Tyler Durden's picture

From Mark Grant, author of Out of the Box

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand - a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending - namely, recession, rising unemployment, and financial stress."

                         -Fed Chairman, Ben S. Bernanke

There was an argument, brought forth by several bright people; that the odds of Inflation or Deflation were about in balance for the remainder of this year. I think the needle has swung though and that Deflation, and perhaps serious Deflation, is just ahead of us. Every country in Europe is in a Recession with the exception of Germany but I predict that they are going to be dragged into the Club in the next quarter. The aggregate demand for goods and services is markedly declining all across Europe and the Target2 remedy to finance purchases is no longer providing the desired effect as financing only helps when demand is present and once demand has declined it makes very little difference as to the cost or availability of funding.

"Booms last longer because optimism is fed by slowly rising emotions involving hope and greed, which, because they are tempered by caution, can reach maximum intensity only over a long period of time and fulfillment only after prolonged effort. Busts are swifter because pessimism is fed by fast-flaming emotions such as fear and anger, which can be realized in a flash of destructive action."

                        -Robert R. Pretcher

The banking system, not just in Spain, is in tatters and the lending in the domicile of the banks is eroding as signified by all kinds of data released recently. Lending outside of the domicile has declined even further so that growth is curtailed by the availability of funding and the further away from the national home of any European bank; the worse the problem. This is then why I am so negative on the Emerging Markets as a safe place to park money. The lack of available funds will dampen growth so that the European recession spreads worldwide as contaminated by the problems of the European banks which, in aggregate, are about five times the size of the American banks and much more active in global lending.

“The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.”

                        -Thomas Jefferson

We have recently witnessed a boom-and-bust cycle in Real Estate in Europe that overcame the banks of several nations including Ireland and Portugal. Now Spain is about to show up to be counted in my view. The issue all across Europe is that the sovereign does not have enough assets or capital to bailout their banks and many European banks are impaired; make no mistake. The first move was to lay off a lot of non-performing assets in securitizations at the ECB but the price always gets paid which will either be severe losses at the ECB requiring re-capitalization or the ECB handing back the collateral to the various banks which would probably bankrupt some of them especially in Spain, France and Italy. The ECB maneuver brought early success but now, as loans become due and as non-performance builds and losses must be recognized; the real truth forces itself upon balance sheets. There is a day when the auditors say, “Show me the money” and when it isn’t there the infamous “Oh My God” moment begins.

Now Bubba, when you use the screwdriver and release the air from the tires it causes all of those little lights on the dashboard to begin to flash and then if you try to drive the car it goes “bump-bump” down the road. No Bubba, get off of your knees and get your mouth off of the thingy; you cannot blow air back into the tires that way.

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RacerX's picture

I'm not too sure the gov'ts/central banks will allow deflation as it will make their debt problems more severe.

Colombian Gringo's picture

Deflation will destroy banksters  and their assets so as long as the criminal gang of 535 is in control, there will be inflation.

Freegolder's picture

At some point deflation wins though. First, they destroy their currencies.

Eventually, the inflation will be absorbed by just one asset, in its physical only form.

You can guess which one.

derek_vineyard's picture

The bond market is NOT signaling deflation.

In 2009 crisis: all maturity TIPS at one point yielded over 3% ...... today the yield is negative through 20 year maturities.

When those TIPS yielded > 3%, people were afraid of deeply negative CPI prints; that is not true today. Asset devaluation is not deflation.

Omen IV's picture

"When those TIPS yielded > 3%, people were afraid of deeply negative CPI prints; that is not true today. Asset devaluation is not deflation"

could you expand on this comment of asset devaluation versus deflation?


Spirit Of Truth's picture

The math is simple.  Do you expect the total level of debt to expand relative to goods and services or the opposite via defaults, restructurings, etc.  If the latter, then you should expect deflation.  If the former, then expect inflation.  I believe Robert Prechter (Elliott Wave Theorist) has been generally correct that the overwhelming force here is debt CONTRACTION relative to goods and services and price deflation should occur accordingly.

