Inflationary Deflation: Creating A New Bubble In Money

Tyler Durden's picture

Excessive monetary stimulus and low interest rates create financial bubbles.

Seymour Pierce's Thunder Road report notes that:

Central banks are creating the ultimate bubble in money itself, as they fight the downward leg in this Long Wave cycle. This is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this Long Wave is incubating a coming wave of inflation. This will not be the conventional “demand pull” inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system , with a new reserve currency replacing the dollar. This makes gold and silver the “go-to” assets for capital preservation.


Strategically, we are far more bullish on equities versus bonds. Tactically, equities face a volatile period - buffeted by alternating cycles of deflationary and re-flationary forces until they overcome bonds as the inflationary endgame unfolds. In that scenario, equity investments should (over time) be aligned with the growing share of real disposable income directed towards essential expenditures, including energy, food/agriculture, personal & household care, mobile telephony and defense (for governments).


The “Inflationary Deflation” paradox refers to the rise in price of almost everything in conventional money and simultaneous fall in terms of gold.

Full report below...

Thunder Road - December

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idea_hamster's picture

"Inflationary Deflation," "Bi-flation," etc. -- all basic failures to understand the differenc between inflation and changes in relative prices.

Relative prices change all the time, and can coincide with inflation.  Doesn't make them the same.

(Haters gonna junk -- sorry to bear bad news.)

Landotfree's picture

I have no idea what they are talking about in that paper.  The paper is one more of looking at the symptoms instead of the problem.   There is some truth to the K-winter based on the equation used for the system ie interest... basically 60-80 years... or a generation.

1.)  the system is credit, which is used as money but is not money 2.) the credit system ie what is being used as money is barely going up at all 3.) the system is lacking almost $20T worth of credit that should be there 4.) there is not much else the Fed can do as they were not created to stop the collapse, they are just there to prolong the period of collapse as long as possible... as it is impossible to keep a ponzi scheme going long-term due to Math

What is next...

1.) next peak, then result collapse

2.) unable to stop or contain... collapse continues

3.) hit max potential on the way down

4.) liquidaiton of the non-performing liabilities

My guess 1-2 billion non-performing liabilities will have to be taken off the books.  Rinse and repeat the same system just like the prior 5,000 years.  If nukes are used 7+ billion could be taken off the books.

Seer's picture

Yeah, it really isn't hard to figure out, is it?

"it is impossible to keep a ponzi scheme going long-term due to Math"

Exponential growth, that's what Ponzis are based on.

Sadly, people don't get it that the issue is MUCH worse than this being just some sort of "money" problem.  Money rides on top of physical resources.  People WANT it to be a "money" problem, as they don't want to contemplate what "lack of resources" will mean.

Slinky down the staircase.  This time, however, we won't be coming out of it riding on the back of growth (with 7+ billion people it ain't happening).

Landotfree's picture

Exactly, the problem is very simple, people have an incentive to ignore it.   

You have to have exponential growth forever to avoid huge collapse, and that can be on the supply or demand side, it need not matter. At least as long as you attach interest to your medium of exchange.

7 billion will have to be cut down drastically, I would not be surprised if my 1-2 billion call is not off by 1-2 more.  Without large population growth it's a pipedream, even with it you are coming to the end of this cycle.

Nice post!


catacl1sm's picture

Georgia Guidestones recommend 500 million.

Landotfree's picture

It's a guess on my part not a wish.   I had never heard of that before just looking it up.   :)

All 7+ billion won't make it once the credit system goes.  

redpill's picture

Negative savings rate = lack of ability to buy gold and hedge against the crisis.  This is why most of the western world is fucked.

JKearney3153's picture

Negative savings rate? What savings? The Proletariat are living paycheck to paycheck on two part time jobs. $10 American eagle gold coin or 6 months of groceries???

MachoMan's picture

Right, but this hasn't always been the situation...  it's only the situation after decades of apathy.  Now, when the bill comes due and there is a desire to squirrel away nuts for the winter, it's too late.

At this point, I would scrap the PM idea (if you cannot afford to purchase them) and simply focus on learning useful skills (presently employable helps; and yes, there are still jobs out there).

Panafrican Funktron Robot's picture

Buying up shooters (of the small bottle of alcohol variety) is a relatively inexpensive way to obtain some "savings" in a relatively fungible barter product.  

Landotfree's picture

Savings rate has nothing to do with why the system is going to collapse.   The credit system must expand exponentially or collapse or on the edge of collapse.

