The Deflation Monster Has Arrived

Tyler Durden's picture

Submitted by Chris Martenson via,

As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.

Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.

If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering:  What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.

It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

The Cost Of Bad Decisions

In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:

Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.

I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:


Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation -- via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.

The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.

Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate -- virtually everywhere across the globe.

So the Fed's pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting.  Three sets of increasingly bad decisions in a row.

The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.

The Even Larger Backdrop

The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.

Using the US as a proxy for other countries, this is what the lunacy looks like:

As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.

But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.

The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.

So the entire edifice of debt-funded growth is now being called into question -- at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.

At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:


The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?

All of this is really just the terminal sign of a major credit bubble -- a credit era, if you will -- drawing to a close.

I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:

“ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

~ Ludwig Von Mises

Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

So now we are facing something far worse.

Why The Next Crisis Will Be Worse Than 2008

I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.

It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.

At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.

Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?

The next thing is to give money to Main Street.

That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.

You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.

Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.

This "helicopter money" spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.

Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.

In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now -- in advance of the approaching rout -- to position ourselves for safety (and for prosperity, too)

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)


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Serfs Up's picture

Yeah, borrowing and spending at 2x the rate of income growth...for decades...what could possibly go wrong?

chunga's picture

WHere exactly is this deflation? It must be things that muppets don't buy that's for sure. 12 dollahs for a pkg of chicken wings. I always heard that the price of petroluem effects the price of everything...ummm. Something aint right.

CosmicDebris's picture

Probably coming soon, as people can afford less and less of everything at the currently elevated prices. Supply and demand.

general ambivalent's picture

Something I rarely, if ever, see mentioned is that oil prices were hammered down precisely to keep distribution costs down. Not only do oil prices affect everything, oil is now in everything. All that Chinese conveyor belt shit that is shipped around the world is made of one or two commodities. Primarily plastics.

Just check, what are kids' toys made of? What are all those racks of cheap (and expensive) clothing made of?

There is no doubt that USNATO is trying to ramp up proxy wars with Russia, but the idea that they could hit Russia with a drop in oil prices may have just been a piece of boisterous propaganda. In reality, the economy is so bad that they had to bring deflation to the distribution chains - mainly through the price of oil and plastics.

Citxmech's picture

True.  The facilitators of our modern, JIT world are cheap and reliable electricity, nat gas-based fertilizers, and diesel.  Impede the flow of either of those "spices," and modernity comes crashing down.

LibertarianMenace's picture

JIT: another name for increased dynamic range. Trouble is, and these hucksters of all things lean will rediscover this for themselves soon enough, is that increased range is paid for by system stability. Winter of Discontent, anyone?

geno-econ's picture

The movie GRADUATE summed it up years ago.  The future is in PLASTICS.  However production of plastics is predicated on cheap feedstocks which tend to be located in Middle East and Russia.  So is that where the future is located ? Remember, Fracking is an expensive proposition even with a Fed induced bubble.

hound dog vigilante's picture



Inflation in the things we need (food, healthcare, and until recently - fuel).

Deflation in the things we desire (real estate, travel, investment assets).


I, too, will be curious to see the impact of plummeting fuel prices on the price of 'everything else'... IOW, i'll believe in deflation when I see it on retail shelves. I'm skeptical... I think we'll see retailers fold & close-up before we see retail price 'deflation'.

Keep this in mind... mega-retailer Amazon has never once turned a profit, so how could retailers possibly survive a truely deflationary environment?


chunga's picture

That's why I'm thinking it's pure planned. institutional fraud. We're well into the phase of shrinking packages and diluted, crappy products made by robots.

The next thing we might see from this quasi- federal group of financial banking experts, predominantly and incidentally tribe members, is NIRP. The idea of having to pay to keep savings in a bank is absurd.

hound dog vigilante's picture

I'm with you... I believe 90% of this "planned".

Deflation benefits those with big $$$ far more than the little guy... the rich will buy-up ALL productive assets & real estate - they are the only ones with the $$ and credit to do so. Wealth will become even more concentrated among the few at the top of the pyramid.

When veiwed from this POV, one can better understand the 'recovery' propaganda from the Fed/media/DC... one last fleecing of the sheep.  We are already in full-blown recession, and probably on our way into an economic depression.  The wealthy/banks are already positioned for this... because they 'planned' it.  Is there any other explanation?


SDShack's picture

That's why its called the New Feudal World Order. Overlords control everything, and the sheeple are just Serfs getting by on scraps while their attention is deliberately diverted to the latest entertainment spectacle. And if the people get fed up and try to revolt, the Security State will step in to crush it. The last step has to be war to eventually reduce the number of useless Serfs. Same as it has ever been.

gatorengineer's picture

Before NIRP they have to real in alot of printed money or it will just go into hidding under mattresses.  The epay schemes they had havent caught on.....  Perhaps they will have a currency change to "prevent rampant counterfitting" and obsolete old paper money after XX date...

I think I have realized the most likely asset class to survive whats comming is to invest in Lead....

chunga's picture

I still believe a federal license will eventually be required to possess cash for any reason. Justification for this will be that "little guys that play by the rules get hurt by it's incorrect use", that and of course, terr'ism.

