Will It Be Inflation Or Deflation? The Answer May Surprise You

Tyler Durden's picture

Submitted by Michael Snyder of The Economic Collapse blog,

Is the coming financial collapse going to be inflationary or deflationary?  Are we headed for rampant inflation or crippling deflation?  This is a subject that is hotly debated by economists all over the country.  Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation.  Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts.  So what is the truth?  Well, for the reasons listed below, we believe that we will see both.

The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis.  This will happen so quickly that many will get "financial whiplash" as they try to figure out what to do with their money.  We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.

So why will we see deflation first?  The following are some of the major deflationary forces that are affecting our economy right now...

The Velocity Of Money Is At A 50 Year Low

The rate at which money circulates in our economy is the lowest that it has been in more than 50 years.  It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down.  The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession.  But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock.  This is one of the factors that is putting a tremendous amount of deflationary pressure on our economy...

Velocity Of Money

The Trade Deficit

Even single month, far more money leaves this country than comes into it.  In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year.  This is extremely deflationary.  Our system is constantly bleeding cash, and this is one of the reasons why the federal government has felt a need to run such huge budget deficits and why the Federal Reserve has felt a need to print so much money.  They are trying to pump money back into a system that is constantly bleeding massive amounts of cash.  Since 1975, the amount of money leaving the United States has exceeded the amount of money coming into the country by more than 8 trillion dollars.  The trade deficit is one of our biggest economic problems, and yet most Americans do not even understand what it is.  As you can see below, our trade deficit really started getting bad in the late 1990s...

Trade Deficit

Wages And Salaries As A Percentage Of GDP

One of the primary drivers of inflation is consumer spending.  But consumers cannot spend money if they do not have it.  And right now, wages and salaries as a percentage of GDP are near a record low.  This is a very deflationary state of affairs.  The percentage of low paying jobs in the U.S. economy continues to increase, and we have witnessed an explosion in the ranks of the "working poor" in recent years.  For consumer prices to rise significantly, more money is going to have to get into the hands of average American consumers first...

Wages And Salaries As A Percentage Of GDP

When The Debt Bubble Bursts

Right now, we are living in the greatest debt bubble in the history of the world.  When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up.  We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again.  Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.

During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money.  The "easy credit" of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.

When the debt bubble bursts, cash will be king - at least for a short period of time.  Those that do not have any savings at all will really be hurting.

And some of the financial elite seem to be positioning themselves for what is coming.  For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash.  That is the most that he has ever had sitting in cash.

Does he know something?

Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens.  The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system.  It will probably be far more dramatic than anything we have seen so far.

So cash will not be king for long.  In fact, eventually cash will be trash.  The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.

That is why gold, silver and other hard assets are going to be so good to have in the long-term.  In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.

In the coming years, we are going to experience both inflation and deflation, and neither one will be pleasant at all.

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THX 1178's picture

Kyle Bass tells us that the US will "kill the dollar". That only happens through Hyperinflation. Deflation would lock the economy up and Paper money would become scarce. I'm literally putting money on Hyperinflation.

economics9698's picture

Dollar devaluation, less imports, foreign countries demand gold or real imports for their exports, domestic supply exchanged for trade = higher prices.


Any questions?

sunaJ's picture

That is viscerally their insane idea, isn't it: to attempt to ride the wave of deflation by creating "controlled" ie explicit and manipulated/secret/hidden inflation?  We have heard the term "soft landing" applied to the US now.  This is the monetary and fiscal conclusion of idealogues lost outside their broken paradigm.  They will be driven to control more, because they will need to financialize and subsidize more to keep the ponzi going.  I would expect in this kind of environment for the category "The Government And Its Contractors" to rapidly dominate the U.S. economy.  When you cannot recognize the difference between corporate and government power, you have fascism, or so I've heard...

francis_sawyer's picture

"For my birthday I got a humidifier and a dehumidifier. I put them in the same room and let them fight it out."

~Stephen Wright


- "I bought some batteries, but they weren't included. So I had to buy them again."

