How Long Can The Great Global Reflation Continue? (And What Happens When It Ends?)

Tyler Durden's picture

Authored by Charles Hugh-Smith via,

Every now and again, it’s good to take stock of the Great Global Reflation that has been marching higher (with a few stumbles and scares) since early 2009, over eight years ago.  

Is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?

Keynesianism Vs The Real World

Let’s start by reviewing the systemic contexts of the economy.

This Great Reflation is embedded in two basic contexts:

  1. The dominant socio-economic structures since around 1500 AD are profit-maximizing capital (“the market”) and nation-states (“the government”).
  2. The dominant economic theory for the past 80 years is Keynesianism, i.e. the notion that the state and central bank must aggressively manage private-sector consumption (demand) and lending via centrally planned and funded fiscal and monetary stimulus during downturns (recessions/depressions).

Simply put, the conventional view holds that there are two (and only two) solutions for whatever ails the economy: the market (profit-maximizing capital) or the government (nation-states and their central banks). Proponents of each blame all economic and social ills on the other one.

In the real world, the vast majority of Earth’s inhabitants operate in economies with both market and state-controlled dynamics in varying degrees.

The Keynesian world-view is doggedly simplistic.  The economy is based on aggregate demand for more goods and services.  People want more stuff and services, and as long as they have the means to buy more stuff and services, they will avidly do so (this urge is known as animal spirits).

The greatest single invention of all time in the Keynesian universe is credit, because credit enables people to borrow from their future earnings to consume more in the present. Credit thus expands aggregate demand for more goods and services, which is the whole purpose of existence in this world-view: buy more stuff.

But credit, aggregate demand for more stuff and animal spirits make for a volatile cocktail.  The euphoria of those making scads of profit lending money to those euphorically buying more stuff with credit leads to standards of financial prudence being loosened.  In effect, lenders and borrowers start seeing opportunities for profit and more consumption through the distorted lens of vodka goggles.

Lenders reckon that even marginal borrowers will earn more in the future and therefore are good credit risks, and borrowers reckon they’ll make more in the future (i.e. the house they just bought to flip will greatly increase their wealth), and so borrowing enormous sums is really an excellent idea—why not make more money/enjoy life more now?

But the real world isn’t actually changed by vodka goggles, and so marginal borrowers default on the loans they should never have been issued, and lenders start losing scads of money as the value of the collateral supporting the defaulted loans (used cars, swampland, McMansions, etc.) falls.

Oh dear! The hangover of credit expansion is brutal, as lenders go bankrupt, wiping out their owners, and borrowers go bankrupt as they are unable to make their payments or sell the collateral to pay off the loan.

Just as credit expansion feeds on itself—everybody’s making a fortune buying and flipping houses, let’s go buy a house or two on credit—the hangover is also self-reinforcing: the value of collateral falling pushes more marginal borrowers into insolvency, and the lenders who made the loans are pushed into insolvency as defaults increase and collateral melts like ice in Death Valley.

In the Keynesian universe, this self-reinforcing contraction of imprudent credit and widespread losses of speculative wealth are Bad Things. Very Bad Things.  Important, Powerful People tend to own issuers of credit (banks), and losses are not something they signed up for.

If all the Little People stop borrowing more money, the Powerful Owners of the credit-issuing machines (banks) can no longer reap enormous profits from issuing more credit, and that is a Very Bad Thing.

As a nasty side-effect of the credit hangover, businesses that depended on people borrowing more money to buy more stuff also shrink, and this contraction is also self-reinforcing: as sales decline, businesses must cut costs to stay solvent, which means laying off employees, abandoning under-utilized offices, closing factories, etc.

The euphoria of credit expansion turns to painful contraction.  Nobody’s happy in the hangover phase, and people naturally cry out, Somebody do something to stop the pain!

The Keynesian answer is simple: the government should borrow and spend lots of money to replace all the money that the private sector is no longer borrowing and spending, and the central bank should lower interest rates and create a lot of new money that private banks can borrow cheaply to loan out to private-sector businesses and consumers.

In the simplistic Keynesian Universe, the credit contraction is like a temporary drought: all the government and central bank have to do to fix the drought is release a flood of new money onto the parched landscape of the credit-starved private sector, and aggregate demand and new loans will blossom like spring flowers.

Horray for central states and banks! Given the power to borrow (or create out of thin air) as much money as they need to flood the private sector with fresh money and credit, the drought ends, animal spirits are revived, people get to buy more stuff by promising to give their future earnings to banks and Powerful Owners of banks are once again earning great gobs of cash from lending to the Little People (i.e. borrowers in danger of becoming debt-serfs, whose earnings go largely to service their debts).

