Guest Post: If This Is What Deflation Looks Like…

Tyler Durden's picture

Submitted by Mike Krieger of Kam LLP

Automatons with business suits swinging black boxes,
Sequestering the blueprints of daily life
Contented, free of care, they rejoice in morning ritual
As they file like drone ant colonies to their office in the sky

I don't ask questions, don't promote demonstration,
Don't look for new consensus, don't stray from constitution
If I pierce the complexity I won't find salvation
Just the bald and overt truth
Of the evil and deception

There is an inner logic,
And we're taught to stay far from it
It is simple and elegant,
But it's cruel and antithetic
And there's no effort to reveal it

Graduated mentors stroll in marbled brick porticos
in sagacious dialog they despise their average ways
betraying pomp and discipline, they mold their institution
Where they practice exclusion on the masses every day

Decorated warriors drill harmless kids on pavement
Stimulating tyranny under red alert
Protecting the opulent and staging moral standard
They expect redemption of character and self-growth

Bad Religion, Inner Logic (1994)

If This Is What Deflation Looks Like…

Then I really, really, REALLY don’t want to ever see what inflation looks like.  Despite the title of this piece I do not wish to engage in some inane debate about whether deflation or inflation is the risk.  I have made it clear for two years now that we are in a highly deflationary environment occurring within the backdrop of a purely fiat monetary system that is governed by “experts” whose ideological framework is based upon the false economic religion known as Keynesianism.  So for people that are actually trying to preserve their wealth an intellectual debate on inflation or deflation might be interesting but is not particularly productive.  I can understand why many in the financial services industry see the greatest risk to be deflation.  Why?  Because for them it is.  Stocks, bonds and real estate will perform horribly in the environment that we have.  Even if they go up for periods, over time they will not make up for the cost of living increases in the things that we need.  This is the major disconnect happening right now between “Wall Street” and “Main Street.”  Wall Street has been coddled and pampered for two and a half decades by the natural forces of a secular bull market in financial assets as well as the Federal Reserve Chairman and a D.C. establishment that refuses to allow the free market to function.  So when a money manager of financial assets looks into his future and sees deflation he is correct.  When the majority of “Main Street” looks into their future they also correctly see inflation.  That is because when you have 40 million Americans on food stamps I am sorry but they have much bigger issues to deal with than the S&P500.  So the world we are looking at is where a BLT sandwich could cost $12 and home prices drop another 20%.  Investment professionals have a very hard time getting the heads around this concept for some reason but that is the reality we are looking at.  Goods that are wanted around the world will rise in price in debased dollars while non-essential items deflate.  The Chinese want pork but they could care less about some McMansion in Ohio.  There is nothing anyone can do to change this.  It is a natural cycle as simple, powerful and inevitable as any cycle in nature.  If it must happen, it will happen.

My problem with the “deflationists” that recommend a high allocation of assets to long-term treasuries is that there are a lot of better assets to buy in the type of environment we are entering.  As I have repeated over and over again these assets are primarily precious metals but also include other commodities.  Especially commodities that people need and are strategic to governments such as food and oil.  There are plenty of equities that are associated with these themes and in my opinion they will do far better over time than long-term treasuries.  Gold for example IS the end game.  Treasuries certainly are not.  Gold is the best way to short the market.  Gold is the ultimate form of payment.  Gold is your vote as an investment manager and a citizen against the maniacs running governments all over the world.  Without going too far into it in this email I think the move we just saw in gold and in the gold shares is the beginning of one of the most powerful moves we will ever see in our lifetime.  I keep reading technical guys talking about tops in gold.  We are very early into this gold bull market from a price perspective.  I think we could see similar gains of the last ten years compressed into the next two.  I also think gold shares will start to outperform gold itself, which would be an major transition.  The curtain has been lifted, the emperor has no clothes and the quicker you figure this out and act the better.

