Spot The Moment Inflation Turned Exponential

In the aftermath of a surreal Janet Yellen press conference, in which the Fed chair admitted that Fed "no longer understands" the "mystery" that is inflation, we did our best to explain to Yellen that the reason why the Fed's search for inflation has been fruitless, is because for nearly a decade it has been looking in the wrong place: the "real economy" where the Fed's impact has been negligible, as opposed to "asset prices" where the Fed has unleashed near hyperinflation.

Sadly, we doubt the Fed will understand what the above chart means.

Which of course, is ironic, because it was the Fed's arrival in 1913 that was the catalyst for inflation to snap and unanchor from 700 years of patterns, and to mutate from gradually upward sloping to spike exponentially over the past 100 years. Furthermore, as Deutsche Bank's Jim Reid writes, nothing will change, and Inflation remains the most likely outcome "until a new global financial system found." Incidentally, he adds the latter because even chief credit strategists of major banks have come to the same "tin foil" conclusion we unveiled in 2009, namely that the existing financial and economic (if not social) system is doomed as long as an unconstrained fiat regime, which creates ever greater and greater asset bubbles, remains.

Here is Jim Reid:

The chart below shows median global inflation first from 1209 (left) and then from 1900 (right). Inflation took on a totally different persona after the start of the twentieth century. The charts are again on a log scale to allow us to easily see the near exponential increase in inflation over the last 100 years or so, especially relative to what occurred before. Note that had we used the median instead of the average, the chart would look almost absurd given the extreme levels of hyperinflation seen in several countries over the last century. The data behind the right hand graph is based on a full set of 24 countries where we have inflation data back to 1900. Prior to this, many countries have data that goes back several decades with some back through the centuries. For the series back to 1210 we have included data as and when it becomes available.

And here is the log chart, both zoomed out and in, showing the catalyst that "broke" inflation: the creation of the Fed in 1913 ahead of World War I.

Yet while the chart above is familiar to most people with even a token interest in finance - except the Fed of course - what was found fascinating, was Deutsche Bank's solution to the problem: gold.

The various breaks with gold based currencies over the last century or so has correlated well with our financial shocks/crises indicator. It shows that you are more likely to see crises/shocks when we break from hard currency systems. Some of the devaluation to Gold has been mindboggling over the last 100 years.


Perversely, the current post Bretton Woods system also allows for huge operations/stimulus to overcome any crisis/shock. We also shouldn’t underestimate the positive impact that this can have on nominal asset prices. Cash is arguably a far more dangerous asset in a fiat currency but unstable regime than it is in a more stable less crisis prone one. However, by continually using stimulus to deal with crises and not letting creative destruction take over, you make a subsequent crisis more likely by passing the problem along to some other part of the global financial system, and usually in bigger size. In a fiat currency world, intervention and money creation is the path of least resistance. In a Gold standard world, mining new gold was the only stable way of increasing the money supply.


We think this leaves the current global economy particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again. There is no natural point where a purge of the excesses is forced by a restriction on credit creation.


So we’re quite confident that there will likely be another financial crisis/shock pretty soon with their frequency continuing to be high until we create a more stable global financial framework.

A new system, according to Reid, which resets the existing broken fiat-based one, and replaces it with one that is founded on sound money. To those who are speechless that one of the top strategists at the biggest European bank effectively has endorsed returning to the gold standard - a pastime typically relegated to the "fringe blogosphere" - strap in because far greater surprises are on their way in the coming months.


Antifaschistische JRobby Wed, 09/20/2017 - 17:46 Permalink

it is misleading to suggest that "inflation" started as a result of the Federal Reserve.   "Central Banking" does not = inflation.counterfeiting fiat = inflationThe Federal Reserve just institutionalized the function of counterfeiting to VIP individuals and VIP institutions.   Inflation is merely a byproduct of counterfeited fiat percolating through a macro economy.

