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Page added on November 3, 2015
What’s Next: Deflation, Inflation, Or Hyperinflation?
Divided Opinions
We are not the only publishers to offer opinions. And not the only ones with alternative points of view. So, to answer these questions, let’s look first at the range of opinions on offer…
First, there is “the authorities must know what they are doing… besides, I have more important things to think about” camp. This is by far the largest group: hoi polloi. The masses. The lumpenproletariat.
Saved by the border collie
There may be some grumbling and kvetching. But most people count on the feds to manage the economy, foreign policy, the future, and the government. They expect mistakes from time to time. But they also believe the system can be trusted to produce an acceptable, although perhaps not always ideal, outcome.
And if not, God help them. Because the difference between the outcome if they bothered to think about it and the outcome if they didn’t is the same. They have no ability to influence public policy… and not much room to maneuver in their private lives.
They get salaries, pensions, Social Security. They need jobs, mortgages, student loans, and medical insurance. They have little capital to invest or protect. They depend so heavily on “the system” that they can’t afford to believe there is something deeply wrong with it. They go along. They get along.
Going along, getting along…
At the other end of the idea spectrum, there are the edgy, malcontent, and extremely marginal opinions. A man, sitting in his double-wide watching TV can come to hold all sorts of wacky views. There is an entire infotainment industry that provides screwball opinions.
You want to believe Obama is a Muslim? You want to believe the Bilderbergers, the Rothschilds, or the Rockefellers run the world? You want to know about GM’s perpetual-motion engine that – if the secret got out – would put the entire auto industry out of business?
We always knew it….
Well, that is a market. But it is not ours. Let others fill that demand. There used to be a tabloid newspaper called Weekly World News. You would see it at the convenience store, right in front of the checkout with enticing headlines such as: “Garden of Eden Found”… “Obama Adds Himself to Mount Rushmore”… or “150-Year-Old Man Finally Graduates from High School.”
There was a second pope hiding under the pope’s hat! More popes to come?!
Our favorite was a front-page photo of an airplane crashed on the surface of the moon. “WWII Bomber Found on Moon,” was the headline. “Pilot Error, Say Experts.”
Finally found on the moon! Needless to say, this was quite a significant pilot error
Terminal Problem
But it is the far-out world of money, economics, and finance that interests us. We try to figure it out. We try to understand. We try to see what’s coming before it arrives. And we try to be serious about it.
Apart from the mainstream view – that the authorities have things under control – almost all serious analysts see a terminal problem developing. The current situation (with zero and even negative interest rates… and debt expanding much faster than GDP) can’t go on.
It had a beginning, in the early 1980s. It must also have an end. Most of the guesswork is now focused on when and how that end comes.
The real reason why the end is near: Elvis told Bigfoot to shut us down!
Recently, one of our dear readers summarized the three major points of view, along with one minor one:
Deflation Camp
Harry Dent is in line with the Austrian Business Cycle Theory: Money printing causes financial bubbles, distorts the economy, and is therefore counterproductive. Like Bob Prechter (I don’t follow him closely, but his argumentation sounds similar), Dent bets on deflation and depression.
Fighting debt deleveraging and demographics is like putting yourself in front of a tsunami. In such an environment, the U.S. dollar would gain purchasing power, and gold would underperform significantly. (Harry sees it back to $700 in 2018-19.) Cash/T-bills/short-term Treasurys are the place to be. Rates will stay low for very long.
Inflation Camp
Jim Rickards’ thesis – “inflate debt away via a massive issuance of SDRs after China has joined the club” – is also very credible. World currencies are massively diluted via issuance of SDRs, which serve only the powers that be. Rather than a new gold standard, this is the solution to Triffin’s dilemma (more flexibility for the elite).
[Triffin’s dilemma describes the constant need for the global reserve currency issuer – in this case, the U.S. – to supply the world with reserve currency by way of a long-term trade deficit. Eventually, argued Yale economist Robert Triffin, this would lead to a loss of confidence in the reserve currency.]
Citizens are excluded/not allowed to own SDRs. Their purchasing power shrinks. They don’t know who to blame. The IMF does not consist of elected officials, and the majority of the population doesn’t even know it plays a role in creating inflation. And they can pretend that they have to save the world, too. (Remember the Greek bailout?)
Hyperinflation Camp
Shadow Stats’ John Williams is having a really hard time fighting for his ideas. He is right about the “CPI-CP Lie” and the current true state of the economy. But whoever invests along his ideas is running out of capital to stay in the game.
Peter Schiff and Mike Maloney are on a similar line. The problem with them is that they have a conflict of interest with their businesses. But I have no doubt about their integrity: They do/live what they say.
