Deflation = Debt + Demographics + Disruption

Tyler Durden's picture

With every passing day the Fed, which recently revealed that among its mandates are China, the VIX, the Dow Jones, and who knows what other market-driven indicator (a market which is also influenced by the Fed, leading to the mother of all reflexivity nightmares), is realizing the trap it has set for itself with 7 year of ZIRP and QE, two policies which on their own would have boosted much needed inflation (because a world drowning in $200 trillion in debt can only survive if the debt is inflated away, otherwise mass defaults are imminent), and yet has seen inflation expectations recently tumble to lows not seen since the financial crisis.

The reason for this pervasive global deflationary tide was explained by Bank of America in very simple terms, or rather letters, as follows: Deflation = Debt plus Disruption plus Demographics.

To wit: The cyclical fallout from the Great Financial Crisis and the secular deflationary “D’s” of excess Debt, tech Disruption, aging Demographics have been the major catalysts for deflation.

  • Disruption: Technological innovation and disruption are driving many goods & service sector prices lower (rent & health care are two important exceptions); extending human life and the propensity to save; fostering wage and job insecurity.
  • Demographics: The size of the working population of the developed world peaked in 2011 and will fall from 833 million to 799 million by 2025, putting downward pressure on potential growth and inflation (Chart 3). And by 2050, the world’s “Silver Generation” will increase by 885 million people, many of whom will save more in anticipation of old age.

  • And of course record Debt: "Minimal deleveraging since the GFC and a large debt overhang remain impediments to nominal growth; global debt as a % of GDP actually rose from 162% in 2001 to 211% in 2013, an all-time high."

Incidentally, it is the last bullet, runaway debt, which has been the most insidious outcome of global "all out" QE. Over the weekend Macquarie explained the implications of this vicious loop very simply:

... the challenge is that ongoing flow of QEs prevents rationalization of excess capacity (in turn created through the process of preceding three decades of leveraging) whilst also precluding acceleration of demand (both household and corporate), as private sector visibility declines. Hence declining velocity of money requires an ever rising level of monetary stimulus, which further depresses velocity of money, and requiring even further QEs. Also as countries compete in a diminishing pool by discounting currencies, global demand compresses, as current account surpluses in these countries rise not because of exports growing faster than imports but because imports decline faster than exports. This implies less demand for the global economy.

Putting all this together with the failure of central banks to generate stable and benign inflation using existing "unconventional" means, is precisely why over the weekend BofA also made a call for a "massive policy shift in 2016", which in not so many words, was just the latest call for helicopter money, joining other banks such as Citigroup and Deutsche Bank asking for the same.

Finally, what does the end of QE and the start of something "bigger" mean? We explained that too over the weekend when we excerpted from the full Macquarie note which summarized what is coming as follows:

We believe that the path of least resistance would be to effectively ban capitalism and by-pass banking and capital markets altogether. We gave this policy change several names (such as “Cuba alternative”, “British Leyland”) but the essence of the new form of QE would be using central banks and public instrumentalities to directly inject “heroin into blood stream” rather than relying on system of incentives to drive investor behaviour.

And with that, the methadone clinic has officially given up, and is about to tell the long-suffering drug-addict that time to mainline "monetary and fiscal heroin" has come.  We expect the mainstream media narrative to shortly shift to one of managing terminal expectations.

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LawsofPhysics's picture

Deflation my ass.  More propaganda from bankers/financiers.

The cost of anything required for a decent standard of living (rent, education, healthcare) has not gone down, especially realtive to wages and purchasing power!

Get long sharecropping and guillotines!

LawsofPhysics's picture

Don't confuse fiat with real money or real costs!

The velocity of a dead currency is in fact zero!

The NSA and banking trolls must be out today.  Lots of junks but no response to the fact that rent, healthcare, education are all up and wages as well as the pruchasing power of the FRN is down.

Oh well, the truth is always treason in an empire of lies...