DaveyJones's picture

Both can occur. Money continues to lose value. No one wants to hold it for long and it continues to slosh to the front end of things being held for shorter and shorter periods. Long term items contine to lose value. Short term immediate needs continue to inflate. Pounds the middle class from both ends 

Matt's picture

The same problem we had previously with Inflation now persists with Deflation.

If you use different definitions, you will have different meanings.

Does Deflation mean a decrease in CPI, or a decrease in the money supply?

I think defaults is a better measure of deflation then whether a bunch of consumer goods becomes slightly cheaper. I seriously doubt we're going to see $8 coffee makers drop to $4 or see milk fall to $1 per gallon, or $1.99 per gallon gasoline.

DaveyJones's picture

nor are we going to see any serious long term "deflation" in vital depleting resources or things directly related to them - like food, energy, raw materials...  

kridkrid's picture

Deflation will destroy the criminal banksters and therefore the criminal gang of 535 who are beholden to the criminal banksters so as long as the criminal banksters are in control, there will be inflation.  Fixed it.

Fake Jim Quinn's picture

Inflation hurts the banks as much, or more, as deflation. Inflation favors debtors, not creditors. Deflation favors creditors.

But your comments about our politicians is correct

hawks5999's picture

The banks aren't the creditors though... they are likely net debtors.

rsnoble's picture

They don't control everything like you think. Esp when thing are taken to the brink. It's not like the gov't can just say "we're not going to have deflation" and presto. The whole system is fucked up and there will come a point where central bankers will get their collective asses ran over. Granted QE3 might cause a pop in the markets but it will be less effective and it won't last. It's coming down, I suspect the rich fucks are running around like chickens with their heads cut off behind the scenes trying to hold it together as long as possible while they figure out how to position themselves meanwhile we get raked over the coals.

Sockeye's picture

At some point this is beyond CB control, ie when sovereigns no longer have enough capital or assets to pledge for extend and pretend.

LawsofPhysics's picture

They stopped having real assets back in the 70's.  Since then "debt" has been considered an "asset" and has in fact been "pledged as collateral" for more debt.  Where the fuck have you been?

Sockeye's picture

Yes, and now they are running out of even debt "assets". Jig is up if they can't grow debt.

TaxSlave's picture

"Full faith and credit" means ME getting stuck with the debt, with gun-toting jack-booted government thugs as the bill collectors.

Only one problem with that.  It's not my debt, and I'm not paying it.  Hunkered down in survival mode, nothing to steal here, move along. 

TSS's picture

IMO the best indication for deflation in the future is the price of gold vs the historical price of gold.

As Jim Rogers says, "When everybody is on one side of the boat it's good to be on the other side".

Hippocratic Oaf's picture

IMO, the best indicator of deflation is in NYC.......which I have not seen yet. prices are still hi.

Jolly.Roger's picture

If the boat is capsizing / sinking is makes no difference what side you are on.

DormRoom's picture

The real estate bubble was allowed to inflate as to mask the effects of exporting manufacturing jobs from the US & Europe to the East.  Economies replaced manufacturing jobs with construction jobs.  Now there are no jobs.

realtick's picture

Deflationary Depression - fixed it for ya


LawsofPhysics's picture

LMFAO!  Like we have a free market where price discovery is allowed, bullshit.  Producers cutting prices can also be due to competition.  In a truly free market competition is a good thing.  Fascists really hate competition and insure that their companies get bailouts by raping the taxpayer.

aerojet's picture

There's not much competition--every big industry went to government and got the laws and regulations fixed up so that real competition is pretty much impossible.  There's a little here and there, of course, because we have to keep up appearances, but it's not like I could just decide to start a cable tv company or a cell phone company and really try to compete on price. It ain't gonna happen.

LawsofPhysics's picture

Fuck television.  Pretty soon the only thing people will care about is food and fuel and you would be suprised what you can eat and burn.  Same as it ever was.

dwdollar's picture

Deflation is what happens when bankers don't print enough money.

Debugas's picture

bankers do not print money for free - they ask for obligations to repay back.

If nobody is willing to borrow bankers are powerless to print

Sockeye's picture

Yep, and we may be there now.

pods's picture

The $1.5 trillion in excess reserves backs you up on that.


aerojet's picture

Well, good.  It's about time the banksters had to be on the hook for something since they created this disaster in the first place.  Idiots.

dwdollar's picture

To get Average Joe to borrow, yes, he needs something like a negative interest rate at this point.