- "My buddy got busted for counterfeiting. He was making pennies. They caught him because he was putting the heads and tails on the wrong sides."

- "Last week, I went to a furniture store to look for a decaffeinated coffee table. They couldn't help me"

Pinto Currency's picture


When you see the bond market crash because of fear of c.b.'s, where will investors run?

Cash?  Maybe for a day or two.

jekyll island's picture

If the gubmint controls the situation according to plan we will have inflation or hyperinflation.  If they screw it up we will have deflation first.  How confident are you that the government will do things correctly, at least according to their agenda?  Have some gold, have some cash, that way you will be protected and will even be able to take advantage of whatever situation they create.  Just don't count on your cash being in your retirement account, me thinks the gubmint will want to protect it with their high quality US Treasuries when TSHTF.  

Pinto Currency's picture


Perhaps we can sum is up as we have a large mess and plan for the worst given the parties involved.

donsluck's picture

I agree, but I'll take it one step further, keep ONLY cash and pms. Everything else is a worthless promise.

Creepy Lurker's picture

Exactly. If you can't hold it in your hand at a dead run, you don't own it.

I have a friend I've known for many years. Out of friendship, I've made sure he knows everything I've learned. He claims to believe and agree with me, yet he takes no actions. Still contributes to the 401k, company stock program and mutual fund retirement program. He's going to lose everything. I worry about him.

Meat Hammer's picture

One thing this article fails to mention is all of levels along the supply chain where .gov (fed, state, & local) normally exacts its pound of flesh that currently don't have flesh being fed into them.

andrewp111's picture

That is when local cops go rogue and extract the pounds of flesh on their own.

DanDaley's picture

That's called Mexico or Chicago...don't leave home without bribe money.

lord of the flies's picture

GUYS WE HAVE A SITUATION HERE! let's define some words: sofar we don't live in a linear economy inflation or deflation can't only be the result of the growing or shorted amount of legal tender currency! so what is it we are talking about?

first: when people loose faith in the paper currency there is no limited pace at wich the paper can circulate and be sure the printing press at that time will never follow... that's usually how paper currency scum finaly termites itself: hyperinflation of prices with hyper-acceleration of the circulation of bills that no one wants anymore in hands when the musics stops !

but befor that final stage is reach hyperdeflation can manifest for the reason that people earn no money and wait for prices they can afford to go down! remember in real world inflation is depending of the number of times a coin or a bill changes from real consumers hands in 1 day more than the total amount of credit issued by banksters that usually feeds speed trading (or dating?) robots and bubbles than real people salaries!

so u see know banksters can decide to create money they dont have can create bubbles but cant make people trust phony money neither buy higher prices when their nominal wages go down; that leads to both hyperdeflatioary circulation of currency with hyper inflation of printed wothless toileet paper for virtual bubbles masturbation!

the question is not anymore what prices gold and silver in paper bull shit but rather who will have precious metals in its hands when nothing will be exchangeble for fake paper money anymore!

Winston Smith 2009's picture

"I put instant coffee in a microwave oven and almost went back in time."

"I went to a restaurant that serves 'breakfast at any time'. So I ordered French Toast during the Renaissance."

"You can't have everything. Where would you put it?"

"What's another word for Thesaurus?"

"It's a small world, but I wouldn't want to have to paint it."

"Whenever I think of the past, it brings back so many memories."

"I have the world's largest collection of seashells. I keep it on all the beaches of the world... perhaps you've seen it."

"I went down the street to the 24-hour grocery. When I got there, the guy was locking the front door. I said, 'Hey, the sign says you're open 24 hours.' He said, 'Yes, but not in a row.'"

"I poured spot remover on my dog. Now he's gone."

"When I was a little kid we had a sand box. It was a quicksand box. I was an only child... eventually."

"If you shoot at mimes, should you use a silencer?"

"Ever notice how irons have a setting for permanent press? I don't get it."

"If God dropped acid, would he see people?"

"The other day I... uh, no, that wasn't me."