Ghost of Robotrader's picture

But your ronco salad shooter price is way down.  The price of RAM is way down.  Hookers are about the same.  Beer is still fairly cheap.  I suppose we should look at shadowstats for the pre hedonic scoop

ToSoft4Truth's picture

'Prices actually have dropped from a year ago, according to the inflation measure used for the COLA.'

'For just the third time in 40 years, millions of Social Security recipients, disabled veterans and federal retirees can expect no increase in benefits next year, unwelcome news for more than one-fifth of the nation's population.'

Bring the Gold's picture

Absolutely. I went to the grocery store and marveled at lower prices, when I visited the doctor it was noticeably cheaper. Oh and my landlord sent us all a letter stating he was lowering rent. Outside of gas what necessity is cheaper now than 9 years ago?!?!

LawsofPhysics's picture

Great sarcasm!  Yes, as a landlord myself I said, what the heck, I can just eat some of those increasing costs to maintain my rentals, my property taxes etc....    NOT!

Lostinfortwalton's picture

Bought a pound of coffee lately? It is 12, not 16 oz and the price of each package has gone up as well. Ordered a steak at Outback? Yoou can't find it on your plate it is so small, but the price has increased. And on and on.....

Bemused Observer's picture

One can have deflation in some asset classes, and inflation in others...this is yet another consequence of our screwed-up markets.

The deflation they are worried about isn't at your grocery store, they couldn't care less about that. It's deflation in investment assets, like real estate, stocks, etc. All the propping they are doing is to support those prices. And as long as they do that, you will see higher grocery bills and less purchasing power. To preserve the illusion of wealth in the investment assets, the inflation must be transferred to something. You'll pay higher prices for food so that big RE 'investors' don't have to suffer losses on their properties.

But don't'll have more "equity" in your overpriced home, which you can access by taking out a low-interest loan! Aren't you the lucky one!

If people stopped buying into the whole 'property wealth' meme, and stopped thinking of their homes as ATM's, RE prices could start coming down big-time. What difference does it make if your house goes up 25% in value if you aren't moving, and have no intention of taking out a loan? That increase only benefits the banks making those loans, and your local property tax authorities.

Learn this people! Your house is your HOME, it's value is not properly measured in dollar amounts. Lower RE values are GOOD for you! You are living in the house, and are getting the benefit regardless of 'market value'. You are taxed on the dollar value however, so higher 'values' only mean you owe more in taxes, and can't relocate due to those higher prices.

But lower RE values mean that big 'investors' will start losing their shirts, and the effects of that will 'trickle down' to your local grocery store.

Seer's picture

Credit, which is really the true (with the actual system that has been in place for quite some time) economic controller IS being squeezed, it's being compressed.  When one looks at The Big Picture (and this article points out the really huge elephant in the room- demographics) it is clear that we're the opposite of growth.  Other than a big fucking war, or some nasty plague affecting the older portion of the world's population, there's really no way to resolve this trajectory such that we'd see any significant change in the short and mid term.  These are the things that are driving the bus, "prices" and such are but bouncing up and down as the bus rambles down the pot-hole'd downgrade.

I take issue with the author over the notion that this is all forcing people to save.  As you, LoP, rightly note, any such savings are being diverted toward supporting the more basic and essential things.  But, really, how could we have continued to have it all inverted such that iShit was more important than essentials?  Looks like the human population (West especially) is "maturing."

1stepcloser's picture

so we are running out of future debtors...

Seer's picture

Everybody out of the Ponzi Pool!  The party is over.  The growth mechanism is dead.

Dr. Engali's picture

Banning capitalism suggests that capitalism existed in the first place. If it did then the "too big to fails" would have collapsed long ago. What we have is cronyism and look for a false flag to bring the current illusion to an abrupt end vs the media managing it's terminal decline. 