Everybody with an SS# will receive their temporary license upon recieipt of signed acknowledgement (on a new tax form) of expiration of said license. All cash transactions must be accompanied by current cash license numbers for both buyers and sellers. After that date, possession of cash for any reason is a crime.

Of course, this will apply only to sheeple. There will be official exemptions because rule of law and fairness enforcement. Watch the criminal fedz get the ball rolling on this by offering voluntary participants a helicopter drop of QE, not in fiats, but in stawks

Sure sounds crazy doesn't it.

Adahy's picture

Cash, haha.

*delivers baby*
*takes baby from mom to clean and...*
*inserts chip*

Nope, no cash will be needed or accepted.
They will just render it obsolete; just need some of the older generations to die off first to make implementation easier.

Shit, just look at people with their phones (implant predecessors) now.  We're already halfway there.

Winston Churchill's picture

Haven't caught on ?

You living under a rock somewhere.

80% of my biz receipts are epay in one form or another, credit cards or bank credits.

Two or three years ago it was 40%.

Still not soon enough for TPTB to be saved I'm thinking.

hound dog vigilante's picture


Wal-Mart closing 150+ stores in the US... so I'm not crazy - retailers will fold/close before lowering retail prices in a deflationary environment.


Freddie's picture

A year or so ago - someone here wrote a great comment about how Wal Mart's entire supply chain and business model will go full retard.  It was very well written and I wish I had saved it.

Maybe the Chinese devaluation will buy them some more time.  WMT is propped up by free EBT/WIC and the free shit army (FSA).  More corp-govt fascism.

nscholten's picture

And by raising their minimum wage- they now have reduced their government subsidy as employees will receive less government subsidy.

sunnyside's picture

I've always felt similar to you but like this:

Inflation in things we consume/use.

Delflation in things we typically borrow for.


The gas/fuel/oil situation is different I think in that this dip is short term, and it is a function of oversupply/pumping and political games.

T.Gracchus's picture

The fact that a household name like Amazon has never turned a profit makes you wonder at exactly what point in time business and commerce decoupled from reality?

Weren't successful businesses supposed to make a profit, in the days before we all had to bow down to the 'new normal'.

Sometimes I just want to bang my head against a wall.

Winston Churchill's picture

Profit is is the same as interest as a time function of money.

In a zirp/nirp world, what exactly is a profit ?

We are in uncharted waters.

HowdyDoody's picture

Amazon hasn't made a profit because they have very good accountants.


Moustache Rides's picture

Isn't having to make a profit synonymous to perpetual growth model?

daveO's picture

Most of the inflation went into the stock market, just look at Amazon's chart. The current, scheduled, deflation will mostly come from brokerage/pension accounts. That's right, profligate boomers, you ain't never going to retire! Store prices will decline according to Yuan devaluations, with about a quarterly lag.

strangeglove's picture

Idk eggs were $1.49/doz here in white Plains NY this week, that's 1/2 the price it's been for the last 2 years at least

Last week they were over $3 a doz

hound dog vigilante's picture


Nice - thank you for that example... I think eggs are a classic, local barter commodity that should reflect 'deflation' immediately. If our hypothesis here is accurate, then we'll see local the diary once again selling curbside/door-to-door like they did 50-100 years ago - it's the only way they can keep any margin (amidst deflation).

It's the retailers/re-sellers that are screwed... and of course the millions on urban/suburban consumers whose existance is 100% dependent on retail/re-seller distribution. 

Either the urban farmers markets scale-up x1000, or we may see a mass 're-ruralization' among the US population, as the urban CoL will become to great in a deflationary environment.

Feel free to check my logic here...

general ambivalent's picture

Here on the east coast of Canada (the real east coast, not Upper Canada) the gas stations and drug stores sell 4L of milk for about 2 bucks less than the supermarkets.

Seems a bit like Walmart-style micro-biflation - or speculation that the profits will come from other sales. However, oil and drug prices/demand-nudging could be the factor.

dogbreath's picture

Thats a loss leader.  If the come for the milk they might not otherwise sell they will get gas and whatever else.  Pretty big selection of groceries at Shoppers now.  London Drug also has good prices on groceries.

Rakksan's picture

White eggs-2dz for $5.00-Market Basket-Gloucester,Ma.

general ambivalent's picture

I build chicken barns. Currently in a place I would not expect, and I don't think the demand is really there. Is deflation in eggs simply there to offset meat prices skyrocketing?

daveO's picture

The current egg price drop is a function of the bird flu kill off that sent prices sky high last year. It takes several months to restock chickens. I wouldn't be surprised if the bird flu was intentionally spread by industry insiders. Farmers did similar things in the 1930's. 

Magnum's picture

Took my wife and son to visit mom today, stopped at a store to get something to cook at her place (boycotting restaurants for now, had I taken us all out that would have been $60 with all the taxes and "tip").  Pack of three pretty big thick crust pizzas was only $11, not the healthiest meal but one of those pizzas fed four of us.  