It's a one way system with a limited length in time till it goes off... usually 60-80 years or a generation on the max side.

Although saving what you harvest for the winter is a good idea, this does not coorespond to a system based on interest... the system must be supplied exponential growth.  

redpill's picture

Not entirely true, but regardless I did not bring up the negative savings rate as a cause for collapse, I brought it up as a reason why people in the western world are fucked because they will not have any resources to help them during the collapse.

Ookspay's picture

500 million? Who's gonna run all of the cool tourist spots and stuff?

eclectic syncretist's picture

The recent collapse in trading volume, which is in much evidence again today, seems indicative of a collective loss of confidence in market function.  It's as if everyone is just sitting around waiting for the collapse to happen, but it still hasn't happened yet because the Fed has broken the markets in order to prevent it.  WTF kind of crazy mess is this?

Bay of Pigs's picture

Call it whatever you want. Currency debasement works too.


Ham-bone's picture

Currency in da basement?  I prefer the shiny stuff in da basement.

max2205's picture

LOng cigs and lighters...buba

daxtonbrown's picture

Bernanke has created a Biflationary depression, the logical outcome of money debasement. Debasement causes upward pressure on things you need, but collapses money velocity leading to collapses in wages and assets. The worst of all worlds, inflation AND deflation.


Ookspay's picture

Hamster, So you have adopted the liberal progressive line that anyone who disagrees with you is a hater?  One of my pet peeves is people who play that card in a weak attempt to stifle dissent. Come up with a new more robust way to defend your views and opinions. BTW I didn't junk...

idea_hamster's picture

The substance of your comment is probably correct -- in hindsight, my statement may have served a chilling function, so was likely a poor choice.  I'd edit it out, but can't any longer.

You should probably have junked, and then just said, "I junked, but because I disapprove of your rhetorical style" -- that'd be fine.  In fact, you can still do so.  Thanks for the perspective.

However, as for the idea that "liberal progressives" have a monopoly on closed-minded group think?  Color me highly skeptical -- I would suggest that knee-jerk denial of sentiments contrary to one's own is a much more pan-human reaction than most people think.  Which is to say, it's an equal opportunity character flaw that runs the political spectrum.  I try to do my best to guard against it in myself, and likely fail more often than I'd like.

(BTW, I'm going to + your post.)

Ookspay's picture

Hamster, Normally I enjoy and agree with many of your posts, Your inflation relativity thingy I just don't quite get. Perhaps I fried too many brain cells this weekend.

As far as the hater comment, I never said that lib progressives have a monopoly on group think. But I do believe that they try to manipulate and control speech and thought by trying to put people on the defensive by labeling them haters, racists, bigots and the like when they disagree, it is a standard tactic of cowards and wimps. You are not a coward or a wimp, try to avoid that is all I was saying.

Cheers - Ookspay

idea_hamster's picture

So inflation is an over-all rise in the price level of all goods and services in the economy.  Changes in relative prices are just that -- one price goes up, and another down.

Certain commodities, like oil, are an input in so many products and at so many stages of (what Austrian economists call) round-about processes, that a rise in oil prices often feels like inflationary pressure beacuse so many actors simulataneously try to pass on input price increases.

But it's not.

If the money supply were stable, the rise in oil prices would work its way through the economy, with the outcome being (for instance) a partial retreat in the oil price, a retreat in prices of some non-oil intermediary goods, and a rise in others.  The overall price level would not change, although the relative prices of goods and services would likely be different.  

When people talk about "bi-flation," the idea of inflation in certain items and deflation in others (most common combo seems to be food/energy rising and housing falling), the rising prices are not (necessarily) inflation.

Inflation is when overall, all prices rise.  This is only possible when the balance of money vs. goods/services changes, most commonly through government money printing.  However, inflation can also occur when the money stock is stable and the goods/services contract, as in a city under seige.

crusty curmudgeon's picture

Yes, yes..all established long ago (by Coase, I believe?) and well known by Austrians. But meaningless in today's environment.  This time, you even identified the relevant premise:

"If the money supply were stable..."

That's a good one.  You were saying?

idea_hamster's picture

Not suggesting the money supply is/was/will be stable -- in fact, it changes all the time.  My point was that things that are often characterized as "inflation" are not necessarily so.