Seer's picture

Nothing "pure" could ever exist in the hands of man.  Our "cunningness" will once again have us developing some other "improved" system that is capable of maintaining mass delusion, for a time...  And for sure, it'll be based on the sucker line that is: the reward is to be found in the future (while TPTB realize the rewards today).

cougar_w's picture

How can anyone write about our situation and not mention failed energy policy and the ultimate end of infinite growth?

The growth story is over. Fucking over you got that? Without free energy you don't have a growth story, and without growth you cannot service debt. Without debt you cannot support a parasite class. Without a happy parasite class you cannot have a moment of peace because those fuckers never shut up. I mean they totally lose their shit if you don't feed them. Feed me feed me bleed for me!!!1! They own the media they own politics they own everything and the moment the growth story started to falter and die, they started shouting. FEED ME! No growth? Well fuck that all you losers are taking out loans to pay your debts now jump you pagans! FEED ME!


Time to shut up and die, parasites, the host is tapped out.

LawsofPhysics's picture

Yes, but no energy is required to create all that electronic FIAT out of then air!

See the real problem yet?


cougar_w's picture

Okay let's play a little game then:

The Fed stops printing fiat for the bankster class to use to lift stock prices with.

The developed world runs out of cheap energy.

Now you go ahead and tell me which one kills you first?

LawsofPhysics's picture

Don't be such a fucking pussy.  Life has involved risk for thousands of fucking years you stupid fuck.  My tribe and I are prepared, that you are not is not my fault, it's YOURS!

No risk, no reward, right motherfucker?!?!?

Bring the Gold's picture

Cougar what are your thoughts on currently cheaper energy prices? Do you see a super spoke back up to and beyond 2007 prices? I am all about EROEI, but I've been feeling the fool for awhile now based on the energy markets.

cougar_w's picture

You are excused for being confused. The energy situation is insane.

EROEI is blown. A few oil patches are still in the green, but most of them are in big trouble. Fracking is dead dead dead, it was never much more than a land ponzi anyway.

Everyone wants to make a projection, the best I would hazard is that energy prices stay low for a while until we reach critical demand (those who cannot do without) and then the price goes through the roof. $500/bbl wouldn't be out of reach. It would probably mean war.

Seer's picture

The current energy prices are about entities trying to outlast their competitors: this is actually happening everywhere, not just energy.  If by "price" we mean "affordability," then yes, "prices" WILL go up: we won't be buying as much of other things (we're, wether we want to or not, returning to "basics.")  Consolidation and relaxing of regulations (as well as acceptance of outright war to gain access to energy resources) will help shore up margins for a bit, but the downward pressure will continue until we're spending more of our collective energy to obtain energy, until we hit terminal negative EROEI and face total and final collapse.

Thinking in terms of "prices" is flawed.  Better is "affordability."  "Prices" could be low and nearly everyone unemployed, how meaningful then would "prices" be if you still weren't able to afford it?

CoolidgeLives's picture

Bernanke, The Hero.

gcjohns1971's picture

"Disruption: Technological innovation and disruption are driving many goods & service sector prices lower (rent & health care are two important exceptions); extending human life and the propensity to save; fostering wage and job insecurity."


This sentence is proof of banker madness... or asymetrical knowledge distribution over time,if you wish (the former being equally true and easier to say).


Largely electronic currencies cannot be 'saved' outside the banking system in any quantity, as is easily done with commodity currency.

So how, exactly, does it foster wage and job insecurity???????

So-called 'Savings' implemented through 'Savings' accounts, CDs, Money Markets, etc, are not merely fully invested already, they are fully in vested at a multiple through the fractional reserve ratio of the banks.

This whole line of arguement, and indeed the whole article, is a red herring.

When your currency system requires 1+ unit of debt to back 1 unit of are eventually going to grow debts too large to service.  They are impossible to pay right from their inception - BY DESIGN.  Because you can't pay 1+ unit of debt (1 unit of principal + interest) with only 1 unit of currency.

The bankers are in a monkey trap.