Deflation to Hyperinflation Camp
I recall an interview with Nassim Taleb on Bloomberg TV in 2009 when he said, “We will go from deflation to hyperinflation without seeing inflation.”
Nassim Taleb, from one extreme to the other …
Tokyo to Buenos Aires
Our view is that Taleb will be proved right. Back in 2009, we predicted “Tokyo… then Buenos Aires” – a Japan-like deflation, followed by Argentine-like hyperinflation. Most likely, there will be no stop in between for moderate levels of inflation. Inflation, as economist Milton Friedman observed, is “always and everywhere” a monetary phenomenon.
But hyperinflation is a political phenomenon. It is caused by those same authorities the masses think they can trust. When they are threatened, they will protect themselves by printing money on a scale we haven’t seen since the War Between the States (consumer prices in Richmond, Virginia, had risen 6,700% by the end of the war).
100 dollars printed by the Confederate States in Richmond, Virginia
There are times when printing money seems like the best course of action – especially for the people running the printing press. It may not do the common man any good, but it gets the feds out of a jam. But that is a long story… and one for the future.
We’re still in a Japan-like long, slow slump. And it looks as though we’re going to be there a while longer.
17 Comments on "What’s Next: Deflation, Inflation, Or Hyperinflation?"
paulo1 on Tue, 3rd Nov 2015 1:38 pm
Just my opinion, mind you, but I liked this article and concur with the conclusion except for the end game play. I believe we are in both a deflationary environment with hidden inflation…(not talked about inflation as per shadow stats conclusion). However, I doubt if there will ever be a resurgence towards growth and/or inflation unless there is a major war. Then, all bets are off as it will most likely occur in the Middle East.
brianr on Tue, 3rd Nov 2015 1:48 pm
And here’s Martin Armstrong’s opinion:
http://www.armstrongeconomics.com/archives/34932
makati1 on Tue, 3rd Nov 2015 7:20 pm
Disinformation, and not a word about resource depletion or natural laws.
“They need jobs, mortgages, student loans, and medical insurance.” No they don’t. Most of the world’s population live good lives without any of those.
Money means nothing in the eventual extinction of our species. Up, down, back, forward. Who cares? The real question is food on the table and a roof of some kind over our heads, not the daily value of some piece of paper or shinny metal.
Bonner & Partners, and their ilk, will be gone in the blink of an eye when the SHTF. Good riddance.
BC on Tue, 3rd Nov 2015 10:17 pm
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2n96
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2mPb
https://research.stlouisfed.org/fred2/graph/?g=2piy
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2oPM
We’re into deflation, a bear market for the broad equity market, recession in the energy, energy-related transport, and industrial sectors, and the implication for NIRP.
But the Fed, TBTE banks, and Establishment eCONomists don’t want us to know, to internalize a deflationary mindset, and then act on it.
Now you know. 🙂
Stephen on Wed, 4th Nov 2015 2:28 am
Here’s my prediction: ALL OF THE ABOVE SIMULTAENOUSLY, BUT IN DIFFERENT INDUSTRIES.
Here are my predictions of price when the energy systems and supply lines fail:
Hyperdeflation: Cars, Suburban Real Estate, and other things that do not work well when there is little energy to run them well.
Inflation: Probably in health care, basic tools, eater, and other things.
Hyperinflation: Materials in decline, food, seeds, survival skills training, and farmland, remaining petroleum, scarce metals, etc.
My prediction is one that will not make banking, loans, global investments, or cheap good supply lines profitable. In fact, if my predictions are right, I think that a global debt jubilee will eventually have to happen, and some fortune 500 companies might be bankrupt, and the richest 1% will be far poorer at the end, especially if it leads to a stock market crash or global depression. I also see a possibility of the end of paper based investment banking.
penury on Wed, 4th Nov 2015 9:40 am
The answer of course if deflation. Products are being degraded daily. Prices may be slow to rise, but everything you buy is less valuable. Quantities are less, qualities are less. look at Short’s reports on oil quality.
yoananda on Thu, 5th Nov 2015 1:20 am
+1 Stephen
JuanP on Thu, 5th Nov 2015 7:25 am
+2 Stephen! All of the above in different industries, and a debt jubilee at some point.
GregT on Thu, 5th Nov 2015 9:50 am
“the richest 1% will be far poorer at the end”
Which likely includes everyone who is on this forum. The .00001% will continue on just as they have for centuries. Money does not matter to those who control the system.
drwater on Thu, 5th Nov 2015 12:04 pm
“Dent bets on deflation and depression.” Actually, Dent sees inflation starting about 2018 based on demographics.
