Deflation / Inflation: Musings

This started as a Tweet. Then it grew a little. Then it grew a little more. Now here we are...

As the "Musings" in the title suggests, this little monologue is entirely off the top of my head - unapologetically raw in its lack structural planning or formal research. Relax, I'm more than capable of writing successfully without such things.

Deflation and Inflation

Inflation is such a deeply ingrained mainstay of global monetary policy that we've been conditioned to believe that it is necessary.

Deflation is seen as "bad" - ironic, since it's never been given a chance to take hold.

"Inflation addiction" has always artificially FORCED inflation upon the markets.

The markets have never had a chance to balance. No fiat market has ever been allowed to run free and to allow price depreciation to find a natural bottom.

Greedy governments and banks have been unwilling to let their dollar-denominated income decrease, even though the purchasing power the currency itself rises in the process.

Deflation is said to cause stagnation and lead to recession, and it does, because Average Joe delays purchases today so that he can buy the same item cheaper tomorrow. But just when Average Joe would pull the trigger and make the purchase, the authorities step in and artificially inflate the money supply again. The deflation process thus never gets to bottom out and begin to reverse the trend of hoarding/saving.

More's the pity, because deflation is the natural counteraction of inflation. Without deflation, there can never be a “correction”. The money markets are never allowed to balance out by means of oscillating between inflation and deflation, they therefore never sit at an equilibrium position. A recession is a short-term natural correction. When cut short, a recession doesn't vanish, its unresolved root causes get plastered over and hidden away, but still lie lurking there beneath the surface.

For this reason, markets are inherently unstable. A century (since first meddling with and later abolishing the gold standard) of inflationary monetary policy has left us so far from a natural equilibrium point that we don’t even know where such a point would lie these days. All we know is that it lies “far away” from current money value levels.

It goes without saying that a policy of continued inflation requires continuous stimulus, and this comes at great cost. Whereas deflationary periods encourage saving, inflationary periods encourage spending. We are taught that this is "good". It isn't. It's unnatural. This results in the consumer being actively encouraged NOT to save anything for a rainy day - itself a major problem.

Not saving means that:

The economy has no liquidity buffer in the hands of the population.
The common man is highly susceptible to any negative market swings (as we see now during Covid-19).
A culture of irresponsible (or absent) personal financial planning is created and reinforced.

Additionally, the use of credit is strongly encouraged, because as soon as the velocity of money declines, an inflationary economy is in trouble. Spending HAS to continue at an ever increasing pace! Living on credit automatically places the population in debt: i.e. everyone owes money on things they "own" which they could otherwise not have afforded.

GREAT system guys...

Of course without external stimulation the entire system would still collapse, it isn’t enough that the Smith family hasn’t saved a dime, it isn’t enough that the Jones family lives in constant debt, more is required. Governments and banks therefore both participate in the creation of additional money, to keep money supply high and to devalue it. (Bad news for any family which DOES manage to save anything!)

The nature of this system is that the more money is created by it, the more money HAS to be created by it. As soon as money creation stops, it all falls apart.

This is why we say that governments and central banks are addicted to inflation: without it, their pyramid scheme (you can see by now that it is one - right?) collapses and deflation immediately returns to try to restore the long-lost equilibrium point.

Of added benefit to the current dispensation is that the newly created money enters the economy right at the top (through the big banks and multinational corporations) - not through the bank accounts of the Smith or Jones households. Thus while the Smiths go ever further into debt, the government gets its pound of flesh in taxes; and while the Jones’ all work two jobs to put food on the table, the families of bankers never have to do an honest day’s work in their lives. (Yes there are helicopter money drops - no they do not even begin to compare to the money going directly into the hands of the rich through processes such as QE and bailouts - and most countries don't have them).

It is IMPOSSIBLE to criticise the end results of deflation when it has never been allowed to reach maturity. Inflation and deflation are two sides of the same coin, but every time our coin toss comes up ”tails”, the authorities force it over to the “heads” side. Every time they force the coin over, they add another tier to the house of cards - aka: “our economy”.

Mark my words: inflation is not only unsustainable, but so unsustainable that it’s about to cause another major upset. Standby for "The Greater Depression”.

Yeah. We need constant inflation all right, we need it like we need another hole in our heads.