In the crayon-coloring book of Keynesian ideology, this is The Way the Universe Works. The problem is always a temporary drought of aggregate demand caused by a temporary drought of private-sector credit, and the solution is always a state-central-bank issued flood of money and credit: the government borrows and spends more money to replace declining private spending, and central banks make it cheaper and easier for private banks to issue new loans to enterprises and Little People.

That this coloring-book ideology no longer describes the problem or solution is incomprehensible to the Keynesians.  That neither “the market” nor “the government” can solve the current set of problems is equally incomprehensible—not just to Keynesians, but to everyone who unthinkingly accepted that the market and/or the state can always fix whatever problems arise.

Oops! The Flood of Money and Credit Didn’t Fix the Economy

The post-credit/asset bubble crashes in 2000 and 2008 and the state/central-bank responses--fiscal and monetary stimulus, a.k.a. flood the land with borrowed money—seemed to confirm the Keynesian world-view: marginal borrowers, lenders and collateral all went south and the stimulus restored animal spirits, which promptly inflated a new credit/asset bubble.

But this time around, the drought never ended, no matter how much money was poured into the economy, and the earnings of borrowers stagnated or declined. (Recall that debt is borrowed from future earnings; if earnings decline, it becomes much more difficult to service existing debt, much less borrow more.)

Federal debt has more than doubled just since 2009 (and tripled since 2001) as the government flooded the land with fiscal stimulus:

Central banks have flooded the global economy with trillions of dollars, euros, yen and yuan, and continue to do so to the tune of $200 billion per month:

Central banks have dumped over $1 trillion in new monetary stimulus in the first four months of 2017—eight years after the “emergency” stimulus began:

Meanwhile, wages are stagnant or declining for the vast majority of wage-earners—even the highly educated:

Household income has fallen across the board:

Stagnating incomes is not a new issue for the bottom 90%; it’s a structural reality going back four decades:

Clearly, fiscal and monetary stimulus policies that were supposed to be temporary are now permanent.  That isn’t what was supposed to happen.

Earnings were supposed to rise once private-sector credit and consumption returned to expansion.  As we see here, bank credit and consumer credit have surged higher, but the incomes of the bottom 90% have gone nowhere.

Meanwhile, total debt—government, corporate and household—has rocketed higher, more than doubling from 280% of GDP in 2000 to 584% of GDP in 2016:

As if these weren’t bad enough, wealth and income inequality have soared during the era of permanent fiscal-monetary stimulus:

In sum: nothing has worked as the Keynesians expected.  Instead, state/central bank measures that were supposed to be temporary are now permanent, and the expansion of private-sector debt has failed to “trickle down” to earnings.

The Keynesian solution—borrowing from future earnings to “bring consumption forward”—has expanded consumption at the cost of enormous increases in debt throughout the economy, which has exacerbated income-wealth inequality and declining real incomes.

Can we finally admit that eight years of following the Keynesian coloring-book plan have not just failed, but failed spectacularly, and not just failed spectacularly, but made the economy even more vulnerable and fragile, as more and more future income must be devoted to service the skyrocketing debts?

Isn’t it obvious that there are deeply structural problems in the economy that inflating yet another cred/asset bubble won’t fix?

Clearly, the real-world economy does not function like the simplistic Keynesian coloring-book model.

What Comes Next: Contraction

Given the extraordinary failure of both Keynesian stimulus and private-sector credit growth to create a self-sustaining cycle of expansion whose benefits flow to the entire workforce rather than to the top few percent, what can we expect going forward? Can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?

In the near-term, is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?

In Part 2: Prepare For The Great Global Contraction, we detail why the economy’s structural problems languish unaddressed, and how the inflating of yet another speculative credit-asset bubble has not fixed these problems.  Instead, the current credit-asset bubble has dramatically increased the fragility of the economy by diverting capital from potentially productive investments to unproductive speculative gambles, and by increasing the unproductive burdens of soaring debt.

When the Great Reflation does finally roll over, there will be plenty of time to ponder what investments might do well—but only those who exit well before the rollover will have the cash to take advantage of the opportunities.

Click here to read the report (free executive summary, enrollment required for full access)

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
VWAndy's picture

 It goes on as long as we fall for the fiat magic.

  The stall and barter. Then some real justice.

Nice Try Lao Che's picture

I've thoroughly analyzed every one of those charts and have come to an accurate conclusion on how it will all end...


Here I am in the research room concluding my exhaustive study.

Shocker's picture

Don't know where its going to go. Way to much debt, no manufacturing, tough times for sure.