All they have to do is have a debt-jubilee to get free.  But a debt jubilee will destroy their wealth, even if it leaves their banking businesses intact.

The alternative is to destroy both their wealth and banking businesses when people simply default en masse (each default of 1+ unit of currency wipes out 1+ unit of debt...because the interest was paid first!!!)

It really is a monkey trap.

They can't get out with their stolen gains.


LawsofPhysics's picture

"All they have to do is have a debt-jubilee to get free.  But a debt jubilee will destroy their wealth, even if it leaves their banking businesses intact." -- This to me simply confirms their greed and desire not to actually have to work for a living again.

Fuck em, if they want to commit suicide, I say LET THEM!!!!

It would have been far more equitable to simply give every tax payer a million dollars with the requirement that they pay down debt FIRST! 

Seer's picture

"Go forth and multiply."  Humans have been operating under the illusion that "growth is good" for a LONG time.  Our key failing was that we didn't question the premise: that there could be unlimited growth on a finite planet.  I suggest that the System is a rational reaction to this premise.  The DESIGN goes back a lot further than we're willing to recognize (but laying blame on groups of people, though they may be supreme deceivers [humans are deceptive, we tend to not want to believe that, which provides us as easy marks], is a lot easier than trying to grapple with the flawed premise on which we tend to base our very existence on!).

"They can't get out with their stolen gains."

Greed is a pretty tough tiger to tame.

I'd have to question whether most of those "gains" were really gains to begin with.  We've lost track of the true measures of wealth: Food, Shelter and Water.  The era of paper wealth is fading fast...

Zen Master's picture

Hyperinflate to the heavans and beyond...followed by a very hard landing.

Cannot guarantee destination. Confirm Order....Confirmed!

Sir SpeaksALot's picture

you mean they dont know?

Lies-all-lies's picture

Ya the debt and demographics are the important parts. In the end though those are still half measures when dissecting the problem. When you have an economy with declining demographics plus 35 years of deteriorating exports you cannot sustain any debt. So as the shit is grinding through the fan it was decided that pumping fresh curency into the only collatoral that could sustain the illusion of economic growth, recovery, and properity was the only thing to do because a real reboot is to hard and goes againt the wishes of the influential because this would require distributing their own wealth back into the national infrastructure. This is now backfiring because I think people at the fed underestimated how much of the cash printed would make it into the private corporate accounts and overseas bc deflation is most defintly the last thing they need as seen by their inability to do a damn thing about it. Dollars heading for suturn and prep for NIRP so that the masses can be punished for the sins of the few. Commodities will go the same way. Then a reboot. 

- Lies's picture

Debt and demographics are only important in the current monetary, financial and economic setup. They do not have to mean anything. Human society thrives of energy consumption, i.e. energy availabilty (food first of all, but also wood, coal, oil, solar). White's law is the first to identify this. Hence if we have more energy, we can live better and produce more. This would be the supply side argument that we can actually create much more wealth. The demand side causes deflation because of rising inequality which causes reduced resources to be available to people who will spend their resources on the products we can create.

Lies-all-lies's picture

Right, but realistically our actual procduction capacity has decreased as fast as consumption increased. There is a ratio between production and consumption that must be maintained to have an actaul economy like the one America imagines it still has. We do not actaully have a super power economy and arguably have not since the 70's and even that may be pushing it. Quite masterfully we decoupled from reality using the credit production scheme which finances the larger financial burden but assures negative growth over the long run to the lack of good collateral production inherent to the new american way.  I think it comes down to change over the last 40 years in what people actaully see themselves doing and understaning the difference between a Mac-Mcdonalds economy and a steel economy. 

- Lies 

Seer's picture

For fuck's sake, THEY know damn well that perpetual growth on a finite planet isn't possible.  They have been able to milk things just as the hundreds of generations before them have known how to milk- through great story-telling, by getting the desperate masses to believe in the promise of "future rewards."

