April 19th, 2014
Published Daily

Deflation vs. Hyperinflation

by Rick Ackerman on December 23, 2013 3:48 am GMT · 156 comments

[This discussion topic has just started to get rolling, so I'm going to let it run for another week.  If you're looking for timely trading suggestions and fresh analysis in the holiday-shortened week ahead, tune to the Touts section and the Rick's Picks chat room.  A free two-week pass can be yours by clicking here.  RA]

Most of us understand that the audacious fraud that has sustained the U.S. economy and the global financial system can only end badly. But how?  As far as I’m concerned, there are only two possibilities: deflation; or less likely, hyperinflation.  In any event, it’s time for another go-round in the continuing debate.  This issue seems to pop up in nearly every forum discussion no matter what the topic, so let’s use the holiday lull to focus on something that is almost certain to be more interesting than the markets. To get things rolling, here are some bullet points of my own:

  • Because of its quadrillion dollar size, the financial bubble cannot be inflated or deflated away via a gradual process; only a catastrophic implosion or explosion is possible.
  • The most deflationary event we can conceive of – i.e., the banks failing to open one weekday morning – is also the most likely.
  • The monetarists’ definition of inflation/deflation as an increase/decrease in the money supply is worthless in an economy that runs on credit. To understand deflation better than most economists seem to, you need only consider its most pernicious and destructive symptom:  an increase in the real burden of debt.
  • This is the force that is suffocating Europe but which is being held at bay – barely – in the USA by the artificial and unsustainable suppression  of mortgage rates.
  • Federal taxes are steeply on the rise, putting yet more deflationary pressure on households.  Add in Obamacare, the largest new tax ever enacted, and it’s only going to get worse.
  • So are cutbacks in pension and healthcare benefits.  Detroit’s bankruptcy has opened a legal avenue for states, counties and cities to significantly reduce benefits if the money to pay them doesn’t exist.
  • Price increases for groceries, tuition and health care do not represent inflation –  as how could they if real wages are stagnant? Under the circumstances, an increase in the price of any or all three of those things leaves households with less money to consume other things.
  • He who says hyperinflation is coming must explain how homeowners will be let off  the hook, presumably by an explosion in real estate prices.
  • No fudging that last item, please, since mortgage debt is such a big chunk of what we collectively owe.

What say you, readers?

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mava December 31, 2013 at 10:19 pm

“Eventually debt service on that national debt is going to skyrocket.

What then? ”

… then you just double, or triple, or quadruple the amount of money (and or credit). Problem solved, debt is twice easier to pay. (has been done many times in history, over and over.)

Unlike you, I am ready to take unlimited credit. Especially at negative rates.

“Debt defaults also come into play, money just disappears.”

You think so? You lent me a dollar, I bought an ice-cream from Mario, now I go bankrupt. Debt default.
You think Mario no longer has that dollar?


Who cares about the dollar Mario received for the ice cream cone. When the defaults really start to snowball, I want to know who’s got the $550,000 that bought someone a suburban house. RA

mava January 1, 2014 at 8:33 am

Rick, do you seriously think that where $1 could not disappear, the $1 TRLN can?

In your example, the seller of the house has the money, the tenant has got the house (hopefully), and the lender has got the jack.


Okay. So both seller and lender have $550K in their respective pockets, all attributable to a house on which payments have ceased? Wrong wrong wrong. You are failing to see the big picture, Mava, which is simply this: After discharging our collective debts and liabilities through hyperinflation or deflation (take your pick), including those folded into a quadrillion dollar derivatives bubble, nobody will have ANYTHING. RA

mario cavolo January 2, 2014 at 2:56 am

Rick, help me here just to get my head around it. In the end the only one left with anything will be the one with the house, presumably then valued at far less than $500k, let’s say…$200k. Obviously deflation. As debt defaults could occur in lots of industries, we can easily see this also happening to cars and lots other goods in a widespread way, everybody obviously is holding a lot less in asset value/price relative to demand and available credit/cash. Tell me that’s your point?…Cheers


Exactly. You have stated what I stated above, but in a slightly different way. Mava’s big picture comprises one house and one lender. RA

Chris B January 2, 2014 at 8:45 pm

“I want to know who’s got the $550,000 that bought someone a suburban house. RA”