Using a ceterus paribus arguement has somehow gotten a bad name in econ, but it's the basis of all our conversations on cause and effect.  As Jeff Hummel once noted, if I asked you what would happen if you turn the volume knob up on the TV, your answer of "it gets louder" implicitly assumes that I'm not pulling the plug out of the wall.

Just because we're talking about a partial derivative doesn't make the arguement invalid.

Look up Jeff Hummel -- easily the smartest guy in the room. Seriously.

Ookspay's picture

Thanks for the further explanation, I needed that... Some of this stuff here on ZH is way over my head, I think I'm in about the third grade, But I'm getting there. The whole idea of a central bank trying to control inflation and behavior by extension through interest rate manipulation kind of pisses me off. Perhaps when I better understand it it will not seem so insidious, or maybe more so. We're all good Ham!

FreeMktFisherMN's picture

Inflation is the increase in the money supply. That is what the old Webster's dictionary used to say. Rising prices are a result of the inflation. But like in the 'Roaring 20s', despite all the productivity gains, prices remained stable. This is where inflation created by the Fed kicked in again, as prices should have fallen commensurate with the increased (valuable) supply, but instead stayed too high. Then the bubble burst and of course Hoover made it even worse via protectionism and socialism. 


Inflation is rampant right now. Its effect of skyrocketing prices is just waiting to be unleashed, even further beyond the current high rate of price levels going up as measured by Williams at Shadowstats. 

Ookspay's picture

Thanks, Keep the tutorials coming ZH'rs.

MachoMan's picture

Changes in prices of goods and services do not necessarily have anything to do with changes in the money supply...  correlation is not causation. 

Trying to find some aggregate or average of price increases as a definition for inflation or deflation is a complete misnomer...  just focus on the money supply and be done with it.  [think why CPI is completely worthless]

NidStyles's picture

If all goods and services are counted then yes it does. If you are referring to CPI as counting all goods and services then the error lies there rather than in whether or not you should count the pricing of goods and services.


I do a base calc of taking the estimated money supply and dividing it by the populace of it's potential holder's. So you figure about so many Trillion divided by about 400 Million at any one time. Then toss in the regression of the GEOMETRIC exponential function for every dollar with a given spread of time. Then you get an accurate idea of what the real rate of inflation is. It's not 2%, it's a bit higher lol!

MachoMan's picture

CPI does not measure all goods and services...  it's merely a shitty composite and manipulated to hell...  we all know this...

However, as to your other thesis...  Even if you take into account the price changes of all goods and services, you're still left with, at the very least, latent inflation or potential inflation energy.  In other words, where is that money sitting in bank reserves going to end up?  You could say that it's not inflation, but I think that would be disingenuous...

The other issue, presuming you are claiming that when there is an increase in the prices of all goods and services, there must be inflation...  I'll posit that this is not even measurable...  not only for the world, but even a single country...  hell, even a state, county, or city.  Hence MIT's billion price project, et al...  which is anecdotal at best.

Price changes are simply a possible effect...  not a cause...  and really not anything worthy of focus...  the focus should be the supply itself (which is also incredibly difficult to measure when credit is money and everyone is hell bent on obfuscating virtually every economic metric, but it's easier to determine than the price of all goods and services in the economy as well as their historical counterparts). 

Panafrican Funktron Robot's picture

Along those lines, for the period 1/1/1952 - 9/1/2012:

Population has increased x 2.01.

The money supply has increased x 74.79.

Inflation, bitchez. 

Panafrican Funktron Robot's picture

More fun with math:

From 9/1/2008 - 9/1/2012, the population has increased 3.07%.  The money supply has increasd 279%.  LOL.

ali-ali-al-qomfri's picture

Thx FreeMarketFisherMN (and ZH braintrust)

Is it because the USD is a reserve currency therefore held around the world in large amounts that we have not seen the actual money supply growth come home to roost and therefore some price suppression has been maintained, ‘while the clown keeps the plates spinning’ ?

I mean we have seen healthcare costs increase YoY @15%+ as well as food stuffs +50%

MachoMan's picture

take your observations and form your own thesis.

You have quite a few reasons for the mitigated price increases (note: not necessarily inflation) that are all interconnected: (1) money multiplier/money sitting in deposits; (2) outsourcing of manufacturing/trade deficit; (3) deleveraging (albeit virtually entirely forced after default); (4) stagnant wages (although somewhat still mitigated by availability of credit); (5) cost of local food production relative to wages; and (6) demographics (aging population, etc.).