It's coming to a head now because we've run out of material to exploit (in aiding the illusion).

nostromo17's picture
Deflation = Debt + Demographics + Disruption

is not catchy and poorly topic explicative even if accurate, just saying.

nostromo17's picture
Deflation = Debt + Demographics + Disruption

is not catchy and poorly topic explicative even if accurate, just saying.

MEFOBILLS's picture

Video is from America of 50 years ago - a flashback to a different time, a time which had a different kind of money supply.

At 5:30s into this video Joe borrows money from Aunt Minney and Uncle Angus and Granpappy and Mr.Titus.  That’s how it worked then, but not really today.

It says nothing about Joe going to the bank and borrowing ahem…creating new credit as money.  Since all money today is credit, then the money supply depends on debt instruments.

Joe’s friends and relatives help him buy tools and property.  Note that Joe’s friends and relatives have savings, and their savings represent past wealth accumulation.

Joe’s friends and relatives become CAPITALISTS by  entering into enterprise.  Joe’s friends and relatives now are share owners with their capital as money, and capital as buildings/tools being put to use.  Joe and relatives are also share owners in land.

Land, Labor and Capitol all come together to create new goods and services.  This is down low capitalism, created organically at a family and neighbor level, possibly also helping out local economies.

But today’s financialized world is not type of Capitalism depicted in the video.   Today’s financial capitalism is also called crony capitalism.

Today, 97% of the money supply is banker credit.  This type of money cannot easily become savings for Aunt Minney, Uncle Angus and Mr. Titus. 

In a MAD (money as debt) credit world, when paying off a loan, the first seigniorage goes to banker.   Example:  A $150K home loan may be $450K over 30 years.  The $300K profit to banker is paid upfront at beginning of debt contract.  Some of this money fluxes out as respent by banker, but the rest concentrates into the .01%.   The usury, or interest on this loan is NOT earmarked for principle payment.  Banking and finance then get to hoard this usury money, and make use of it by buying  financial assets or to speculate.   Minnie, Angus and Granpappy are under constant drain pressure as labor’s exchange medium is banker credit as money, and this type of money is constantly under drain pressure, to then disappear into loan principle, or to pay usury up front.  The upfront payments loan payments usually vector away to Oligarchy.

Finance Oligarchs are then able to buy Joe’s patents for cheap as Joe goes into bankruptcy.  Finance Capital then assembles Joe’s innovations, assets, and patents into a large company.  Said large company, now in alignment with private banking finance, then tries to monopolize and corner the market, especially by bribing government and politicians.

Capitalism would work, if the money type changes to become a much larger component of floating type – maybe 70%.  In other words, with sovereign money, a real form of capitalism would re-emerge, and would be viable.

  A money supply that is 97% bank credit is financial capitalism, and this type of capitalism is one of finance rentiers in control of money power.   The parasites are using a debt usury mechanism to steal - it is welfare for the rich, and the finance got that way by running a giant con game (not by being more productive or creating something new and useful).

 The parasites latch onto useful productive parts of the economy and suck its energy and lifeblood. Creation events down low in the economy, at Joe’s level, are short circuited thus preventing a renewal cycle.  Shill cry’s then ring out across the land, asking for some sort of new ISM.

But, the real fix, is to fix the money type. 

We have no discussion about the nature of money, especially credit money and its effects.  The primary cause, source, well spring is money as debt.  As long as the money supply is MAD, then there will be MAD results.'s picture

No, no, no. I like the Icelandic ideas, but there is a problem with sovereign money. Sovereign money is as good as the government behind it. Weimar Germany, Yugoslavia and Zimbabwe are the examples. When the going gets tough, a sovereign money system will collapse currency at ease.

It's a better system than the credit expansion though.

The money system needs to be fixed to lowest common denominator for everything which is energy. Anything from an iron ingot to a space station can be calculated in the amount of energy (Joules) used to create it. Everything that exists within technosphere can be calculated like this. The total amount of energy consumed in a year is our actual GDP. Total amount of money needs to be tied to total amount of accumulated energy (building, products) - deterioration (energy required to restore usefulness to initial) + current yearly energy expenditure.



