We are experiencing a deflationary period. Debt is being destroyed faster than it can be created. However, once deflation runs its course, there is going to be a period of terrible inflation. This is because the government is trying desperately to fight deflation by printing new money. How much is the government printing? Well, here’s the monetary base:
I put the scale back to 2001 so that you could
- Compare to the previous recession, and
- Realize how much money was created in the last decade.
That data is skewed because of the massive absolute growth. On a percentage basis, we’re printing like crazy:
I also wanted to see the year-over-year trend. Even then, we’ve fired up the printing press:
Wow. There’s no doubt that we are going to try to print our way out of this. Unfortunately, we have a debt (government, business, and consumer) measuring approximately $50 Trillion that we are defaulting on. The unwinding of asset prices such as stocks and housing prices ensures that we will default on a lot of this. This is deflation. Who’s going to win? Debt unwinding or Government Printing? My hypothesis is that deflation is winning, and after a period of deflation we will have a period of massive inflation.
I thought I would try to provide the evidence on the inflation side of the argument. Important evidence that I am missing is how much of a multiplier effect that printed money is having. For that, we’d have to track the total market value of the bond market, or some equivalent measure of total credit.