If you track the cycle of those reserve notes, then I think you'll likely find plenty of american (and canadian) farm land/RE and businesses being purchased, which increases the price... 

[PS, I'll posit all of this is simply cost push inflation...  not bi-flation, not any other flation...  this is why the "rising tide" is so peculiar about the ships it rises...  it's an increase in the money supply without any demand for the increased "money"].

FreeMktFisherMN's picture

I'm just clarifying the view I believe is true of inflation--also held by Austrian school--that the increase in the money supply is inflation. QE and frac-reserve banking, for instance. 


Certainly the USD world reserve currency has tons of inertia, but this won't last. China will either not put up with the debasement of their holdings and refuse to buy our debt, or their citizens will uprise as they deserve to enjoy the fruits of their labors instead of exporting it and importing inflation. Contracts are being secured for oil bourses that do not need the petrodollar intermediary. I just wrote a paper on all this for my int'l relations class about China's ascent. 


There simply is not enough production in this country. 'Growth' that is valuable cannot be deduced from 'GDP.' GDP is bogus. Same goes for China with its notorious ghost cities, but they are producing, and they are producing what the world wants as shown by their trade surpluses. They're not doing that for nothing, either. They will continue to gain more power, and I think ultimately they'll go with the BRICS and form trade networks where there are better opportunities. 

MachoMan's picture

I'm just clarifying the view I believe is true of inflation--also held by Austrian school--that the increase in the money supply is inflation.

This is the only view.  Every other has been completely proven ridiculous at this point.  Changing what the measurement metrics incorporate as price increases does not actually mitigate increases in the money supply...  Further, solely focusing on price changes ignores other supply/demand functions that may be playing a more important (total) role in those price changes.

NidStyles's picture

As I replied to you above sir. It's you measuring stick that is broken not the methodology behind measuring.

idea_hamster's picture

Few points:

Inflation is the loss of purchasing power, i.e., the rise in prices.  The money supply can grow concurrent with a rise, fall or no change in the price level.

In the 20s, the population of the US was growing, which is, in fact, deflationary.  This was offset by the growing money supply as the Fed monetized gold inflows from US exports, which kept the price level stable.  

The "bubble burst" is a modern term that's thrown about a bit too freely, IMHO.  What happened was that the Fed decided to stop monetizing the inflows of gold from US exports.  That led to sharp deflation.

Hoover did make it worst through protectionism.  Socialism?  I'm not so sure.

IMHO, inflation isn't rampant right now, but is likely understated in official figures.  The reason is that the growing Fed money supply is offsetting the falling shadow banking industry.  ZH does a good graph on this elsewhere.

Snidley Whipsnae's picture

I Hamster... " Which is to say, it's an equal opportunity character flaw that runs the political spectrum. "

I believe what you are referring to in this sentence is human nature and it definitely is pan human. In addition, it has no time constraints and is therefore an excellent constant to keep in mind when reading 'history'. If a 'historical record' does not pass the human nature smell test it is usually revisionism.

btw... I didn't have a problem with your original post.

StychoKiller's picture

EVERYONE has a vested interest in perpetuating the status quo, something as simple as hot water, indoor plumbing or electricity, for examples.

WhiteNight123129's picture

The traditional view is that CPI and wages correspond typically, but not during money printing. Fullarton 1844 explains the money printing is like bringing more Gold cargo for spain or conventional money (fiat).
Relative price structure can go up while economy crumbles in real terms, there are many many many examples of that. While prices of everything was going up in prices during hte Assigants period, the wages were stagnant (White 1875).

The CPI because of hte substitution effect actually measures wages not inflation. If the consumer is contrained with his budget he will switch evidently, not by choice but out of necessity. So replacing steak by hamburger is due to the fact that the consumer will squeeze whatever he can afford to purchase, he will not be able to afford the old item but will switch to the new. This is the basic lie of CPI substitution, which ends measuring wages instead of measuring prices....

So if your definition of inflation is increase in wages, you are correct there is no inflation. But if you definition of inflation are prices then you are at a loss, and you have to understand the mechanics of money printing on prices.

Finally you could measure the Dollar denominated in Tobacco since processed tobacco is the least variable commodity, the volatility is minuscule outside the trend. The demand is very stable and supply is very stable, so the USD has plunged 25% against processed Tobacco in the last 3 years. That is interesting given that the total production of electricity per inhabitant in the US is lower than its April 2009 level.

