Inflation Vs Deflation – The Ultimate Chartbook Of 'Monetary Tectonics'

Tyler Durden's picture

Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum's previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term "monetary tectonics' to describe the 'tug of war' raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their "inflation signal" indicator. has done a great job of summarizing the key aspects (and the full chartbook is below)...

The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:

  • Monetary inflation  is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
  • Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.

The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.

deflating credit vs inflating monetary base 2000 2013 money currency

The chartbook shows several trend which confirm the deflationary monetary pressure:

  • Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
  • US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
  • Money supply growth in the US and the Eurozone is trending lower. See second chart below.
  • Personal consumption expenditures are exhibiting disinflation .
  • The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
  • The gold to Treasury ratio is declining. See third chart below.
  • The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.

US bank credit commercial banks growth 1974 till 2013 money currency


money supply growth M2 vs M3 1991 till 2013 money currency


gold to bond ratio 2002 2013 money currency

On the other hand, inflationary pressure is present through the following trends:

  • An explosion of the monetary base M0. See first chart below.
  • US households show signs of stopped deleveraging. See second chart below.
  • The currency in circulation keeps on expanding.
  • Commercial banks have piled up an enormous amount of excess reserves which, in case of a rate hike by central planners, could flood the market through lending in the fractional banking system. See thrid chart below.

US monetary base since 1918 money currency


US households stop deleveraging 1971 2013 money currency


excess reserves 2000 2013 money currency

How is gold impacted in this inflation vs deflation war? The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.

The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:

  • Price deflation results in a real increase in the value of debt and a nominal decline in asset values. Debt can no longer be serviced.
  • Price deflation would lead to massive tax revenue declines for the government due to a declining taxable base.
  • Deflation would have fatal consequences for large parts of the banking system.
  • Central banks also have the mandate to ensure ‘financial market stability‘

inflation deflation US Fed 200 years money currency

Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.

monetary seismograph incrementum inflation signal 2013 money currency




Monetary Tectonics Inflation vs Deflation Chartbook by Incrementum

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Event Horizon's picture

In 1913, a paradigm was worth $0.20,

with inflation now $0.02

Boris Alatovkrap's picture

Definition of inflation and deflation is depend on who is define. Bankster fear deflation of asset, collateral backing, does not care of deflation of commodity or food or stuff is use by citizenry. This is not "deflation" of bankster. Bankster fear inflation is wages because citizenry is cut into wealth skimming activity of bankster. Now when fancy pant paid celebrity economist is refer to inflation and deflation, you are understand nature of discussion.

... just Boris' 2¢

SafelyGraze's picture

nice. the cents sign is recognized.

btw, which of the monetary measures captures derivatives / swaps

not M0 M1 M2 ..


bustdrs's picture

Big like.

We love it when people promote the deriv spreadsheet of the BIS.

It gives a chance to ask what we did to "manage risk' before deregulation was bulldozed through by fat Larry and Rubin in 1998.

tradewithdave's picture

Tan Larry ... endless Summers.

Carpenter1's picture

No way in Hades the banks let the debt slaves pay them back with debased currency. Deflation first, banks take possession of all assets at pennies on the dollar, then hyperinflation.

Crash N. Burn's picture

"As the debts go higher and higher (which can only end in a deflationary crash); we see the money-printing accelerating at least as quickly, if not faster (which can only end in hyperinflation). Much like the deductions of Sherlock Holmes appear “elementary” once explained to the reader; so too do these economic dynamics appear, which Williams was the first to correctly decipher.

Prior to committing us to a hyperinflation death-spiral ....; it would have been possible to have suffered only a deflationary collapse/purge – a debt-default purge known historically as “Debt Jubilee”. But this would have required the Masters of our Ponzi Economies to allow their own, ultra-leveraged Paper Empire to also be entirely vaporized in that economic purging of bad debt and malinvestment.