Ok, so some quick charts here for those that aren’t paying particularly close attention to the various commodity markets.  If this is deflation…

Corn 1 Year Chart

Cotton 1 Year Chart

Lean Hogs 1 Year Chart

Currency Comments 

Two weeks ago I discussed that the market would push the yen to the point where the BOJ would be forced to take aggressive action to stop it and then potentially the yen would start to collapse and the JGBs would go with it.  This would then herald the end of the government bond bubble globally (it’s really a fiat currency bubble).  Well, the yen did push the government in Japan and they did act and the yen got smashed by 3% versus the dollar in one of the most powerful reversals I have ever seen.  Does this mean the end of the yen’s rally and JGBs?  Way too early to tell, but I did get something else from it.   Surprise, surprise it is exceptionally bullish for gold.  Why?  Because it just proved to another segment of the investment world that perhaps remained in denial that all governments are playing games with your savings.  That fiat currencies are pieces of paper that are being fondled and molested by global central bankers.  That these games will not stop.  The Fed can buy all the SPU futures they want and the other players can sell the treasuries they recently bought back to the Fed and then goose the market, but the magicians of mayhem can’t print gold and that is all you need to know. 

Welcome to the Revolution     

There is a revolution happening in America and it is coming from all sectors and it is being brought to you by people from all walks of life.  My generation has been subject to vicious propaganda and brainwashing since we were born and we are waking up to it.  We are not happy about it and we are going to change this sick system.  Did anyone else find it odd that the media decided to blow up a story about some nut that wanted to burn Korans?  We are in a depression and THAT is a story they chose to headline?  Very suspicious.  Don’t fall for it.  Take the red pill and let’s get on with it.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Pining for the Fjords's picture

Dammit, Mike.  The first rule of Fight Club is we do not talk about Fight club.  Otherwise, great stuff.

B9K9's picture

@CogDis said “None took my advice (naturally) since Mr. Negative is too negative to be correct in the face of the MSM drone that all is well.”

Cog, the day only a small fraction of your client base begins to wake up and realize something is amiss is perhaps the earliest, and most valuable, leading indicator to which one might have access.

As many know, I happen to subscribe to the deflationary hyper-inflation hypothesis. That is, hyper-inflation won't necessarily ensue due to excess money aggregates chasing too few goods. Instead, hyper-inflation will come about as a general loss of confidence in the underlying legal tender used as the primary means of exchange. In fact, well known historical precedents of subsequent central bank reactive money printing exercises are effects rather than causes.

IOW, as it becomes increasingly apparent that the combined US public/private debt will never be re-paid (and could conceivably be defaulted outright), the $dollar which rides atop this pyramid-of-faith will collapse in value. Under this scenario, the price of goods begins to rapidly escalate as people desperately attempt to rid themselves of worthless fiat confetti, culminating in critical goods (food, oil) eventually being removed altogether from the market-place in exchange for $USD.

The action in gold we're seeing these days is only a front-runner to what is going to occur across a broader market basket of goods & services when the herd eventually panics & bolts.

You, my friend, will be able to bestow the ultimate correlation confirmation kiss. When your clients begin to reveal/confess even a shadow of a doubt, that will be the initial tip off regarding an overall loss of confidence. I just hope you share it all with your fellow ZH denizens before the cascade event(s) begins in earnest.

mrgneiss's picture

Yes, I think the gold bears are too focused on a typical "inflation" scenario or excess money supply, and ignore the likely outcome you outlined, loss of faith in the USD here and around the world.  Do they read any of the articles like the one above and have a cogent argument against them?  Oh well, I guess it would be boring if we all had the same point of view.

Bendromeda Strain's picture

All laid out in painstaking detail on FOFOA's site...

mrgneiss's picture

I think he should win a Nobel Prize in economics (FOFOA)..........he's a nice change from your usual tiny nit-pick I have is how he often will bring up a tantalizing topic, then he'll write "more on that later"

Pining for the Fjords's picture

+++   FOFOA is a treasure, a must-read if you haven't.

mule65's picture

Sounding more like The Matrix than Fight Club LOL.

Slartebartfast's picture



UncleBen's picture

toathis, you are the same babyhomo from the gay-ass Marketwatch suck

FEDbuster's picture

Toathis, time to crawl back to Cramerica.  Jimmy has some koolaid for you to wash another blue pill down.

Conrad Murray's picture

Wow, I guess there's no arguing with that thesis.  I mean, your refutation of the above article is stellar, and your evidence truly is beyond debate.  Well played...asshole.