Processed Tobacco was very stable between 1950 and 1971, actually 2% increase during the whole period. But then it is a continuous upward slope very well fitting M1. In the 1990s, processed tobacco was flat for a while.

So the CPI measures wage inflation and typically there can not be price increases without wages increases. However that happened many times during money printing. A situation of real economy plunging stagnant wages yet higher prices. I know it is puzzling, but you should read White from 1875, it talks about Qe1 QE 2.... QE4, dead-ceiling debate and the fact that the French though impossible to repeat the mistake of hte Mississipi hyperinflation because they were a new smart nation and not an absolute monarchy and as such it would not happen.

Also they talk about the resistance to QE1 but then easier and easier and more people calling for stimulus. It fits very well the US of today even in the GINI index rising, the extravagant and large wealth created for speculators while the rest of the country starves, the need to send people to war as a way to deflect attention, the interest of the bankers. Money printing has always and always the same characteristics.

I guess people in 1791 in France looking at stagnant wages would ahve claimed that there were no inflation and that the price rise of everything was due to change of relative price. And they were right, the relative price is that the currency plunges, the increase of price has nothing to with higher wages and excitement of trade, (Fullarton 1844). As Dalio points out, the multiplier is bogus, ex post data. That is why people can not understand how a commodity with dismal change in demand and supply keeps rising since 1970. Actually between 1950 and 1970 tobacco increase in demand was much more robust yet prices were flat. This is the mechanics of conventional (fiat money) or constantly increasing Inca Gold supplies.... Nothing to do with excitement of the trade.

I do not bother me if the relative price of the dollar is lower, I do not hate, so far I benefit from it, but it should bother the ones  holding those dollars.

For now we have monetary debasement, next we might have finally wage increases in the US which would fit your definition of inflation. Now if at the same time terms of trade get better you can have both inflation and a currency strengthening. If you think it is impossible you should check the level of inflation, FX and terms of trade for Brazil between 2009 and end 2011.





Roosting Chicken's picture

Translation:  After the government screws you, have a cigarette.

Stoploss's picture

What no one realizes is that when the inflation hits, it will be so violent, and fast, it will cause an inverse reaction reinforcing the deflationary forces, because the cost of anything will be out of everyone's reach, which results in everyone having nothing.

Deflation results in everyone having nothing..

Massive global hyperinflation results in everyone having nothing.


Are any lights coming on yet???

cranky-old-geezer's picture



"Inflationary Deflation," "Bi-flation," etc. -- all basic failures to understand the differenc between inflation and changes in relative prices.


Inflation and deflation are monetary terms, not economic terms, not price terms.

You can't have inflation and deflation at the same time.  Inflation means the currency is losing value.   Deflation means the currency is gaining value.   You can't have both at the same time.  No, there's no such thing as "biflation" nor "inflationary deflation". 

So their fancy looking report is just more bullshit, like many fancy looking reports these days.  They don't even understand basic monetary terminology. 

fonzannoon's picture

Paging caviar emptor....please pick up the white courtesy biflation phone....

Caviar Emptor's picture

ok ok, don't rush me.

Yes, Virginia, there is biflation. It's the long-term outcome of an accumulation of short term fixes and ploys, all of which were aimed at creating inflation "fixes" or buffers over the course of the last 40 years: Petrodollar, transnational outsourcing (aka "opening up China" and "free trade"), supply-side stimulus, shadow banking etc etc...

Now the chickens come home to roost into a perfect storm: the reserve currency is toilet paper just at a time when 7billion mouths are screaming to be fed. It was used to create chronic, massive overcapacity. But it's buying power for critical resources and inputs is dropping daily.

MachoMan's picture

Why can't all of this simply be explained through cost-push inflation?  [aside from the inherent notion that bi-flation is impossible given the money supply can't expand and contract at the same time]

cranky-old-geezer's picture



Interesting.  Pushing your "biflation" bullshit with purely anectdotal evidence ...cause there's no way to support it with real evidence.

Currency can't gain value and lose value at the same time. 

Oquities's picture

the US dollar lost value against gold while simultaneously gaining value against residential real estate.  it likewise lost value against oil while simultaneously gaining value against natural gas. 

StychoKiller's picture

In Flatland, there was much consternation when a 3-dimensional object intersected with the Flatland plane.  Consider that the amount of currency in circulation is only ONE dimension of a multi-dimensional problem...