Need some real good solutions to put us on correct path.

Layoff List:


VWAndy's picture

 The good things are not going to get any funding in this system it all goes to the stupid.

Déjà view's picture

Top rating by 2/3 of big 3 rating manadated by DOJ...

Perimetr's picture

It's not just a matter of trust and belief in the system.

This is corporate fascism.  

There are NO LIMITS to the amount of digital fiat legal tender that the fascists will create in order to retain power. 

Limits can be imposed internally only through revolution

or externally through (1) sanctions that refuse to continue to accept digital fiat in exchange for goods and services or

(2) though war that brings about the end of the corporate fascist bankster regime.


VWAndy's picture

 Option #2 has been tried. Way too many times. jus sayin

Haus-Targaryen's picture

Simply protest the system the best way we all can: 

1) No debt.  Oh, you want a new car?  Pay for one in literal cash.  No some wiretransfer or cashiers check, bring literal 100s and pay the guy IN CASH.

2) Save your money in tangible things, whether that be gold or silver, land, equipment needed to run a farm, solar panels, solar hot water heater, do everything in your power to keep as much as you can from going into the system.

3) Barter for as much as you can.  Easier in small towns with larger purchases.

4) Shop local.  Don't go to WalMart, go to a farmers market, and pay cash.  Find a local farmer for your meat.  

The best way we can harm these people is simply refuse to comply, as compliance and confidence is what this system is able to live off of.  

cossack55's picture

They can just print more of whatever it takes.....$, Yen, Euros, gold, silver, oil, helium3, etc.  It will continue forever

seabiscuit's picture

What has been missed in this article is that the Fed has finally fixed the economy. Where is the gratitude? Are you not entertained?

Consuelo's picture



Hey - whaddya know, a Weekend version of the regular weekday re-hash from CHS...   Holy shit dude - how many different permutations can you come up with that all say the same thing...?


'Peak $$$Prosperity' indeed...

SkunkyBeer's picture

Fantastic article, great charts. Thanks for concisely illustrating the many ingredients that have led to the toxic stew we currently call our economy.

It's a no-brainer to conclude the current path is unsustainable. But I'm just not sure I see how we get to contraction in the near to medium term, as currently there is no penalty or consequence to the CBs for conjuring up infinite amounts of money out of thin air and dumping it into the markets. For example, Switzerland is desperate to devalue the CHF, so they CTRL-P trillions and buy US equities (mostly FANGs) without a care in the world as to whether the equities soar or crash. Their ultimate goal is only to tank the CHF to help their exports, and their failures to date have only led to MORE CTRL-P, more dumping, and a higher stock price for Apple and Facebook. Japan too, the BOJ are desperate to get the JPY to inflate.

It will be interesting to see what will trigger the inevitable contraction. Possibly runaway inflation, or stagflation. But I just don't see it happening any time soon.

Muppet's picture

The CBs mistakenly bankrupted themselves and their respective Governments.

The real crux is that if contraction comes, markets sink and defaults occur, causing the stimulus dollars the CB's printed to evaporate.   That printed money vanishes except for one thing... the paper debt.    The CBs cannot let it evaporate... because their holding the paper debt.   They themselves are the ones most at risk.  The debt was supposed to be spread out.

If the money the CBs printed evaporates, it means there truly won't be enough to ever repay and unwind the CB debts. 


VWAndy's picture

 It was done with intent.

lasvegaspersona's picture

or...the dollar fails and those who exited the market early are stuck with worthless currency...

quasi_verbatim's picture

TURD -- the Total and Universal Repudiation of all Debt -- is coming to a gummint near you.

But Banks will do it first, by bail-in. Carry on stacking.

wmbz's picture

"Is this Great Reflation running out of steam, or is it poised for yet another leg higher"?

It will go higher...Much higher! Print and pump, night and day, just as they have been. $20 trillion debt soon to be 25,

30,35, and on and on till the value of a dollar is worth less than a dogs turd. It's not far from it now.

Blankfuck's picture

Dear FED PRESERVE FUCKERS, cant you print mo money fo me?

Blankfuck's picture

Dear FED PRESERVE FUCKERS, cant you print mo money fo me?

Blankfuck's picture

Dear FED PRESERVE FUCKERS, cant you print mo money fo me?

Troy Ounce's picture


Thanks CHS.

Whatsapped to a few Keynesian friends.

rosiescenario's picture

If you are a debtor, a currency debasement is just what you want. AND with the largest debtor of all in control of the presses, I'd hazard a guess that the dollar will continue along its never ending path toward 0.

