Will It Be Inflation Or Delfation? The Answer May Surprise You

Michael Snyder

Is the coming financial collapse going to be inflationary or deflationary?  Are we headed for rampant inflation or crippling deflation?  This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation.  Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts.  So what is the truth?

Well, for the reasons listed below, I believe that we will see both.  The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis.  This will happen so quickly that many will get "financial whiplash" as they try to figure out what to do with their money.  We are moving toward a time of extreme financial instability, and different strategies will be called for at different times. 

So why will we see deflation first?  The following are some of the major deflationary forces that are affecting our economy right now...

Predicting the Future Gold Price Misses the Point

Jason Kaspar
Activist Post

“Gold bugs” routinely solicit my prediction regarding the future gold price, assuming I must be an “educated” gold bug since my hedge fund happens to maintain large gold exposure.

I loathe the question, because a typical gold bug will not “hear” my response, instead waiting for me to validate their speculative fantasies with the prospect of dollar signs and five-figure gold. Will gold rise to $2000/oz? $10,000/oz?

Where is the gold price headed?  It depends on the variable.

-In what time period? The next week? Month? Year? Ten years? 
-Compared to what? Dollars? Euros? Real estate? Gummi bears?

Of course, nearly everyone wants a prediction in dollars, which is highly humorous and paradoxical because the purported destruction of the dollar is a primary reason to own gold in the first place. What victory is there if the dollar value declines 50% and the gold price doubles?

Economy Hit with the Ultimate Smokescreen: Biflation

Ponzi economy being exposed

Eric Blair
Activist Post

You can tell when a Ponzi scheme is approaching its collapse by the increased number of smoke and mirrors needed to cover up the counterfeit foundation of the scheme.

The U.S. government, who already grossly disfigures the real numbers for GDP, unemployment and inflation, is constantly having to twist reality to keep their scheme afloat.

The government recently reported that unemployment numbers reached the lowest point in nearly two years at 8.9%, "sparking optimism" in the establishment media.  Many analysts point to two months in a row of "job growth" as evidence that the U.S. is well on its way to recovery and it should be good news for job seekers.

Try telling that to a random unemployed commenter who responded to the news with the following:

All lies. Why not just up the ante and say the unemployment rate is 5%? The last job I applied for had 440 applicants, many of whom had Phd's, for the whopping non-living wage figure of 35K.

Even if jobs are added, the question begs--what kind, and how much per hour? $8?

 We all know the inherent problems with the official unemployment number, as it never tells the full story. But assuming hiring has gotten better, these lower wage jobs will surely affect consumer spending in the near and long term.  Additionally, John Challenger, an executive with an outplacement firm, claimed his optimism is tempered because, "Certainly the specter of rising gas prices could impact employers' staffing decisions over the next six months."

Which brings us to the phony number in the theater to hide the Ponzi scheme that I want to focus on: inflation. The 12-month inflation rate as of January 2011, was 1.6% according to the official Consumer Price Index, or only 1% when you remove food and energy.  The report stated:

Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent.

The gasoline index is indeed an eye-popping number.  Too bad it's not accurate.  According to a recently released report by the American Petroleum Institute (PDF) gas prices are up about 25% on average over the last 12 months, and a whopping 105.7% in just over two years (since December 29, 2008 lows).  And these numbers scarcely reflect recent jumps in oil prices due to turmoil in Libya and the Middle East, which has already caused the Obama Administration to consider tapping the nation's strategic oil reserves.

For all the news lately about looming food inflation with commodities skyrocketing, the Consumer Price Index for the past twelve months seems somewhat accurate.  In other words, the commodity speculation is only now starting to impact food prices in a major way.  The CPI release pointed out that "The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising," and January's food at home index has already increased 0.7 percent.

All of these real increases to the cost of living for average people are balanced out with used housing, cars, and washing machines that are declining in price to create a palatable inflation official number.  This phenomenon is called biflation.  First introduced by Dr. F. Osborne Brown, biflation is where inflation and deflation occur simultaneously in the economy.  It is an effective tool to confuse the public and give pundits the intellectual case for spinning the numbers in either direction.

During biflation, there's a rise in prices of commodity-based assets like food and energy (inflation) and a simultaneous fall (deflation) in the price of debt-based assets like homes, cars, and appliances.  The free-market concept is that the price of all assets are based on the demand for them versus the amount of money in circulation to buy them.  In other words, their sales are utterly dependent on banks for credit, which is in turn dependent on the job market.

Wikipedia clearly describes the process of biflation as follows:

With biflation on the one hand, the economy is fueled by an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for them rises due to the increased volume of money chasing them. The increasing costs to purchase these essential assets is the price-inflationary arm of biflation. 

With biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and other typically debt based assets) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of biflation.

This biflationary period will likely continue, as money will continue to be printed to cover bank losses and government debt, while hardships will likely continue to mount for the average consumer.  Although the deflationary debt-based products seem like necessities in our modern world, their demand elasticity is far greater than that of food and energy, meaning they should not be equally weighed to determine the struggle of middle-and-lower class households.

So don't be fooled; biflation is being used as a smokescreen to keep the public from becoming alarmed about rapidly rising food and energy prices. Those who recognize the severity of the problem would be wise to prepare for massive inflation of human necessity today before the problem gets even worse.

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Learn this Word: "Stagflation"

Anthony Migchels

Henry Makow

Since the start of the Credit Crunch in Sept. 2008, a fierce debate has raged over whether we will face deflation or inflation. We can now conclude we will have a toxic combination of both, known as stagflation.