Steven Wright

daxtonbrown's picture

GDP = M * V has two variables. That means there is no way to predict inflation or deflation, only to predict massive distortion as the informational value of money collapses. What you get is a Biflationary Depression.


Stoploss's picture

Massive deflation first.

This shines the light on where the debt is, (as if we dont already know), for all to see. Then comes the debt jubilee, or there will be default. This time is not different.

Massive hyperinflation comes after the debt jubilee, or default, whichever choice is made.

That will most likely require interest rates in the forty percent range based on the monetization that we know about..


So, the usual bond market implosions, stock market implosions, imploding implosions upon implosions, it's looking more an more like i picked the wrong decade to stop drinking..

Manthong's picture

"debt jubilee" ??   more likely just massive defaults and withholding of payments by those that still have capital and will sneer as the debt miesters eat themselves.

Spitzer's picture

Hyperinflation is not the printing of money. It is the loss of confidence of the money that has already been printed.


For details, see the Asian financial crisis


El Viejo's picture

So the gold mongers have been casting doubts on the currency to increase the valuation of their assets??

HMMM original.

Stoploss's picture

Staring down the vortex of deflation with the wind at your back would result in some strange shit. Always happened before in some form or fashion.

There are many more variables now with the development of the new financial weapons.

Either way we're going to find out whether we like it or not.

Lore's picture

Janszen's "Ka-Poom" model. I hope he gets recognition for it in posterity, as I think he was the first.  Unfortunately, it won't be so neat as all that, since third parties are about to pull the rug out.

j0nx's picture

What third parties? Do tell. Anyone that pulls the rug out gets tripped up along with those who they pulled the rug out from under. It's called MAD.

Lore's picture

When rules keep getting changed, the only logical recourse is to stop playing a rigged game.

anonnn's picture

Which is more likely?

Classic debt jubilee? or

Government-brand of debt jubilee?

E.g. Student debt-- forgiven if join the military.

Credit card debt-- forgiven if volunteer for radiation contamination cleanup.

Utilities debt--  forgiven if volunteer for mediical experiments.

Auto loanr debt-- forgiven if donate body parts.

Mortgage debt--forgiven if volunteer for assassination teams.

Other debt-- volunteer as FEMA guards, dishonorable snitches,  disappearance teams, goon squads, house-to-house gun seizure teams, etc. 

C'mon. The best and brightest from Harvard, MIT, etc csn easily create  attractive and workable options as needed. Real win-win stuff.

For TPTB, what's not to like?


espirit's picture

Geez.... I hope you turn down that high-ranking .gov job when offered.

Your thought train is scary.

new game's picture

or you can be herded onto the train...

hey, what if you or I was, say, not in this fucking country? huh, like sittting near the beach in a far away country...

then, i ask? do you really care? only if it spreads to wwIII and comes knocking, and that is why picking the right spot is omni-important...

ie. marc faber and the other goof ball with the bow tie

samcontrol's picture

yet , nobody is interested in my self sufficient farms.

cro_maat's picture

Community farms (solar & wind powered, with water / mineral rights) will be islands of hope in the chaos. However, the Monsanto sponsored goon squads, rain police, DHS and other yet to be created farm confiscation SS will make for a lively countryside!

eddiebe's picture

There is one thing we all seem to be leaving out: Bail-in.

ATM's picture

Our "bail in" is going to be massive money printing. That steals accumulated wealth. No need to get involved in messy negotiations between debtors and creditors and equity holders at all. They just print and anyone with dollars is forced to bail in. Much easier politically and gives these thieves cover so they can blame all the usual suspects.

donsluck's picture

I will stick to my guns and propose that the EU is healthier than the US BECAUSE of bail-ins. This is how a bank bankruptcy SHOULD work!

Lord Koos's picture

I think you are correct.  Bank fails, people lose money.

Urban Redneck's picture

or Derivatives, or Taxes- or any other competing claim on the limited money supply, that the FED will be "forced" to respond to at the end of the second act... 

MrSteve's picture

you omitted currency revaluation or reissue of a new, sound currency. That has happened...

Ignatius's picture

"Then the machines."

