Guest Post: The Case Against Deflation

Tyler Durden's picture

Submitted by Aladair Macleod via,

Regular readers will know I am in the inflation, possibly hyperinflation camp; but there are those that think the future is more likely to be deflationary. In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it.

Rather than repeatedly go into the errors of their ways, we must accept that they are in charge. They have decided that prices must not fall, and they see moderate price inflation as a necessary stimulant to business: this is the reasoning behind Helicopter Ben Bernanke’s defining statement, when he made it clear that central banks could spray the economy with endless fiat money if need be.

Given this determination to stop prices falling, worries that the outlook is deflationary are unlikely to be realised. But there is a second group of commentators which believes that in a slump there will be an unstoppable credit contraction as banks are forced to foreclose on failing businesses. This, they say, will lead to a mad dash for cash to pay off debt, leading to fire-sales of assets as credit contraction spreads to otherwise sound businesses. The imperative to pay down debt will overwhelm central banks’ attempts to replace it with cash.

The error here is to misunderstand where we are in this sorry tale. The belief common to all deflationists, that the developed world has so far avoided a severe economic contraction, is wrong. The fact that this is not often recognised must be blamed on the irrelevance of nearly all government statistics. Not only are they self-serving, but they do not allow for the increasing meaninglessness of government money. The only hard statistics are unemployment, which despite official attempts to water them down, cannot conceal the fact that there has been a slump since the banking crisis.

The banking crisis marked a sudden increase in consumer preferences in favour of money, assuredly egged on by banks who switched almost overnight from risk-tolerant to risk-averse. This is why GDP numbers in most major countries took such a heavy knock, reflecting money being withdrawn from economic activity. That was the event deflationists are worrying about today.

So deflationists are forecasting an event that happened five years ago and their fears have already been disproved by massive monetary intervention. That is not to say the slump is over: far from it. Current indications are that things are about to get worse everywhere. But the nightmare cycle of falling asset prices becoming self-feeding and a dash for cash has already been prevented.

So successful was the Fed leading other central banks to save the world in 2009 that the precedent is established: if things take a turn for the worse or a systemically important financial institution looks like failing, Superman Ben and his cohort of central bankers will save us all again.

Call it kryptonite, or failing animal spirits if you like. It is closer to the truth to understand we are witnessing the early stages of erosion of confidence in government and ultimately its paper money. Ordinary people are finally beginning to suspect this, signalled by the world-wide rush into precious metals last month.

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GubbermintWorker's picture

Real assets bitchez!

Manthong's picture

To the muppets, they are arbing a ~60” HD Led screen against an ounce of gold.

You get paper and/or a screen while they drag the gold.

The Fed, the ECB, the BoE, BoJ and the PBC are all in the same game.

What’s that paper or screen worth in a year or two?

The Watchman's picture

.....plug me back in...... I don't wanna remember nothin'......

Manthong's picture

just the tasty steak  and glass of wine :-)

MiguelitoRaton's picture

Japan was also in the grip of Keynesians and they stimulated like crazy but they still got deflation over decades, what makes you think it will work here when personal and business credit is not expanding...can the gov really make up the difference?

Big Slick's picture

Another argument against deflation... unlike its opposite, the government cannot tax it.

sessinpo's picture

That might be an argument for deflation.


In other words, the government is fighting deflation (like Japan), expecting it can overpower market forces. Of course it can temporarily, but can it in the end?

Another way to put it is this. The government is usually wrong. So if they make you think inflation is the problem, then.....

Doubleguns's picture

Ummm not enough folks rushed into precious metals to change the out come for the fiat. We need MOAR to rush in!!!

Stoploss's picture


It has been proven beyond a shadow of a doubt that deflation is the most powerful financial force, period.

If it were not, it would only take 'about fifteen minutes' to correct..

Aghast in Midlothian's picture

Can fix it tomorrow, if wanted. Simply give $1,000,000 to each US citizen. The spending would begin....assets would inflate...and the hell hound of inflation would begin to bay. 

Stoploss's picture

A less volatile method would have been for the FED to assume all private sector debt instead of monetizing, but we tried to make that clear about five years ago. Too late now.


Kirk2NCC1701's picture

If they Deflate, the fiat-price of Gold goes down. What about bullion prices? 