I'm becoming a fan of companies that can produce relatively good packaged convenience food, a booming industry that will grow as restaurants keep getting pricier due to rents, employee expenses, etc.  

Adahy's picture

The price drop is due to the rebound in commercial chicken populations after the flu wiped a significant portion of the overall population out and drove prices up.

The eggs from the coop in the back stayed steady at $0 per dozen.

farmboy's picture

Interesting here $ 1.50 for 900 grams. Perhaps youre friendly and competitive Wal Mart?

stant's picture

Here in Podunk fly overville ribeye 4.99 ground chuck 2.59 pork ribs 1.69 . I backed up the truck . When ? A hr ago

gatorengineer's picture

Chunga this is another fucktard article here.  There has never been a deflationary collapse in history and this one will not be one either.  Negative growth does not equal deflation. 

What you have is Crony capitalism and margins are blowing out as you already have wink and a nod price fixing.  Price of fuel down, and ag staples like corn and wheat down, products made from them skyrocketing.  Price of gas in Jersey is $1.82 with $30ish oil what was it last time we were here? and no federal or state taxes havent moved.

Housing will soon collapse, but that is price correction not deflation, as the banks are pocketing increased spread between borrow and loan.

There will be an orgy of printing if this is the real drop, which will have to be directed at mainstreet, especially before the election.  This time there will be weimar hyperinflation, in to the great reset.


hound dog vigilante's picture


would an extended 'price correction' = deflation?


I can imagine a period of years - not months - wherein prices fall & remain low... and yes, then hyperinflation follows.


sschu's picture

There has never been a deflationary collapse in history

How would you characterize the early 1930's?


Okienomics's picture

Could be, but every forecast of hyperinflation has been dead wrong, and I'm leaning against it occuring again any time soon.  Of all the prognositications out there, I'm leaning toward  The current environment is coordinated and planned, leading us all toward a new monetary framework that replaces Bretton Woods II (and whatever you'd care to call what we're in right now) with a new structure built around the SDR (which, by the way, will continue to include dollars, thus avoiding a "dollar collapse" so many have predicted).

There's elements of his thesis I don't like to hear, but most it rings true and seems to be playing out according to plan.  Worth a read of his free stuff.  By the way, not a shill and not in any way tied to the website, don't even pay for it, just passing on what seems to me another interesting perspective.

daveO's picture

Yep. The reserve currency will follow the manufacturing, in the long run. Meanwhile, the US extracts all the wealth it can by abusing it's 'good will', it's safe haven status. Us descending into 3rd world. This helps explain why TPTB want to flood the nation with 3rd worlders who will be right at home in the new normal.

KansasCrude's picture

Hey Okie please pass whatever you are smoking cause it sounds better than my fears.  USD has to collapse and soon its tethers will rot away. We have already hyper-inflated the money supply and now waiting for its explosion.   We should be seeing significant demand driven deflation now but the Corps, (IMO) are using lower commodity input pricing to pad their margins or service their debt so its mainly hidden except for gasoline. 

We continue to see Hyperinfllation events happening i.e. Zimbabwe, Vennieland and Argentina. Looks like Nigeria has lit its fuse too. I have trillion dollar Zim note to remind me Hyperdrive is real. Its worth less than Charmin. Upthread we saw the correct analysis. " Inflation in what we use and deflation in what we may occasionally (discretionary) purchase and Paper Assets."   Remember the system does not function long with deflation in a fiat monetary world.  The criminals will make sure we have inflation as its the only way their decrepit system will creak along.

Hyperinflation will happen quickly (when it starts) and in a devastating manner.  We can only hope it quickly brings down the current mess and we get the reset.  Hopefully we will have enough assets to keep at least a reasonable standard of living but that's debateable sorry to say. 

Make your own way as best you can and build your resilency any and every way you can. 

Best of Luck Neighbor









dizzyfingers's picture

As you imply, it's the MR. BIGS whose interests are being published by chattering classes, not CommonMan like most of us who live in Reality world.

barroter's picture

NEVER pass on savings to your customers...keep the $.  Right?

Seer's picture

I suppose we need to revisit what "inflation" is and what it is not.

In "textbook" terms "inflation" occurs when there's an increase in the money supply due to an overheated economy: too many dollars chasing too few goods.  The amount of money in CIRCULATION is key, and comes about, in this consumerist model, via increased wages.

What we have is:

1) Less money in circulation (also with contractions in credit);

2) Not enough dollars in people's pockets (this will be a key point leveraged to the hilt by all the various political hacks and talking heads);

3) Declining wages;

4) OVER-SUPPLY of goods- if one wants something it's not hard to get it.

Defining what we're experiencing as "inflation" just doesn't seem to stick, for now.

847328_3527's picture

So, are these the "moderate tearrists" or the "radical" tearrists?

franzpick's picture

"...til debt do us part."

Hyper Entropy's picture

Basically, if you didn't focus some effort on deleveraging debt, you're now fucked.

CosmicDebris's picture

Started doing this about five years ago and have almost no debt. Still difficult to keep up with the bills, but would be impossible had I not gotten out from under the debt.