Back in the 80s I would joke that we're all gonna be either money managers and restauranteurs.

Funny then, but the algo's are seemingly already burying the money managers.

The point of an economy in my mind has always been about serving the people at large.  Maybe Ted Kaczynski was on to something....

Stuck on Zero's picture

What's safe?  I don't believe that it's possible to hold cash unless it's in the form of $100 bills in the mattress.  You may think you have cash in the bank but the bank loaned it out or purchased bonds with it.  People think they have safe cash in Switzerland but it's likely the Swiss loaned it out to none-too-safe Euro deposits.  You may think you have gold in an ETF but probably it has been loaned out or rehypothecated.  You may think you own property but the state can tax it away from you in a blink - like they did in the depression.  Buy physical and make friends.


HulkHogan's picture

If you live in Canada, and banks will honor them with cash value, buy those new $100 silver coins and stuff them in one of your many moose heads hanging on your wall.

The Heart's picture




lasvegaspersona's picture


Robert will be right...for his 15 minutes (h/t fofoa)

He will then be wrong again...Deflation has NEVER EVER happened to a fiat, purely transactional currency...EVER!!!

The central bank can just buy up debt for cash and the collective suffers the cost via hyperinflation!

Pool Shark's picture



But there has never been so much global debt.

What's the USA's official debt? $16 trillion? If you add in unfunded entitlements and liabilities, maybe $75 trillion?

Okay, how much currency (M0) actual cash and coin is there in existence? About $1.5 trillion?

When the debt comes due, there isn't enough paper to pay even 2% of our debt (not to even mention private debt). How much cash do you have as a percentage of your total net worth? 1%? 2%? 5%? Even if you include bank deposits, how much actual 'money' do you have? Now imagine all your streams of income are stopped; how long could you survive on the cash/bank deposits you hold? Maybe a couple months? Do you think the price of things (with the possible exception of food & fuel) could actually go up in such an environment?

Our debt isn't even backed by paper!

When things collapse, cash (FRN's) will be in very short supply (just like they were in the 30's).

When the collapse comes, it will be deflation: 'The Destroyer of Worlds."

All Risk No Reward's picture

The proper context for analysis is that of a societal asset stripping operation.

The Fed is a Trojan Horse and this is a classic, Sun Tzu Art of War operation in order to seize control of their prey/

How to be a Crook


Renaissance 2.0 - Financial Empire - Full Length - Damon Vrabel


JP Morgan is very high up in the POWER CHAIN.  They are not giving out 3.5% 30 year loans because they are dumb.

Their OWNERS control the system...  and they are lending 30 year money at 3.5%.

They are lending 3.5% money to further indebt society in anticipation of bankrupting society and rolling up that property under their TBTF front corporations.

Your community's bond slavery will not have been an accident or oversight.  If you remember one thing, that's it.

Squid-puppets a-go-go's picture

ergo, the solution is:

0) allow every insolvent corp & bank to go bust & default on the dollar

1) revolution

2) debt jubilee

3) nationalise all the assets stolen by the jp morgan type assholes 

4) provide genuinely govt banks to reissue credit at non-usurial rates

5) transition towards re-privatisation over a period of around 20-30 years - but this time without multinational oligarchic monoliths to overpower the will of the people and politicians


this, of course, is dependent on the $US being replaced with a new currency that is low enough to be reflective of america's diminished power, thus enabling reinvigoration of manufacture and trade balance

Marco's picture

How do you identify the jp morgan assholes in general? Other than being rich that is.

Urban Redneck's picture

The government is a very poor provisioner of credit and lacks the skills to accurately gauge risk-  so the inevitable result would be more 0% loans for Solyndra cronies who couch their graft in policies that appeal to "social good" and no money at any cost for people extracting and manufacturing wealth.

I have the suspicion that most American sheeple are so addicted to ZIRP credit, that if they were confronted with real (unsubsidized) interest rates they would scream bloody usury...

blindman's picture

you need a finer brush to paint that picture.

zhandax's picture

They are not lending their 30 year money at 3.5%