Inflation vs Deflation – Monetary Tectonics

The below article is a great piece of work from Gold-Silver For those who don’t understand inflation or deflation, I’ll briefly explain. Inflation is the general rise in prices and deflation is a drop in prices. Economics has been hijacked by people who don’t want you to understand what is truly going on with the economy while they rob you blind. This is why they use expansive and elaborate terms to confuse and obfuscate what is happening in the world economy.

There are those of you, like me, who thinks that drops in prices are good, it means we have more currency in our pockets. The point is price deflation results in a real increase in the value of debt and a nominal decline in asset values. For those of you unsure as to what the terms real and nominal mean in economics I will explain. A nominal value is expressed in monetary terms as units of a currency. A real value is where the nominal value is adjusted to remove the effects of general price level price changes over time, also known as inflation.

So with central banks and governments gorging on debt, ‘printing’ money in order to inflate that debt away. Deflation is a bad sign so they will continue to print and will increase ‘printing’ currency, be it £’s, €’s or $’s. They are sowing the seeds of their own destruction and we will all be victims.

My advice, buy physical gold and silver as a hedge against the worst happening. I need to state I am not a financial advisor but I recommend to friends and family that they put 20 – 30% of their ‘wealth’ into gold and silver. Whether they listen is another thing. I will leave you with this last gambit before the article, in the past 300 years there have been over 700 fiat currencies, the longest that has ever survived is 50 years. The world moved onto a purely fiat monetary standard when the USA defaulted on its gold obligations in 1971. Coming up to 43 years so there’s not that long left but for the detractors of my point of view and this article…this time it will be different…it won’t. Enjoy the article.

We introduced the first chartbook from Incrementum Liechtenstein in the fall of last year. It showed the debt bear market in 50 amazing charts. In their second chartbook, Ronald Stoeferle and Mark Valek from Incrementum Liechtenstein analyzed in great detail the raging war between inflation and deflation, as well as gold’s role in it.

The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:

  • Monetary inflation is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
  • Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.

The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.


The chartbook shows several trend which confirm the deflationary monetary pressure:

  • Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
  • US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
  • Money supply growth in the US and the Eurozone is trending lower. See second chart below.
  • Personal consumption expenditures are exhibiting disinflation .
  • The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
  • The gold to Treasury ratio is declining. See third chart below.
  • The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.




On the other hand, inflationary pressure is present through the following trends:

  • An explosion of the monetary base M0. See first chart below.
  • US households show signs of stopped deleveraging. See second chart below.
  • The currency in circulation keeps on expanding.
  • Commercial banks have piled up an enormous amount of excess reserves which, in case of a rate hike by central planners, could flood the market through lending in the fractional banking system. See thrid chart below.




How is gold impacted in this inflation vs deflation war? The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.

The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:

  • Price deflation results in a real increase in the value of debt and a nominal decline in asset values. Debt can no longer be serviced.
  • Price deflation would lead to 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‘


Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.


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