By Ronald-Peter Stoferle, Incrementum AG Lichtenstein

Historic Chaos, Crisis & The War Between Inflation & Deflation

November 20 (King World News) 

In our last article, we explained the current battle between inflation and deflation and compared it with the permanent reciprocal pressure of two tectonic plates.  In the following, we would like to elaborate why deflation will be avoided whatever it takes....

Continue reading the Ronald Stoferle piece below...


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The natural market adjustment process of the current crisis would be deeply deflationary.  Based on the Austrian school, deflation is regarded as a shrinking quantity of money and an increase in the quality of money.  The reason for this lies in our current fractional reserve banking system.  The largest part of money in circulation is created by credit within the commercial banking sector.  The much smaller portion is, however, created by central banks.  As the financial sector in most parts of the world reversed its preceding credit expansion, overall credit supply was reduced significantly.

“Falling prices or price deflation are not the cause of economic and financial crises, but their consequences - and at the same time their cure.” Roland Baader

As can be seen on the following chart, this (credit) deflation, respectively deleveraging, is currently compensated by very expansionary central bank policies.

In our opinion, this is an extremely delicate balancing act.  Due to the following grave consequences, deflation is a horror scenario from a political viewpoint that has to be averted at all costs.

*  Price deflation results in a real increase in the value of debt and a nominal decline in asset values

*  Debts can no longer be serviced. 

*  Creditors and savers would lose money in nominal terms.


*  Massive tax revenue declines for the government due to a declining taxable base 

*  Deflation would have fatal consequences for large parts of the banking system 

*  Central banks also have the mandate to ensure financial market stability

As the illustration below shows, until the founding of the Federal Reserve, deflationary and inflationary periods tended to alternate.  Since 1913, and especially since the end of the Bretton Woods system, the situation has however radically changed: in only 12% of all years price deflation occurred. 

According to Austrian Business Cycle Theory the prices of capital goods (= asset price inflation) increase first in the course of an inflationary process, while consumer price inflation (= rising consumer prices) only ensues later.  The asset price inflation that is currently in train can be identified by a multitude of symptoms.  Prices for antiques, expensive wines, vintage cars, but also real estate and especially stocks recently increased strongly.

As the Fed desperately wants to “produce” (at least) 2% inflation, we think that consumer price inflation will pick up significantly going forward.

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