It is because these Masters (previously identified as “the One Bank”) refuse to allow their empire of bad debts and ultra-leveraged bets to implode that they have committed us to the worst of economic catastrophes, hyperinflation. Like trying to inflate a punctured tire; they pump more and more of their paper currencies into these Ponzi Economies (at an exponentially increasing rate)."

When Deflation Becomes Hyperinflation

Paper assets deflate, while real assets explode. I'd say "it'll be fun to watch", but of course, it won't.


Tall Tom's picture

Boris ...You might agree that now, today, you'd have had your paradigm. In 1973 it would be just your 2 cents...




Good pun Event Horizon...

Lucius Cornelius Sulla's picture

The ability to further expand credit is predicated on wages.  IMHO, as long as they remain depressed then deflationary pressures will persist.

LawsofPhysics's picture

Deflation of what?  Useless plastic crap you don't need, or commodities essential to survival and a high standard of living?  With 7+ billion, and growing, all competing for a better quality of life, I see plenty of demand for the latter.

Singelguy's picture

There is pent up demand but with stagnant / declining wages consumers have niether the cash nor the access to credit to satisfy that demand. With consumer debt at 160% of income (but declining slowly) even if the consumer had access to credit there is little ability to service more debt. Wages have to increase before demand can be satisfied.

Boris Alatovkrap's picture

Solution is obvious, raise Federal Mandate Minimum Wage to, oh, say $50, no $100 per hour. This is fix USSA economy for good.

Soul Glow's picture

Demand for what?  What do people actually need to survive?  Fresh water, nutrition, warmth.  And look at most people!  They aren't even getting those three things and they go to see movies twice a week.

Most people drink water with a ph below 5 due to city water and that is if they drink water at all.  Most people drink pepsi/coke products and eat fast food and neither has any nutrition.  As for warmth most people have horrible circulation from sitting all day.  See, people don't even need these things and they are staying alive like the Bee-Gee's.

So as for TVs and gadgets, well, people don't need them.  There is no pent up demand.  These things are wanted by greedy people, and when inflation and cost structures have oil around $100/b, these things fall by the way side.

BuddyEffed's picture

Deflation in things that require long term loans and a high probability of stable workforce numbers and stable workforce incomes.  If wages stagnate or unemployment increases, it would seem to follow that it could become harder to get credit and that the price on things needing 7 to 30 year loans could drop.  Deflation in discretionary items too.  But yeah, inflation in basic necessities seems very possible.

HoofHearted's picture

We like to call this "manipuflation." 

Herd Redirection Committee's picture

So deflation in:

House prices (in most non-laundered money locations)

College tuition

Cars (esp. new?)


Inflation in:

Energy prices

Food prices

Health care costs?

DaveyJones's picture

for those reasons and due to the uncertainty of money and its value. People are moving out of long things including long term instruments and continue to crowd money on the short end of things..where there's less risk with less time. No one wants to hold on to it for very long because it's becoming the very opposite of its purpose and function - certainty, stability, and a steady abstract of exchange. This happened in Germany in extreme ways, people would not take hold of the money until they knew exacty what they were then gonig to exchange it for, something in the real world.  

mayhem_korner's picture



Deflation will persist on things which are financed by debt so long as the credit supply is dammed up.  But things that are not financed - consumer staples, perishables, etc - can and will be subject to inflationary pressures.  Neither deflation nor inflation is universal - both can (and do) occur simultaneously as a function of the way they are financed.  And the more folks are strapped with keeping up with inflation on staples, the less they have available to service debt on durable "assets" like housing.

The only reason housing hasn't collapsed farther is that the beneficiaries of the endless liquidity are (again) speculating via cash purchases.  This will not end well, but I believe that the pressure from interest rates is going to be the catalyst to reel in the uber speculation on housing, stocks, etc.

bwh1214's picture

Until a loss of confidence, a physiological phenomenon, I believe it will happen and happen quickly at some point down the road.  At that point all debts will be destroyed.  It doesn't matter all that much if there are a trillion dollars or 100 trill, a loss of confidence will cause money velocity to skyrocket and however much money is in the system will be more then enough to cause the hyperinflationary spiral.