Stagflation is the phenomenon of rising prices and falling demand and production. It was first experienced in the late seventies and although it eventually disappeared, there was never a good explanation for it.

Proponents of both sides of the aforementioned debate had strong arguments. 


Deflationists said the banks were insolvent and would not be able to provide credit, leading to a diminishing money supply and declining prices.

Inflationists said Central Banking and Governmental policies of bail outs, QE1,2,x and stimulus would lead to more money in circulation, with rising prices as a result.

Both were right, but they missed a crucial point. There are two economies. One is the real economy, where you and I operate. We work and make stuff. Cars, food, all sorts of services.

And there is also the financial economy. This is the shadowy world of finance, FOREX, stock exchanges, commodity exchanges. The graph below shows the vast scale of this financial economy, which is many times bigger than the real economy.

Graph by Margrit Kennedy and Bernard Lietaer, based on BIS figures 

The transaction volume for the financial economy is in red and the real economy is in green. At this point we are talking about 5 trillion worth of  transactions per day in the financial economy, many times more than in the real economy. We can also see that while the real economy grows in linear fashion, the financial economy grows exponentially. The unexpected decline we see around 2000 is explained by the introduction of the euro, which diminished FOREX speculation. A small price to pay for that giant leap towards World Currency. 

It also shows that the financial sector began only in the early seventies. This is explained by the rise of the computer. Most people don't realize that even in the early sixties, most wages were paid weekly.....in cash. It is the computer that made it possible for banks to connect everybody to their system. It also explains why stagflation had not been around before the late seventies. 

The financial and real economies to some extent interact, primarily via commodity exchanges. But the financial economy is largely isolated. Most of the hot money never reaches the real economy.  

Thankfully, otherwise the dollar wouldn't even be worth the 1% of its 1913 purchasing power it has now. This is so, because for instance, FOREX is just an eternal ping pong of transactions within the banking sector, leading to an eternal wealth transfer from the not-so-savvy to the "usual suspects." 

The two parallel economies also explain why price rises have not kept up with the expansion of credit. A lot of the newly created money was siphoned off to the financial economy. 

We have a deflation in the real economy but a massive inflation in the financial economy. Stagflation is coming because a portion of this hot money is now entering the commodity markets, leading to inflation in the primary sector (agriculture and mining). These rising prices will be passed on by producers in the secondary and tertiary sectors (industry and services.) 


An example of this process were the skyrocketing oil prices in 2009. It has been established that Goldman Sachs was using TAARP funds to drive up prices.  

Another example is the current rise in food prices. Or what do we think of JPM cornering the copper market? 

The deflation in the real economy is caused by the credit crunch, and by the new Capital Reserve Requirements that were foisted upon the banking system by the Bank of International Settlements. 

Meanwhile corporations are choked by lack of credit and going out of production, resulting in rising unemployment. 

So what does the future look like? We will be facing rising prices while the economy will be depressed, i.e. declining production and high levels of unemployment. This will result in volatility in the commodity markets, something we are now seeing with commodity stocks correcting by as much as one third.  

 I would like to express my appreciation for Dick Eastman's courageous and groundbreaking thoughts on the parallel economies and its implications. 
Other Articles by Anthony Migchels: 
The Hidden Slavery of Interest
On Inflation, Saving, and The Nature of Money 

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Why Hyperinflation is Coming and How to Prepare Now

Eric Roseman
Sovereign Investor

“We all keep worrying deflation, but it can turn so fast” – Adam Fergusson

Back in 1980 when my late grandfather, Abe Roseman, passed away, I inherited numerous personal items. These included tie bars, cufflinks, his old desk and lamp, and several other reminders of my childhood that to this day always put on a smile on my face.

Thirty years later, rummaging inside my late grandfather’s desk, I found 55 ounces of silver. Somehow, after all those years, I failed to pry open every drawer; what a surprise! How did he know I was a silver bull?

Or, perhaps, he wanted to be prepared for hard times.

Wisdom in Experience

I was pretty close to my grandfather. Abe was born in 1911 and lived through the Great Depression in Montreal. My grandmother would later remind me how bad things were in Canada at the time with unemployment at absurdly high levels from coast-to-coast. My grandparents knew how to be frugal and understood the value of money.

My generation (I’m in my early 40s) doesn’t know what it means to suffer an economic catastrophe; but we came darn close in 2008. I think we’re already in a “soft” economic depression. By “soft” I mean that without government backstops two years ago, we’d see blood in the streets, civil chaos and, possibly, runaway inflation by now.

In my view, this is a depression.

When 2 Million Marks Won’t Buy a Loaf of Bread

One item I inherited from my grandfather in 1980 was a bunch of old German bank notes, neatly tucked away in a plastic folder. At the ripe age of 14, I had no clue what these bills were worth, let alone what the German inscription meant. So I just buried Grandpa’s stash in my safety deposit box for the next 30 years.

Last month, however, I decided to review the causes and effects of the German Weimar Republic’s hyperinflation in the 1920s. I went to the bank and got Abe’s German notes. To refresh my history I read Adam Fergusson’s When Money Dies, first printed in 1975. I urge every investor to grab a copy ahead of “Quantitative Easing Part II” this summer.

It turns out my grandfather kept a bunch of German marks from periods ranging from 1922 to 1924; the note below is a scan. The amount is Zwei Millionen Mark or 2 Million Marks printed on Aug. 15, 1923 – exactly the same year that mind-boggling inflation started to run out of control in Germany.

Unbelievably, two million marks could barely buy a loaf of bread. Within hours, prices would escalate rendering that loaf to 3 million marks, four million marks etc. German paper had become almost worthless. Hyperinflation wiped out the entire middle class.

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