As long as the marginal production costs stay high, the street price of bullion will be dominated by the marginal production costs + bullion supplies.  No matter what the paper-price is.  Moral:  If you chose to own gold, it better be bullion.

THX 1178's picture

If they deflate the stock market deflates. If the stock market deflates its either print or die. If print then US bonds become unappealing investments. Flight from bonds? Fed creates money from nothing to buy dumped bonds on Open Market? 

I think it will be deflation then hyperinflation as central banks around the world led by the fed print to save us from another nightmare... only to create a worse one.

A is A's picture

Yep, very possible. One last deflationary cycle to send our deficits to 2 trillion. This will send us printing to the sky. Then the FX vigilante will will do what the now extinct bond vigilante should have done a long time ago but couldn't because the FED owns the bond market. Finally, bye bye $.

kito's picture

In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it..........


bullshit.....there are many in the deflation camp who think there isnt a fargin thing the government can do about it at this point.................

malek's picture

You mean because the printing rate will be limited by light speed?

Kirk2NCC1701's picture

That would be consistent with Einstein's Special Relativity: 

As speed approaches c (light speed), mass approaches infinity.  In other words, the faster you print, the more paper (mass) you got.

Who'd have known that Einstein knew this already in 1907?  6 years before the Fed was created!

fonzannoon's picture

Well if there was not a thing the government could do about it at this point then how can we explain the market being where it is at this point?

That being said I am in the camp of when it finally does burst, whatever the cause...there won't be a damn thing the government can do about it. What happens when we get to that point is the only question left.

 Kito I think they have a plan for cash by the way and it involves the new hundred dollar bill. I am sure you have read this. Any thoughts?

SAT 800's picture

The stock market is supported by a constant flow of buy orders that come in every month from 401K plans which are operating as mutual funds; they are "index funds"; they buy the S&P500; for instance. This very clever and diabolical mechanism has been in place for some time now. Consider, for instance, the chronically high paid government employees; they almost all, to a man, have 40lK's; and ninety percent of them are probably in index funds. I regard this clever plan of offering the public the IRA and the 401K; in the expectation that the mass media can drive 80%+ of the funds into the market as the greatest financial crime of all history.

fonzannoon's picture

I don't have any idea how and why what you just said always seems to get forgotten everytime we talk about how "retail is not in this market"

They are shoved into this market every two weeks. Stocks and bonds.


W T F II's picture

This was not occurring until now..? I guess the wires must have been crossed from Apr-June 2012 or Sept-mid Nov 2012 or from Aug-Nov 2011 of from May-end June 2010....??

Since current volumes are historically low, I guess there just aren't as many checks being processed...??

drdolittle's picture

In a nutshell why you can't keep money in "the market".

We're all gonna get rich buying the market, then we'll all retire by selling the market to the next guy!
kito's picture talking about the inevitable collapse................

W T F II's picture

AND....the "deflation camp" has a great campfire courtesy of collapsing lumber prices in the "Housing Boom Economy" we've artfully engineered for ourselves.

W T F II's picture


At least we know what he is seeing NOW. From the speech:

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."

Good post...

apberusdisvet's picture

gold rises in both inflationary and deflationary periods; in times of crises like the current one with the sky dark from 100s of black swans looking for a place to land, gold will be the ultimate wealth preservation hedge.

SAT 800's picture

Let's not forget Silver, now! It has earned its stripes and it's credibility throughout history. Other than that note; I agree wholeheartedly with your post. Do you or anyone have one paper dollar that has preserved the purchasing power it had at any relatively recent period? Such as the election of the Obamanation, for instance. Since that disgraceful slap in the face for intelligence, both the price of gasolene and hot dogs has doubled. I'm entirely out of patientce with these conventional financial planners and pundits with their various plans to gain more "dollars" in their portfolios"; it will not serve. The deal is going down.

Kirk2NCC1701's picture

Say what?  We all get how gold protects you during Inflation, but please explain how gold protects you during Deflation.

sessinpo's picture

This isn't true. During the the deflationary collapse of the 1930's, gold spot prices went down.


