Inflation and then Deflation

The threat of “inflation” is dwarfed by the prospect of “deflation.”
Central bankers’ views on inflation were recently discussed in a Financial Times story. As the Financial Times observed, “pricing rises may become permanent for the first time in decades.” 

In 1954, the CPI Inflation rate was observed to have changed to deflationary.

The rise of industrialization before to World War II stifled deflationary fluctuations. 

In 1980, the economy changed from a manufacturing-based economy to one based on services and financial markets. There was an increase in debt, but service occupations had a poor multiplier effect due to financialization. As a result, debt and decreased output remain deflationary factors. 

The majority of economists today believe that large increases in the money supply herald a new era of permanently high prices. This is supported by an increase in the system’s M2 money measure. 

Data reflects It takes 9 months for inflation to take hold after an increase in the money supply. 

Headwinds to inflation arise outside of money supply. 

The rise in debt and deficits hampered economic growth as a result of the increase in debt and deficits. 

Last decade, debt and deficits have grown at the same rate as GDP.  

The rise of social welfare as a percentage of disposable income is an indicator of economic decline. In a zero-sum game, the economy is deflated by tax recycling. 

The “multiplier” effect of government expenditure was investigated in a recent Mercatus Center study. 

As a result of government purchases, the private sector shrinks while the public sector grows. Despite this, private income declines. 

Structural and psychological factors play a role in deflation. Expanding credit requires a strong economy. 

When economic development slows, high debt becomes insurmountable.. Borrowers’ ability to pay decreases when the economy slows. 

Creditors may refuse new loans in order to avoid paying interest on existing debt. Increases in the economic load lead to an increase in defaults. Fear of default is also a factor in reducing credit availability.

There is deflation when wages fall behind inflation. 

Fed attempts to achieve “full employment and stable pricing” in the past have hindered the economy. For every $1 of economic growth, higher levels of debt are needed. 

Changes in demographics will be the greatest deflationary factor of all. 

Less money in the stock market and less spending as baby boomers retire. 

The cycle of tightening begins now. 

It’s likely that the argument between inflation and deflation will continue next year. Stimulus-induced inflation? Sure. After the “Sugar Rush,” deflationary forces will rapidly resume.