Davy on Thu, 5th Nov 2015 1:55 pm
Stephan, the debt jubilee is likely to be more like a situation of what you have physical control of is yours than any organized effort at allowing an economic reset per a debt jubilee. I imagine this situation may and probably will have the stipulation of what you can have and can protect. There is likely little chance we will have a business-as-usual kind of debt jubilee without a corresponding collapse with economic activity dropping considerably. With such a situation significant amounts of people will die off leaving many assets unclaimed. This will be a squatters and finders rights scenario in addition to what you have is yours.
We should keep in mind a collapse of our current food chain will halve our current population. That is an immediate situation. We will not be able to distribute food at the level needed with a collapsed economic system. New plantings will not happen on the scale needed because inputs and fuel will not be available at the quantity needed. We have food reserves of less than a year granted but if economic activity falls off how much of that will make it to where it is needed.
Martial law or other state of emergency scenarios can and will manage to deliver some food yes but it is a whole different story gearing up next year’s planting. I am seeing a disconnect even on this site with this situation. We here have a good understanding of doom but many here don’t connect the dots to the food chain and what a breakup will mean.
The only way we can partially reduce a small percentage of these dangers is to have a massive move back to the land of people to prepare for postmodern farming. This in effect would be to create share croppers, serfs, and small farmers. This could include agricultural co-ops like we saw with the communist of 30’s or the Israeli kibbutz. The chances of this happening by the current leadership are negligible so prep yourself at the local level. If we don’t watch out we will have Pol Pot style “Killing Fields”. This will not have to be forced by an army it will be forced by nature with people struggling to produce food from deserted cities.
We are completely “naked” to a food shock. The economics of a global system will start out paralyzed and that will leave food in the wrong places or rotting. If we have a slow long emergency we may be able to overcome some of these issues but expect an end to the luxuries, conveniences, and discretionary choices of our current business-as-usual. We will enter a period of great turmoil with widespread food insecurity. Places like Asia and Africa will have mass famines and death. There are areas in Asia and Africa that just can’t be supported properly now how about a food chain break down. If you are not near a food producing region I would get the hell out now while you can move.
Stephen on Sat, 7th Nov 2015 4:16 am
Davy,
I think preserving food will be one of the last things they will use the remaining oil for delivering. This may preempt war machines if there becomes very little left. But you are right, we will need to re localize food production, and educate people now to start building farms instead of condos on land and to avoid subdividing, and relocalize food instead of strip malls.
If the people in the cities or suburbia want to survive, eventually we will have to allow people other than real estate developers and corporate CEOs to have real seats at the planning table and cities willing to put sustainability long term and the needs of their people over short term profit, even it creates less or negative economic gain in the near term.
Stephen on Sat, 7th Nov 2015 4:21 am
I am not sure that a martial law enforcement mass war machine would work. I would think that if the power grid were to go down and generator fuel becomes scarce, the military would fail with it. After all, many of the tanks, bombers, planes, and even army radios need power or gas to run. The Calvary has shrunk in modern times. If the materials needed to make tanks, planes, aircraft carriers, ships, etc were to run dry, the military industrial complex would stop with it. At some point people would likely use the remaining power and fuel for peaceful puroposes (or food or water distribution) instead of war or killing people. The same is true with rounding up millions of people and killing them in camps.
Stephen on Sat, 7th Nov 2015 4:22 am
Additionally, if mass unemployment happens from a power grid failure or fuel supply failure, how is the government going to get enough tax money to keep funding the war machine if its costs for the remaining fuel and supplies experience hyperinflation.
Davy on Sat, 7th Nov 2015 5:51 am
Stephan, the types of collapse scenarios are many and varied. We just don’t know. What we do know is likely the status quo will adapt downward. Many here see little evidence of long term growth. Martial law is a distinct possibility. Militaries will manage to use equipment even after society decays. How long is debatable but in a long emergency situation it could be a while. If we go into a long emergency they will be the ones with their tank full. Militaries will be moving away from mechanized warfare as soon as it becomes problematic. Militaries are our last line of security when SHTF. They will take care of their people because it will be the people that support them. Some may go rogue but the communities that survive will be those with good security. Civilization at any level must have internal and external security to survive for any length of time. That is just human nature.
onlooker on Sat, 7th Nov 2015 6:38 am
I think all paths lead to Stagflation. A depreciation of asset prices along with inflation of commodities coupled with devaluation of currency. All signs point to this. I am sure the more expert posters have more to say about this.
Boat on Sat, 7th Nov 2015 10:52 am
When Kenz gets to Washington and ends immigration he will prepare the US for degrowth and smart change. Without all the drama now associated with living in smaller more efficient economies.