Dilluminati's picture

Unless you took gains from the stock market and stashed it into something fixed asset there was no reflation for you.  

If you fail to actualize this "reflation" bubble then there is no reflation but instead debt deflation instead.

That simple.

Sudden Debt's picture

You get what you deserve.

And by walking in line and do what you're told, you aren't living to your full potential.


America lacks creative people. 

It's not because you work 8 hours a day that you're a valuable asset to the company.

How many can be replaced in a second?

How many can be replace by some software or a robot?


If you deliver valuable work, you'll get a valuable salary.


The problem is that Americans have gotten to much for free because of the emperiacal advantage of a strong dollar.

And now that the dollar is dying, they'll have to work in the same way as the rest of the world and America has a lot of catching up to do.

At the current rate, America may be lucky if it only turns into a banana republic.

And Americans only have themselves to blame.

rejected's picture

"America lacks creative people. "


That is because all creativity has been extracted by the education system,,, especially University which prepares them to work in the corporate world where creativity will get you nowhere as any inventions or other improvements belong to the corporation.  You don't own anything,,, including any residual creativity the University didn't get.

Prometheus_Goldman's picture

YOU personally CAN FIX America.. NO SHIT!!  Call your representatives...  Start a movement and joint the COS below!

Keep you powder dry, you friends informed!

rejected's picture

"Call your representatives..." 

Sorry Charlie,,, They're not "our" representatives any longer.  They're all bought and paid for.

FBaggins's picture

It is this kind of economic background which is leading the neocons to start another war in an effort to put off the inevitable by borrowing and spending more  the carrot of acquiring more resource collateral to back the dollar and the debt. 



Ghost who Walks's picture

Through a process of Karma the editors of this webpage have selected a great image with a story to illuminate the theme of "Reflation"

I believe based on personal experience that the balloon in the image is one of a fleet of dark red ballooons that are owned by senior military officers through a front business in BAGAN in central Myamar. The passengers are wealthy and fork out about $450 per passenger for one hour aloft. The flights take off at sunrise due to weather conditions, and drift across the wreckage of a once great civilisation. There are literally thousands of temples and some have gold leaf covering the spires. The bulk of the population are very poor and the ground crews would be lucky to be paid $5 to $7 per day for their work.

So the process of inflation and the trip is dependent on two thing;

1/ The amount of energy that the balloon can use that it carries in gas bottles

2/ The air temperature. The ballooon lift is based on the difference in air density between the inside of the bag and the air. Once the day starts to heat up, the balloon pilot has to use more gas to stay aloft which means that the flight becomes shorter.

The American economy is similar to the balloon. The reflation is dependent on "Energy" - currently the Petro Dollar is used to aquire the energy to run the american economy. However the balloon can only carry so many gas bottles or it will never lift off the ground. This is similar to the debt and the growth in GDP. The ratio is fast approaching a point where too much debt will prevent liftoff.

The second issue is also important and relies on the environment. I'm not not going to use the Global warming meme. The business investment climate is the key here. The point is well made that once the density differential approaches parity, there is no effective lift. The little people will not continue to feed energy into the system if it is not profitable. It could be argued that they have no alternative, and they have to keep doing this to survive. I use the example of the behaviour of the "Millenials" to show that this change has started already and there will be a reduction of people taking on debt in the future. Consumption per head of population will fall in the absence of more "energy".

The balloon pilots work their craft by varying the height to take advantage of a very slight breeze to end up at a different location. Not all 15 balloons at Bagan end up at the same landing spot. Some balloons find that the plan for the flight cannot be achieved and the passengers have unexpected outcomes. So it will be for the Central Banks and Nation states.

The message is "The flight only has a short period, it is pleasant but very expensive. It would cost a little person 90 days pay for one hour of this pleasure" Then back to subsisting. The Bagan area could use investment in irrigation and agriculture, however the money has gone into bread and circuses for the rich, with an expectation of trickle down.

journal's picture

Someone always says they can print forever. Other than just saying it is not sustainable or it will all blow up. what might make them reconsider, Insufficient income for pension funds or insurance companies, whatever? The central banks certainly don't care about individual savers.

Ghost who Walks's picture


Same crew still in charge after how many disappointments?

Very clear evidence of the futility of printing.

The government has murdered its opposition and used force to control the population.

Forget Insurance companies and policy holders, forget pensioners, just the lack of the required calories to go about your daily work wasn't enough to cause a revolt that removed the Zimbabwean crew.

The previous Central Bank Governor of Zimbabwe Gideon Gono didn't exemplify care for individual savers. He knew what his job was.