However, there's more than one way to print money. QEx being exhibit A...

aerojet's picture

The farm animals like us are out of borrowing capacity and really, who the hell wants more debt right now with so much uncertainty?  I don't want to be chained down at all.  So then .gov steps in and runs gigantic deficits, which just prolongs the problem and makes the eventual solutions that much harder to implement. 

tarsubil's picture

If interest on loans is lower than inflation, people will borrow.

Overfed's picture

The bastards won't loan any money. At least, not to the little guy. Credit cards don't count.

Matt's picture

This mess we are in is all the banks' fault. When times were good, my credit limits on my cards kept increasing automatically.

Now, when growth has slowed or even stopped, they aren't increasing my limits anymore.

They need to increase everyone's "debt target' so everyone can borrow more, to keep growth on track. If you just lend people more money, they can use that to make their mortgage payments, and to buy more goods.

just in case someone doesn't get it: /sarc

Cursive's picture

If The Bernank seriously thinks deflation is caused by a drop in aggregate demand, he should be stripped of all of his "economics" degrees.

Ricky Bobby's picture

In the age of all encompassing states there needs to be an intellectual justification. Keynes that vile Fabian elitist sure delivered it. I say we pull down any statue or picture of that serpent.

LawsofPhysics's picture

Reward savers and productive labor?  Did this group of the population suddenly buy some politicians?  I think NOT.

Ricky Bobby's picture

A corrupt society does not give a fuck about savers and productive labor, unless of course you mean slave labor. They will be allowed to save a frew bread crumbs for hard times.

LawsofPhysics's picture

That is the point, glad you were paying attention.

fonzannoon's picture

If deflation was unavoidable why not go short the martket and let the chips fall where they may. The banks etc. may go under but they would make a killing basically going long their own demise.

Debugas's picture

deflation is always avoidable - you just have to start printing money and giving it away for free (i emphesize - not lending but giving away for free)

fonzannoon's picture

Agreed, but outside of Bush in 2002 I think, no one has ever sent me a check.


GoldenTool's picture

See Bush just didn't go big enough.  Obama needs to go full tilt with 20-30k per adult.  Would be about 6t if my math is correct.  Would fix the housing and jobs situation I bet.  Not to mention instant re-election.  Down arrow away, heh.

LawsofPhysics's picture

No, Bush went just as big, it just "went" to different cronies. Some were the same (financial sector).

CreativeDestructor's picture

They'll need to monetize about 20-30 trn to avoid deflation. But you gonna have inflation and deflation same time. Huge inflation in digital money. Deflation in hard asset backed money. So they print but states go bust in hard asset terms. Even in paper money terms. Even that they won't be able to print fast enough.

Winston Churchill's picture

The States are already bust.

ZIRP has killed them all as well as any corporation

that still has a defined benefit pension scheme.

There are  Huge contingent liabilities in addition to

the National ones that are being fudged away right now.

If true GAAP were being used,the game would already be over.

Jesse's picture


Was the author referring to Bill Clinton (Bubba) or had he intended to speak to the former German central bank (Buba) which tends to heavily flavor the ECB?

Inspector Bird's picture

Wasn't Jefferson a perpetuator of debt?  He died in debt, he lived most of his life in debt.  He was a voracious speculator of land, and rarely held cash or assets of any kind.

I suspect inflation will occur before deflation.  Although it's hard to tell just how significant inflation has been, recently.  We've been in a deflationary environment and seen none to speak of, which means we've been running a real inflationary rate of what?  6-12%?  Possibly.  Even though CPI is showing low inflation rates, and Shadow Stats is showing about 10%, my guess is real inflation is much higher.

All the money they've created to run these deficits has to create a firestorm at some point, even with the fall off in aggregate demand.  In all likelihood, QE3 is right around the corner.

LawsofPhysics's picture

ZIRP is QE!   No interest essentially means that there is no "cost" associated with capital creation.  If you believe that (especially on a planet with hard limits and finite energy) then there are a few bridges I have for sale that might interest you.