The homebuilder and the landowner have the $550,000. The new “homeowner” has some equity (his downpayment) and a contract that allows him eventual ownership of the home providing the terms of the loan are met. The Entity that lent the money to purchase the home has the remaining equity in the home. When Joe loses his job and can no longer abide by the terms of the contract, the Lender will still possess his portion of the equity in the home, and if the Market is rising, the Purchaser will walk away with his portion of the equity in the home, minus any penalties. If the Market is Down, then the Purchaser will lose some or all of his EQUITY – not his MONEY. His money is now in the hands of the homebuilder and landowner, or previous owner, and all he has to show for his money is EQUITY. In a mass default/upheaval, it will be EQUITY that is wiped off the books – not MONEY. The money never disappears, it only changes hands. However, it could be re-valued higher or lower by various means or situations, or it could be replaced by another form of exchange and become worthless once the time period of exchange lapses. (Like script during WWII)

Don’t confuse equity with money – they are two entirely different things.


You haven’t addressed the small matter of the global daisy-chain collapse that will occur on the inevitable Day of Reckoning. $550,000 is not a sum that the landowner or lender will likely have kept around the house. They will in fact have invested it in something — a financial instrument, perhaps, that will in turn have been hocked (i.e., “leveraged out”) 50 times.

When this house of cards collapses, I would not want to be the landowner or the lender, standing in line behind hundreds of others whose claims to the $550,000, or at least some piece of it, will be subordinated to the claims of…well, who can possibly say who will get first dibs?

Concerning “equity,” it is you who are confused, for there will be precious little of it to go around after the quadrillion dollar debt pyramid has imploded. What equity remains will be based solely on the income stream that an asset is capable of generating. RA

mava December 31, 2013 at 11:21 pm

“Unless you can conceive of a way in which hundreds of trillions of dollars of debt will become much easier to service in the years ahead, you must accept that deflation will eventually win out.”

I can conceive a way. The same way as before – by inflating, inflating and inflating. Here, I define an inflation as it is traditionally defined – an increase in the money supply.


Inflating the price of lettuce, maybe. That’s what countless trillions worth of inflating inflating inflating has accomplished so far. And still, no one has addressed my question about what will happen to mortgage debt in this supposed inflation inflation inflation. RA

mava January 1, 2014 at 8:46 am

(Like Gary, you’ve conveniently chosen to ignore the salient points of my argument. See my specific rebuttals, which I’ve embedded in your post. RA)


It has been already done. Inflation creates miracles (for the purpose of this conversation).

What would happen to the mortgage debt? The lender will get screwed (which historically is a normal). [Screwed?? Let's call a spade a spade: ALL lenders are in line to receive CONFETTI. And we are not talking merely about mortgage lenders, but holders of a quadrillion dollars of downstream debt that has been daisy-chained mainly from real estate assets. RA]

The inflation will eventually [Eventually?? There is no 'eventually' here. The global financial system is so tightly torqued that it will implode in the space of a few hours] create a situation where a minimum wage job earner can pay three or four monthly payments from his single paycheck [This is a non-starter for more reasons than I have time to list. RA] where before it would require a middle class salary to pay one payment.

Prices rise with inflation. Wages are prices of labor. Wages rise, even if later than other things. The inflation can not be a cost-pull, but strictly with relation to wage inflation, it purely is a cost-pull phenomenon. Workers stop working for old wages, and they thus get raises. [Ahh, more 'eventuallys'. Wage inflation came organically and over time in the 1970s. The current era, financially speaking, is about as similar to the 1970s as feudalism was to the Industrial Revolution.]

The debts are nominal, – not adjusted. Yes, the interest rates can “adjust” the debt service, but, Rick, during “easing” the nominal rates go DOWN, not up. Thus, the debt on a house already sold can not be adjusted for inflation. It will remain nominated in pre-inflation dollars, while being paid in post-inflation dollars. [There is no 'inflation' in our future, only ruinous deflation and/or hyperinflation. RA]

This, essentially, is a scam, of course. The reason it is ALWAYS executed is that the main beneficiary is the government. It receives the benefit of the purchasing power stolen thru inflation. But in its wake, those who follow, also get benefits – those who mimic the government.

