Inflation, deflation & the dollar – where do we stand?

We have had inflation since late 2009, using my favored definition of inflation as an increase in money supply and credit from Mish. By the way, commodity prices change with the speculative whims of of the financial markets, and are not a good definition of inflation (commodities fell from 1980 to 2000, as we experienced credit & monetary inflation and the price level doubled).

Since 2007, the monetary base has of course soared (see below), but in 2008 and 2009 its increase was overwhelmed by the decrease in private debt (marked-to-market), and the mood of risk-aversion. Since then defaults have eased and new debt issuance has grown, so we have had significant inflation.

Monetary base:

Monetary Aggregates:

The world is still laden with too much debt to sustain, so we will likely be back into deflation and de-risking before long. The following debtors in particular have yet to have their come-to-Jesus moments:

  • US cities & states (muni-bonds)
  • Canadian and Australian homeowners (record high prices, prices too high relative to incomes and rents, absurd loan-to-value ratios).
  • Several European nations (Portugal, Spain, Italy, much of Eastern Europe). Actually even Greece and Ireland will have to default before long, since their bailouts were just extensions and added to their debt.

The Kondratieff cycle is not perfect, but its main point is that debt cycles are generational, since they have as much to do with attitudes as with numbers. The deflation/de-leveraging phase (winter) can last over a decade, and this one certainly looks like it will.

Previous recent generations were as follows, off the top of my head:

  • Winter: 1929-1940 (decrease in debt, falling assets, low interest rates, falling to stable prices)
  • Spring: 1940-1966 (early debt growth, rising assets, rising interest rates, moderately rising prices)
  • Summer: 1966-1982 (continued debt growth, falling assets, high interest rates, rapidly rising prices)
  • Autumn: 1982-2007 (rapid debt growth, rapidly rising assets, falling interest rates, slowly rising prices)
  • Winter: 2007- (decrease in debt, falling assets, low interest rates, falling to stable prices)

The dates are approximate Рsome say that winter began in 2000 when we first faced deflation. Also, all nations are not in sync. Japan went into winter in 1990, and is still in it despite massive and repeated central bank printing.  What clears the way for spring is the reduction in debt, and the west is making the same mistake that we criticised the Japanese for making, propping up failed institutions and not allowing the market to clear.


Bonus chart: US dollar index since 1985 – in classic form, by the time everyone started worrying about a dollar crash (2007), it had already happened.

Despite its central bank’s profligate ways, the Japan’s currency has risen dramatically since the 1990s. Don’t count the dollar out just yet. This chart shows yen per dollar (downward slope = rising yen):




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8 thoughts on “Inflation, deflation & the dollar – where do we stand?

  1. Regarding debtors that are headed towards an “awakening” – I would include Home owners in India and China.

    India: Homes that used to cost (in USD) $50K 10 years ago are now being sold for $250 to $350K! Incomes have not risen at the same level as tradtionally, most people in India buy a home out right with cash. Now they are getting loans ..

    China: Same story but in most places they are empty!

  2. Yes, of course. I forgot about China’s giant property bubble. Major waste of capital there. I didn’t know about India’s, but it’s not surprising, since debt is all the rage the world over.

  3. Hi Mike,

    Hope all is well. Can you please ellaborate on the impact of Japan’s crisis which is in my opinion worsening as the region that has been affected is responsible for 40% of Japan’s GDP. They have to maintain this somehow (if they can) on 20% less Energy. What will be the impact if Japan becomes a net seller of US Treasuries in order to raise the capital needed to rebuild Japan? Could this eventually lead to the collapse of the US Treasury Bond market in the second half of 2011, a market that now has only a single buyer: the US Federal Reserve? If so, then interest rates are going to shoot up it would be safe to say. What would be the impact on stocks, commodity prices and precious metals?

    Here’s an interesting article on the subject:


  4. There’s always some crisis like this, and you can spend hours pondering the what-ifs. But the scenario you describe is not worth worrying about IMO. Japan will be fine – the impact of the disaster is way over-hyped. Even if they did become a net seller, the impact would be at the margins – single events like that in a market that is driven by generational long cycles are insignificant.

    The problems of demographics and a banking system that, like the west’s, won’t allow liquidation of debts are orders of magnitude greater.

  5. I asked Bill F the same question. His answer: – They won’t sell treasuries, if they did and then sold the dollars and bought yen, the yen would go higher, which they don’t want. They will just print yen to pay for everything, until they can’t. -

    So, the money printing machine will continue, currencies will weaken over time …. that is for sure ….

  6. Right. Actually, you know what was the real play after the earthquake? Uranium. Look at this index (this is my site – sorry about the url misdirect last month) – jumped from 75 to 90 in a few days, b/c these companies were so oversold. Some smaller stocks did even better, after doing even worse.

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