Seer's picture

"The primary cause, source, well spring is money as debt."

Born out of the notion of perpetual growth (on a finite planet).  No, the "primary cause" is our belief that growth is good and that we must always grow.  ALL empires collapse not because of any failings of ideology or leadership [or "money"] (see Sir John Glubb, "The Fate of Empires"), they fail because they are all premised on perpetual growth.  Civilization is really about cities, and cities' basic modeling is that of a collection of people whose existence relies on the import of goods and materials; importation is never sustainable as it requires the continued (perpetual/eternal) support of external entities (one needs to understand what happens when a key exporter reduces the desired good/material for it's own use/consumption- this is the beginnings of war).

Unless a given money/currency system can manage in a non-growth environment it is mathematically certain to fail.

Glass Seagull's picture



this all makes too much sense.


Should I buy or sell ETSY quanto swaptions?

Shibboleth's picture

And therefore QE4ever. There will be no inflation because the money doesn't reach the sheeple. And the sheeps' wages will only go down.

Seer's picture

It's not even money!  It's an authorization to cook books!  And those books are the sacred texts that deceive us into believing that we can have perpetual growth.  Yes, the sacred books must be preserved at ALL costs, even if there has to be sacrificial offerings to the growth god!

Buck up, go forth and multiply!

MEFOBILLS's picture

Sovereign money is as good as the government behind it. Weimar Germany, Yugoslavia and Zimbabwe are the examples


Weimar had FX problems due to Versaille treaty.  The hyperinflation was when Reichsbank was privatized under Morganthau plan.  Private "credit as money" was printed in excess  = hyperinflation.   Zimbabwe was a black african country, formerly Rhodesia, that killed off the white famers, and hence killed the economy. Therefore there was too much printing relative to goods and services  = hyperinflation.  I don't know about Yugoslavia - I'll have to look into it, but generally any sort of hyperinfaltion is some too much money per unit time in realtion to goods and services production.  Note that this equation has nothing to do with energy.

Earth + Machine + Labor = goods/services.  Earth provides minerals/air/water/energy.  Energy is used in machines to amplify labor by making horspower instead of limited human power.

Modes of production are Land, Capital, Labor, Goverment.  Government is required to be in inelastic markets and to prevent rent takings.  In this area, Government is the lowest cost producer.

Energy is not the anchor for money, it is goods and services.  

Volume of goods and services should be matched by volume of money.

A very efficient anchor for sovereign money would be a Bancor system, which would be an accounting technique for marking international exchange. Sovereign money would then be anchored by goods/services in international exchange.  Thus any country that got to printing, like Zimbabwe, would soon find themselve shut out of markets.

All money is law, and hence laws need to be constitutional  in order to restrain goverment.

The argument that government canot be trusted to print also falls apart when looking at monetary history.  For example, during the greenback era, greenbacks were never printed in excess of law.

Using Zimbabwe as an example is bad form.  All other hyperinflations in history have been due to FX pressures, related to debts and hypothecation excess.

Seer's picture

"Energy is not the anchor for money, it is goods and services."

ENERGY IS PHYSICAL, perhaps as key a Physical as there exists.  "Goods" are products, products that REQUIRE energy in their making.  "Services," do I really have to explain why these are dependent on energy (and physical resources)?

Anyone who thinks they understand what the problem is and is attempting to "correct" things MUST identify the role of "interest" shall be (out of mathematical reasoning I believe that "interest" essentially equate to growth, a demand on the future, a demand that is certain to fail under any system that operates based on the premise of perpetual growth on a finite planet0.

infiniti's picture

This website is a joke. ZH 3 years ago: buy gold, massive inflation is coming! Now: deflation is here, gold is down 40%. ZH 3 years ago: the chinese and russians are taking over the world! ZH now: china is in a recession and russian currency is down 50%.