I beleive gold mining stocks went up but most commodity spot prices went down.

drdolittle's picture

Down from 20 to 35$ right?


booboo's picture

Trillions to to keep a balloon with two holes in it inflated, there must be air seeping out somewhere. Ben needs a bigger set of lips, Bartiromo sized lips.

prains's picture

and it's not a balloon

grid-b-gone's picture

  "we are witnessing the early stages of erosion of confidence in government and ultimately its paper money"

This is the point most don't consider. Every $85 billion month of market-propping printing erodes the value of every other dollar already in the system when there is not core growth in the economy to justify the printing. 

Throughout history, no political entity has been able to lay off the printing once it becomes such a central and integral part of the public sector in relation to the private sector.

Bernanke might think he will be the first, but history is batting 1,000.

Dewey Cheatum Howe's picture

It is not going to be Bubble Ben but his succesor that is going to try and taper off QE. You watch and see.

Antifederalist's picture

Taper, my ass. They will print until our eyes bleed. And it will seem normal. Until it doesn't.

Dewey Cheatum Howe's picture

The FED can't survive without the government, the government can survive without the FED if they truely wanted to. When QE endangers their survival which is real close, it will be tapered off.

KickIce's picture

Actually. when you consider the amount of money printed, aren't we already experiencing deflation?

Xploregon's picture


Wait a sec! -"The FED can't survive without the government, the government can survive without the FED if they truely wanted to. When QE endangers their survival which is real close, it will be tapered off."


So .gov will get deseprate and "if it wanted to", it could survive without the FED?


WHAT???  Are we talking the US Goverment? ROFLMAO.

SheepDog-One's picture

There's never going to be any 'tapering off' morning it will all just be shut down and everyones money gone, MF Global style. There's NO way out of this, the only endgame to this insanity is complete destruction of the entire aparatus, YOU watch and see!

Dewey Cheatum Howe's picture

You maybe right but I think we can all agree this shit show don't end well no matter how it ultimately goes down.

francis_sawyer's picture

& the day that it all goes POOF in an instant... & people are standing around wondering what the hell just happened... They're going to look for a scapegoat... & that scapegoat is going to have a face & a reputation for 'money changing'...

They're NOT going to take out their aggressions on a faceless limestone building with marble columns... You watch & see...

Dewey Cheatum Howe's picture

You are damn skippy, it is going to be wabbit hunting season when that happens. It is not just going to be the money changers that are on the hunting list once that happens, you can add politicians to that list. The government with it's FRN bonds it is issuing early next year (which coincidentally or not coincides with the end of Bernanke's term) should keep the government from defaulting in the short term doing some refinancing of existing bonds to keep the aggregate interest rate on t-bills low enough to not explode government debt. Contraction is coming, all the individual pieces says they are preparing for contraction probably as early as around the beginning of next year. (more likely with no unforeseen black swan events after midterm elections in 2014 assuming people throw out the status quo). Everything now is just extend and pretend until they have 'control' mechanisms in place to obfiscate the rate of contraction.

Herd Redirection Committee's picture

or people will take the scapegoat thats given to them.  'Government ineptitude' and 'Ignorance by the masses' and a dash of 'it was your own fault', and you never know how these things will be defused, misdirected, blow up, etc.

My wish is that people, at least 10% of the pop., become educated before we reach that point. 

I think the avg. person needs, for e.g., a deck of cards to guide them.

Herodotus's picture

If the money changers are lucky, they will be expelled in a manner similar to what took place in England in 1290.  Or with bad luck it could turn out to be a lot worse.  In any event, if I were a money changer, I would keep a packed suitcase next to my back door.

KickIce's picture

The end game is a shift from debt tyranny to full blown tyranny. You will only be premitted to work, rent housing or buy things if you play their game.

Vooter's picture

"You will only be premitted to work, rent housing or buy things if you play their game."

I bet we could still wreck housing and things if we felt like it...

W T F II's picture

They'll just switch to "EQ"...

SheepDog-One's picture

'EARLY stages of erosion in confidence in gubmint and it's phony paper slave money?'

Holy fuck if this is the early stages, there's no fuckin way I want to ride out 'middle' and 'late' stages....when will that be around 2350 A.D.?

Fuck all this I may as well go live in a tent this world is fucking bullshit.