Missing_Link's picture

Of course Great Depression 2.0 is "not coming."

How can it "come" when it's already here?

Pillage's picture

babybop from marketwatch

NumberNone's picture

HEY...some of my best friends are alocholics. hic..we like to drink straight from the bolottles...hic

Voluntary Exchange's picture
@Toathis   Sorry baby face. I sure wish it was so but it ain't.  The actions of the central planners both in US and globally represent a huge misallocation (theft) of already scarce wealth and resources such that what is coming down the road for us soon is going to be a monumental tragedy.  Try to live through it, remember it and  make it a permanent lesson  against monopoly governmental services, central banks and fiat currency.   Good can come from this eventually but you got to grow your thinking and come to understand what it is you are seeing now and about to see, and not fall for the same old lies and propaganda.  May I suggest you study Austrian economics to get a basic grasp as to what is happening now and what will shortly happen? Good luck!
hbjork1's picture

Going through the "hierachy of needs".

1. Food and water - OK or not?

2. Safety, security, and protection from the elements. OK?

3. Sense of belonging - Love  OK ??????????

4. Esteem, recognition, status ??????????????????????????

5. Selfactualization ???????????????????????????????? 

All may have to "Suck it up" a little.  Many people around today have expectations that cannot be met in the long run for the total populace. Yes there will be movements and maybe riots.  But look at the bright side.  IMO, the disciplines required will not be as severe as those required prior to the "swinging 60s .  Something like the 70s should be sustainable.  The housing market that seems to be emerging gives one little straw in the wind. 


doggings's picture

'kin tw@t.

none so blind as those who will not see.

ZackAttack's picture

Bi-flation... Inflation in the things you need; deflation in the things you own and earn.

SWRichmond's picture

So the world we are looking at is where a BLT sandwich could cost $12 and home prices drop another 20%.

Absolutely correct IMO. 

Bi-flation... Inflation in the things you need; deflation in the things you own and earn.

I'd only add this slight change: things bought with long-term debt fall in price, things bought with cash flow that are needed to survive (food, energy) go up in price, all when priced in fiat. 

Everything is deflating with respect to real money (gold), some things (houses) faster than others.  This is the thing that "financial professionals" don't get, can't get, and never will get.  So, wrt gold, we are in a deflationary environment.  When you think of it in these terms it makes perfect sense.

Investment professionals have a very hard time getting the heads around this concept for some reason but that is the reality we are looking at.

That's because they're all graduates of some stupid indoctrination B school like Wharton where they churn out Keynesian drones.  I've met and spoken with some of these people and the depth of their indoctrination is amazingly deep.  The fiat paradigm has been hammered into them.  I think in B school they get them to buy the program by first blowing a lot of sunshine up their asses, like telling them they're smarter than everyone else, then they start in with the wonder of fiat currency thingies, fractional-reserve lending, Fed-love, and hatred of gold.

centerline's picture

Most investment professionals are completely "inside the box."  Taught economics and finance from treetop level down to the details - accepting that the given starting point is factual and sound.  It works just fine, until it doesn't.  Then, everyone is suddenly an idiot.  Amazing.

maddy10's picture

Infact most "experts" are inside the box.

Once you stop renormalising infinities whole quantum theory fails,

Once you go into stem cells,cancer Doctors have no answer

within the constraints that we have imposed upon ourselves, we have "experts" everywhere

i.knoknot's picture

indeflation: noun; not sure whether prices are rising or falling...


(+++ btw, SWR)

chistletoe's picture

someone is indekitchen with Dinah ...

hbjork1's picture



All you said and weak math.  I am just an engineer but I  had at lest one course rigorous in vector and tensor usage.  Everything that I have seen in the general economics analysis amounts to trend analysis; not much there on what goes into and comes out of the elements of the economic system. 

The famous professor Merton is reported after the imfamous LTCM meltdown that he was pessimistic on ever being able to mathematically predict risk in derivatives.  

It will never be easy but if schools like Harvard and Wharton would require a regorous course in vector and tensor math, before they start with the advanced economics courses, there might be some rollback in the "mysterys" that currently bedevil the economic academia.  

Here is one shot a better analysis of one area of the problem.