Soul Glow's picture

A Treasury auction where the indirect bidder doesn't hit buy should do the trick.

DaveyJones's picture

they're speculating and criminally? controlling the market by holding off foreclosures - which they can only do with the "criminal" assistance of public money

AbelCatalyst's picture

Totally agree...  In addition, in a fiat based system debt IS money, and the destruction of debt is a decrease in the money supply, which means an increase in the value of the dollar, which is deflationary...  As long as dollars have a place to go and die (debt destruction via paying down debt or default), then deflation will be in play... As soon as the debt shrinks to a reasonable level, inflation will kick off...  Unfortunately, we have a VERY LONG deflationary road ahead and the Fed is running out of runway...   

yogibear's picture

With over $200 trillion of US debt it'll be printing gone wild for Yellen and the rest of the fed members.

Debugas's picture

Yellen can not print to give money away for free

She can only print to lend out in exchange for obligations to repay back

Bastiat's picture

The fed can also print to purchase near worthless assets at inflated prices.  The inflated prices being the "giving away" part.

Debugas's picture

does not it need to get new treasury bills for it to happen ?

Soul Glow's picture

They buy whatever they want.  POMO is buying bonds from the Major banks after auction, the President's Working Group on Financial Markets, a function of the SEC, the Treasury, and the Fed, buys whatever they want whenever they want.

The Treasury are on the phone with the Major banks everyday.  They let them know what to expect in the auctions too.  Everything is coordinated in this market; that's where the term "don't fight the Fed" came from.

Yet they can't keep it up forever.  The debt loads are too high compared to revenue growth, because there is no growth, and there will soon be a saturation point where the debt load proves unstable per growth.

Simplifiedfrisbee's picture

This is simply a necessary function in the currency creation process. Debt equals currency. The breaking point will certainly not begin from within the financial sectors core operation. That is why QE is so important to the FED, it holds the crumbling infrastructure intact while the replacement is built. The White House is not going to nuke itself from the Pentagon.

The shock that ripples through Yellens crusty reptilian like feet, will be external. Look to the Middle East to provide the big middle finger.

The US will continue to be profitable after the so called "collapse." Only not for any average citizen. Furthering the financial regulations in many sectors and that excludes the majority.

Dr. Kenneth Noisewater's picture

Buying piece of shit mortgage-backed securities bought at 100 cents on the dollar = money printing.

Is next, piece of shit munis.

LawsofPhysics's picture

In the history of earth, no society/currency has ever collapsed/died because their purchasing power became too strong.

One has to wonder how resource  scarcity fits into all these eCONomic models?

hedge accordingly.

El Vaquero's picture

I tend to think that resource scarcity doesn't fit into the models. 

LawsofPhysics's picture

Somewhat of a rhetorical question, but perhaps we should ask Krugman, he has a nobel prize...

El Vaquero's picture

I would agree, but I don't think that Krugman will take too kindly to being interrupted from playing with his Vultron dolls.  He might get condecending with us, and that would be terrifying. 

WhyDoesItHurtWhen iPee's picture

I tapered a krugman this morning, pushed the handle, the vortex removed it from view, what a relief.  Deep fried fiat does it every time.

Boris Alatovkrap's picture

Quantitative Easing is monetary equivalent of bowel movement, but smell is worser.

Debugas's picture

it is not about resources scarcity

This model is about payable demand scarcity - people have needs but have no money to satisfy them

then if you ask producers why they can not lower the prices ? It is because they paid too much money to their workers and refuse to sell below cost of production


LawsofPhysics's picture

Mighty fine circular reasoning there, good luck with that cognitive dissonance.  The point is that the model is irrelevant as that which cannot be sustained, won't be.

Time for a reset, long past the time to find out the real value of everyone's labor.

pods's picture

I think most would be shocked that their labor is the private workforce equivalent of "non-essential."

OT I cannot even enter these arguments anymore as it gets me thinking about how much of human productivity was scammed over the last century with their "stable prices" bullshit.

