Inflation or Deflation?

Inflation or Deflation?

Inflation or Deflation?

Inflation or Deflation? is a question that has been asked often since the Federal Reserve started feeding dollars into the financial system after the financial crisis in 2008. In most cases, injecting money almost immediately produces price increases that soon are seen clearly as inflation. It didn’t happen this time. Even as the Fed poured more and more dollars in, (over $4 trillion since 2008) inflation, as measured by the Consumer Price Index (CPI) varied little or actually went down. Why?

shanghai-stock-exchange In “What I Learned from Turkeys,” we saw that sometimes trends can end suddenly, almost in mid-stride. Trends don’t always end like that, of course. Usually, trends end less abruptly. Sometimes they roll over slowly before picking up speed in the opposite direction. In stocks, prices do often come down faster than they went up.

In “Those Nasty Lumps Under the Carpet,” we saw that during the financial crisis of 2008, derivatives were not allowed to be priced at market, even though some percentage were actually worthless. Instead, the powers that be sent an avalanche of money into the system to cover the losses. They said it was for the banks to start lending again and return the economy to the path of growth. But, the banks held onto the money and the economy just muddled through for the last seven years.

The Case for Inflation

djia-nominal-value Starting in 2008 through the present time, the US Federal Reserve has increased their asset balance by over $4 trillion dollars. This came from various bailouts of major banks and financial corporations, and its more recent bond buying programs. Money for all this was created out of thin air by virtue of the printing press. (Actually, almost all the currency created is electronic, existing only as numbers in the accounting books.) Their resulting assets are actually debt instruments of the US Government and major banks and corporations. Some of this debt was so toxic, that the existence of the financial institutions were threatened. (We’ll return to this in a future essay.)

usd-nominal-value Inflation is caused by too many dollars chasing a given supply, which drives the bid price higher. So, the logic goes that if the Central Banks are dumping money into the market through bailouts, and buying bonds, price inflation must result. The people in this camp are still buying gold and patiently waiting. They point to the signs of recovery, like increasing hiring, decreasing unemployment numbers, a rising stock market, rising housing prices, and other economic indicators as evidence of a growing economy and inflation returning soon. Yet, all this added currency has failed to produce even the Feds target inflation of two percent, nor a return to full employment. Labor utilization is actually down along with average income. There is hiring, but the jobs offered are at lower wages, and often, part time positions. All the Fed’s efforts have mainly produced low interest rates, and raised the level of consumer, corporate and government debt to record levels through all first-world countries.

The Case for Deflation

djia-pricedingold The majority of debt and derivatives are denominated in US dollars (USD), and when they lose value, it creates a high demand for dollars. One person’s debt is another person’s asset and income stream. Anyone affected by the loss of value of debt or derivatives will sell anything they have to raise cash. And, mostly, the cash they will need will be USD. That drives the value of the dollar up. Because the nominal value of derivatives is in the hundreds of trillions of dollars, the price of all assets will fall as people worldwide sell  in the scramble for dollars, resulting in a deflationary depression. It is likely to be similar to the 1930’s depression, but larger because the mania and debt level leading to the crash is much larger.

usd-pricedingold As you can see in the nearby chart, the value of the dollar priced in gold has been rising since 2011. This upward trend in both the nominal and real value of dollars will continue until the excessive debt throughout the world is reckoned with, mostly by default. Prechter (Robert Prechter, Elliott Wave International) estimates that the US stock markets are topping now, and will bottom in 2018-2020, with the economy bottoming some 2-4 years later. The current strengthening of the dollar is only counter trend, and once the bulk of the bad debt is gone, the worldwide money-printing presses will gain traction. This will initiate inflation, and eventually, hyper-inflation will ignite, raising all asset prices, and returning the dollar to its downward path of destruction.

What To Do?

(The following is a compilation of the best current advice from the author’s advisers. The author does not know your situation, nor does he intend to offer any personal advice. Each reader must do his or her own research and determine what is right for their own financial situation.)

When the dollar is strong and asset prices have been knocked down, bargains will be everywhere.

A cartoon from the 1930’s shows two men standing outside a brokerage office watching stock prices on the ticker. One says to the other, “Yes sirree, at these prices I would definitely be buying, if I had any money!”

The trick is to hang onto purchasing power until then. So, where to hold USD cash? 

wages-pricedingold Start by getting several months (3-6) worth of cash on hand. Next, buy short-term (2 years or less) Treasury Notes, or funds backed by short-term Treasuries. Banks in the US are not well funded, and the largest four hold over $200 trillion worth of derivatives, according to Martin Weiss. The best place to hold cash is in multiple, well-funded foreign banks. FATCA and other legislation has made it difficult, but not impossible for US citizens to open accounts in foreign banks. Two that still take US customers are Caye International Bank, Ltd. in San Pedro, Ambergris Caye, Belize (,) and ENR Asset Management in Montreal, Canada ( Requirements for opening an account can be found on the bank websites. In some cases, you can open an account without visiting the bank, unless you wish to. One important bank feature to look for is the capability to switch your funds to other currencies, for when the USD starts to slide down again.

If any of this is right for you, don’t delay. Your research and completing the indicated steps can take some time. The worldwide financial system could unravel at any time.
Good luck and stay in touch,
George Escola
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Inflation or Deflation?
George grew up in the central San Joaquin Valley of California, and after high school, joined the US Navy. The Navy provided travel and education, including a degree from Purdue University. He left the Navy after 14 years to pursue other opportunities and worked in San Diego, California for 29 years for an industrial gas turbine manufacturer in New Product Development until retiring in 2008. George spends his time photographing and documenting his travels.
Inflation or Deflation?

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