federal Reserve and the Bank of Japan as a way to push interest rates even lower in the United States. Rather than analyzing the Japanese example and drawing the appropriate conclusions, American policy-makers have an irresistible itch to follow Japan’s jump into the abyss of the Black Hole of zero interest. The result, perfectly predictable, is catastrophic.”

—    “Economic Aspects of the Pension Problem,” Antal E. Fekete, January 5. 2009,  King World News.