Matt Taibii's site:

Caviar Emptor's picture

What I've been saying for months and months. We're going BI!

SheepDog-One's picture

Exactly, a hot dog will cost $24 bucks, a 3 bdr 1, 1/2 bath will cost about $20,000, welcome to Ameribabwe.

OH, and BTW its all a moot point anyway because Ameribabwe is a -0- production economy, we dont make anything, so no one will have a job so just get a chess board and spend days in the park like they do in Havana.

fiddler_on_the_roof's picture

why do you say USA don't have anything. Not True.

USA have everything - Primary : Food/best Ag lands, Armaments, Medicine,Natural Gas, Natural resources/waterways/Ports, healthy population growth ... Secondary:Computers, Software, Network Gears, Universities, Infrastructure


LMAO's picture

I couldn't agree more when it comes to "healthy population growth"

Flashes of "The Biggest loser" zapping through my head.

No wonder health care is unaffordable. LMAO

SpeakerFTD's picture

I mentioned this on an earlier thread, but the inflation/deflation debate has to be looked at one the basis of Maslow's Hierarchy of Needs.'s_hierarchy_of_needs


Basically anything that corresponds with "self-actualization" will virtually go to zero, while prices soar for everything related to  "physiological"'s picture

no, self-actualization is a myth. not possible, because its not static. by its own definition. it can neither be deflated or inflated by anything occurring outside itself. think the Matrix.

Calls and Putz's picture


...It's Youflation™ - where the prices of things you need go up and he prices of things you own go down.

i.knoknot's picture

who junked *that*? i'm gonna borrow that, it's a great quote. ( naturally w/ attributions, etc.)

RockyRacoon's picture

Attribution my fuzzy coon butt.  I'm flat stealin' it.

(Gotta uphold the coon tradition; see that mask on my face.)

Calmyourself's picture

I would copyright dat right dere, beeaatch...

Moonrajah's picture

Youflation - great neologism! How about we take it one notch higher and make a YouFlate site where anybody can upload their videos about the effect of ...flation in their region? Nothing like getting it straight from the horse's mouth.

romanko's picture

why do I feel like I'm at choir practice?

Hansel's picture

Because the priest is touching you down there?  :P

Yophat's picture

Thanks for the laugh!!!

Kobe Beef's picture

harharhar! good one, Hansel

zaknick's picture

Gonna keep posting this all day because it should help clear up a lot of ambiguity and shows us how badly we've been had.

ZackLo's picture

Some good stuff in there but, I would rather not give the power to create money to the government because if you look at the way they handle taxes now....shit we would lose half our purchasing power in a week if those crazies on the hill got the ability to print money. Also you have to remember we live in a democracy so the mob rules...and they WILL vote to steal from each other.. The fed is private and it still prints at the whim...fuck printing presses.

Kayman's picture


Yeah, it's a hell of a dilemma. Either the Fed is controlled by the democratic process (the mob?) or you let some self-important criminals control the country through the money supply.

So how's the current system working for ya ????

Voluntary Exchange's picture
@ Kayman, Zacklo: ............................................................................................................................................. There are much better alternatives!  The establishment would rather you didn't know about them. I would strongly urge you to reclaim your "power of the purse" and only purchase security and adjudication services (what many think only a monopoly crime syndicate called the "state" can provide) from those non-monopoly services providers who respect and keep voluntary agreements among non-predatory individuals, groups and families. You could start by studying the history of Ireland before 1650. It is an example of a functioning society that lasted more than a thousand years with  a free market justice and security network without a  so  called "state" in the conventional sense. Check out: ............................................................................................................................................ ........................................................................................................................................... If you want to learn about it.  Also check out the works of Rothbard and Hermann-Hoppe.
Raging Debate's picture


I think you got the right understanding Kayman. Do I get to vote on the next Chairman of the Central Bank? What if the Central Banks de-facto own the government? So I get to vote for the President who is told who to elect as the next Chairman which has already been nominated by the Central Bank.

Government should issue the currency and liquidity/storage function of banks should evolve into peer-to-peer lending and CB's go for a bigger supply chain based on carrots vs a gun pointed at your head.

But the Golden Calf won't decentralize itself outside of war creating pain for them as individuals (lost family members that gold just can't buy back).