Makes me sad because I could work for 12 hours a week and fish the rest of them if we were able to keep our productivity gains over the last century. 

But nope, back on the fucking wheel to pay off interest on these conjured up clownbux so the moneychangers can have a third estate in Bordeaux.

I never think about what it would be like to disembowel another human until I start thinking about how our "money" comes into existence.

Hallelujah! Holy shit! Where's the Tylenol?!


Sean7k's picture

At least you understand what's happening. Can you imagine being one of the ignorant masses? 

Tyranny sucks, but it really sucks for those that embrace it in its' fullness. We can choose to be bad and disobey. 

Keep up the good work Pods.

pods's picture

I sometimes get a bit irritated when it is this cold in the land of milk and honey (NC).  Gonna have to move down with the little brother in FLA.

And the new puppy is keeping me up at night.  :)


Tall Tom's picture

No I cannot imagine being one of the ignorant masses. "Your wise men don't know how it be Thick as a Brick"


But to be a little bit empathetic...Those whom belong to the ignorant masses cannot imagine that which you know.


I got it bad
You don't know how bad I got it
You got it easy
You don't know when you got it good
It's getting harder
Just keeping life and soul together
I'm sick of fighting
Even though I know I should
The cold is biting
Through each and every nerve and fibre
My broken spirit is frozen to the core
Don't wanna be here no more

Wouldn't it be good to be in your shoes
Even if it was for just one day
And wouldn't it be good if we could wish ourselves away
Wouldn't it be good to be on your side
The grass is always greener over there
Wouldn't it be good if we cold live without a care

You must be joking
You don't know a thing about it
You've got no problem
I'd stay right there if it were you
I got it harder
You couldn't dream how hard I got it
Stay out of my shoes
If you know what's good for you
The heat is stifling
Burning me up from the inside
The sweat is coming through each and every pore
Don't wanna be here no more

Wouldn't it be good to be in your shoes
Even if it was just for one day
And wouldn't it be good if we could wish ourselves away
Wouldn't it be good to be on your side
The grass is always greener over there
And wouldn't it be good if we could live without a care


~Nik Kershaw

Dr. Engali's picture

"I never think about what it would be like to disembowel another human until I start thinking about how our "money" comes into existence."


Many of us will have to examine who we are and what we are capable of doing in order to protect our loved ones in the upcoming shitstorm I am afraid. 

pods's picture

I think so to Doc. Not happily, more of a fatalistic view:

"Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats."

-HL Mencken


Professorlocknload's picture

True. Shit Storm coming. Authority has made it's choice in Moral Hazard, and can't back pedal now. In it's attempt to save face, hell will most likely have to be paid.

This is why I figure this will morph from voluntary to mandatory economic compliance, then into military compliance in it's ultimate evolution.

"Destruction of the currency involved"  now must be the end result. Just that it is a process, not an event, so who knows how long it can be strung out? Years? Decades?

Had the Rule of Law been enforced some time ago, the worst could have been avoided. At this point, it seems the power is no longer answerable to any law.


No Euros please we're British's picture

Shit storms are just another proof of global climate change and will be taxed accordingly. 10-20% from your pension fund and savings should do the trick.

BuddyEffed's picture

Are you sure it's not "people have needs but have no resources to satisfy them (or less resources to satisfy them relative to before)"?  I think the causality between money and resources and needs is that needs are really and ultimately satisfied by resources.  You can have money, but without resources, the money does you no good at all.

El Vaquero's picture

That's merely a proximate cause.  What happens in ponzi schemes when the exponential growth slows down or stops?  Everything goes to the top before it comes crashing down.  All debt based currency systems are ponzi schemes when you get down to it, and ours is no different.  We're already bumping up against the resource limits, and that is causing growth to be slowed down, and I would argue that it has stopped.  The dollars gone up to the top, and we are awaiting the crash. 


The problem is that the system is to rigid to allow people to easily adapt and too dishonest to tell them that maybe they should adapt.