In reply to by JRobby

YUNOSELL Kidbuck Wed, 09/20/2017 - 19:09 Permalink

I'd like to think they are some people of true integrity out there that would resist this. Likely they would turn down the power to rob others at the outset, knowing that power corrupts.I think the men who wrote the Declaration of Independence were these type of people, but their ilk are long gone now in politics.

In reply to by Kidbuck

synthetically … ParkAveFlasher Wed, 09/20/2017 - 17:26 Permalink

"... the inflation curve front runs population growth, which is also hockey-stick-like over 700 years." "Hockey-stick-like" growth (or decay) curves are no rarity nowadays.  And, of course, observations such as yours (pointing out obvious similarities in such curves) are perfectly valid as long as there is no attempt to (mistakenly) equate (mere) correlation with causation. 

In reply to by ParkAveFlasher

rp2016 Wed, 09/20/2017 - 16:45 Permalink

Now what .. Tyler? They took all the money got rich and now they say .. "sorry you are on your own. can't do any better than that"... Is that it? What now?

Batman11 Wed, 09/20/2017 - 16:50 Permalink

Financial stability is a lot easier than it looks; Central Bankers just make it look hard.The FED doesn’t understand a lot of things and doesn’t seem to be willing to put the effort in to work things out. They still attribute 2008 to a “black swan”.“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.Our Nobel prize winning economists have the same problem.This is “financial intermediation theory” and this makes it impossible to work out how 2008 happened.I looked into it and puzzled over the mechanism by which money could be destroyed in the system as so obviously happened in 2008. This is well hidden, and it took a bit of effort, but eventually I found out how money, debt and banks really work; the “credit creation theory” of money. You can see credit bubbles building up in the money supply. going exponential, a credit bubble is underway (debt = money)Richard Werner followed the same path after the Japanese crisis in 1989 and is extremely dedicated and has traced the history of the regression of our knowledge of money, debt and what banks do.Monetary theory has been regressing since 1856, when someone worked out how the system really worked.Credit creation theory -> fractional reserve theory -> financial intermediation theory“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner someone get our experts up to speed on the “credit creation theory” of money. Richard Werner has done all the work and you can get it from him.The first empirical study of how banks create money in the 5,000 year history of banking.Everyone is going to carry on making a complete pig’s ear of running the economy until they get a grip of the basics.Australia, Canada, Sweden and Norway are in the midst of a real estate bubble as their bankers and central bankers don’t know what they are doing.Richard Werner explains how the Basel requirements are based on “financial intermediation theory” and won’t work; they are not based on the monetary reality where banks create money.  The Basel requirements actually push bankers into real estate lending, which is extremely dangerous, e.g. Japan 1989 and 2008. stability is a lot easier than it looks; Central Bankers just make it look hard.

Batman11 Batman11 Wed, 09/20/2017 - 16:53 Permalink

Financial stability is a lot easier than it looks; Central Bankers just make it look hard.Germany can do it due to the way their banking system is structured.Germany ensures bank credit caters for the long term needs of business and industry by having 70% of its banks being small, non-profit organisations that are closely tied to the regions they serve. There is no incentive to blow bubbles for short term profits, dividends and bonuses.Have TBTF banks trying to maximise profits and you are fucked. 

In reply to by Batman11

Rapunzal Batman11 Wed, 09/20/2017 - 17:01 Permalink

I said in many comments before, the FED knows exactly what they are doing. They playing the dumb guessing game with us, for several reason.

1. The experts can feel superior and therefore are not paying enough attention.

2. The FED can play in the next crash innocent again. Like they always do.

3. They will be paraded and laughed at, but not the real controllers. The likes of the Rothschilds.

4. The FED will be eventually dismantled by the parasites Rothschilds and they can sell it to the people as win.

All good and the shit show can go on under a different name.

In reply to by Batman11

Batman11 Rapunzal Wed, 09/20/2017 - 17:15 Permalink

I have a feeling they do, but when enough know how the system works they won't be able to get away with it.It's not hard, it's just all the important stuff is hidden.Paul Krugman is completely stuffed with his financial inter-mediation theory, he can't work anything out with that.He needs the credit creation theory of money and that has been hidden.Milton Freidman tried to use fractional reserve theory in monetarism, but it's wrong and it didn't work.Bank lending is not controlled by Central bank reserves.  

In reply to by Rapunzal

khakuda Wed, 09/20/2017 - 16:56 Permalink

Prices used to go up and down and it was not big deal.  Then the Fed and the debt based system came along and prices could never be allowed to drop again.Think of how crazy it seems that the Fed's biggest goal these days is to make sure the cost of living rises by at least 2% a year by their own measure which is very purposefully flawed to show less inflation than really exists.That's right, all will be well if only the cost of living rose each and every year.  The only reason that is true is because of the insane amounts of debt and desire for the government to grow its tax base (remember, if prices go up and wages follow, you get pushed into a higher tax bracket and they get a bigger cut).  In a cash based economy, inflation would make no sense whatsoever.

JerseyJoe ejmoosa Wed, 09/20/2017 - 18:04 Permalink

It is worse than you think.China's manuafacturing capacity is so over blown by cheap money fed to old state run industries.     When a company can't pay its bills, the banks step in and float the dead company a new loan but the entire loan is kept by the bank to service the loan.   So the dead company goes deeper into debt and has no way to pay the original loan back - let alone the pile the banks added.  One benefit - the workers can pretend to work and get paid.   The Party likes it like that. Chinese banks can only get by with this scam for so long before it collapses.  

In reply to by ejmoosa

khakuda JerseyJoe Wed, 09/20/2017 - 19:31 Permalink

Yup. Case in point. I needed a new air filter for the lawnmower last month. eBay straight from China shipped for $1 and it is the same exact thing Amazon and Home Depot sell for $6. Looking at it closely, it looks like it even came from the same manufacturing facility.

It costs me almost $.50 to send a first class letter across town. It is not possible to produce this product, ship it halfway across the world via mail and make a profit at $1 shipped.

In reply to by JerseyJoe

Zero-Hegemon Wed, 09/20/2017 - 17:09 Permalink

Summary: The FED needs asset bubbles to support their continued creation of FIAT currency, like a junky needs heroin. And today the FED just promisted to "kick" tomorrow. Just like your average junky.#AssetBubblesMatter

mvsjcl Wed, 09/20/2017 - 17:19 Permalink

"...the "real economy" where the Fed's impact has been negligible..." ...the real economy, where any demonstrable signs of inflation have been mercilessly beaten down in whack-a-mole fashion by a sledgehammer forged by captured government functionaries and a media bamboozled, bushwhacked, bribed by and beholden to the the very interests they were empowered by the Constitution to warn us about.

GunnerySgtHartman Wed, 09/20/2017 - 17:20 Permalink

Inflation remains the most likely outcome "until a new global financial system found." Memo to Jim Reid: We had it once, and you banksters took it away: a financial system free of central banking and a currency actually backed by something other than "full faith and credit" baloney.We want it back.  NOW.

PrivetHedge Wed, 09/20/2017 - 17:55 Permalink

When you rent a currency paid for by that currency (our current system) exponential inflation and debt are built right in, because we are repaying the loan interest with the loan itself.This is the Rothschild/ money changers trap.

moonmac Wed, 09/20/2017 - 18:00 Permalink

I go to Goodwill just to see how things used to be made with quality. I look at a $1.99 item and realize they couldn't make this today for $50 on a one million piece production run.

rf80412 Wed, 09/20/2017 - 19:40 Permalink

The problem is that markets are rocked, businesses bankrupted, and rabble roused by comparatively short term crises, both inflationary and deflationary ... even if the long term trend is as flat as your hat.TPTB have every incentive to crush froth, even at the expense of hyperinflation over the course of a century.