Government is a scam, therefore it likes debt. To mimic the government you also take on debt. Inflation wipes it out. [Yes. And hyperinflation wipes out EVERYTHING, including all institutional conduits of saving and lending, such as the bond markets. RA]

“Neither the lender not the borrower be” [Say what!? RA]

The lender gets wiped out. [You seem not to have thought much about what this implies. It is somewhat disingenuous to say 'the lender', when in reality you are taking about every saver and lender on this earth. RA]

The borrower destroys itself from point of view of work ethics (welfare rot).

Not sure why are you asking about this, I think I read you explaining all this stuff a while ago.

[I asked because neither you nor anyone else who disagrees with me has addressed any of my arguments. RA]

Andy Gutterman January 1, 2014 at 3:34 pm

“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” The Rothschild brothers of London writing to associates in New York, 1863.


Thank you for sharing this. In one sentence, Rothschild, the ultimate banking insider, has explained how the Fed could be so evil and get away with it. RA

Jason S January 3, 2014 at 1:36 am

Mava, I think the reason for Rick’s frustration is that you are referencing inflating away the debt without considering that the way central banks around the world create more money is through additional debt. So if you conceive of a way of servicing a dollar’s worth of debt through inflation, that entails creating more than a dollar of additional debt to do it. When all is done, the amount of debt will be greater not less.

mava December 31, 2013 at 11:41 pm

“Deflation and inflation are effects of changes in the REAL rate of interest. That is why I keep harping on the point that we can take deflation’s measure by simply noting whether debt is getting easier to service or harder.”

I think, Rick, you are confusing the cause and effect. The deflation and inflation can be a cause, but not the effect of the change of real interest rate. (Fisher)


Please re-read my posts on this, Mava, since I’m done repeating my point. RA

mario cavolo January 1, 2014 at 1:22 am

Sweet spot on calls wrapping up the year with the market rally and gold’s swan dive to your 1184ish target, Happy New Year to you and yours!

Cheers, Mario


Thanks, Mario — and all the best to you and your family in 2014. RA

mava January 1, 2014 at 8:49 am

Happy New Year!

Andy Gutterman January 1, 2014 at 3:26 pm

Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote:

I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men. -Woodrow Wilson

VILE VLAD January 2, 2014 at 3:03 am

Your tacking another week to this discussion of inflation vs. deflation is a total bore. But then again, it’s the ‘holidays’, and so you want to rest, and not think. So no problema. But this site will stink until you bring up something real to discuss.


Here’s your chance to produce the next Topic of the Week, Vlad. Please get it to me by Saturday if you’re interested. Incidentally, your first effort — What Rick thinks, and why he does what he does — is hardly fodder for a good week’s discussion. Your thoughts about being one of the 10% might be worth developing, though.

mava January 2, 2014 at 10:03 pm

I do not want to bore anyone with endless arguments. Anyone, that is, who is not interested to know the truth.

I’d like to clear one of my points that is currently at risk of being confused.

I was responding to Andy’s statement that I have understood as “debt default reduces money supply”.

I argue that the debt default does not reduce the money supply, and therefore, those who define the deflation classically, as a reduction in money supply, must conclude that the debt default itself does not cause the deflation.

RA:”Okay. So both seller and lender have $550K in their respective pockets, all attributable to a house on which payments have ceased? Wrong wrong wrong. You are failing to see the big picture, Mava, which is simply this: After discharging our collective debts and liabilities through hyperinflation or deflation (take your pick), including those folded into a quadrillion dollar derivatives bubble, nobody will have ANYTHING. RA”

I must have been unclear. I stated: “In your example, the seller of the house has the money, the tenant has got the house (hopefully), and the lender has got the jack.”.

I meant that:

Whoever sold the house (a builder) is left with money.
If it is $550K then this is what still exist in the system, even after the debt default on the $550K has already occurred.

The borrower (i.e. the home owner) has the house. He had exchanged the borrowed $550K for a house. He still has the house, even after he has defaulted. (He may loose the house to the lender).

The Lender no longer has the $550K. He had given the money to the borrower, and the borrower had sent the money to the builder. If the home owner defaults, then the lender has lost that $550K. The lender may foreclose on the house, in which case, he will deny the homeowner the possession of the house, and he may try to sell the house again.

In the case where the lender left the house to the home owner, what we have is the $550K that moved from the lender pocket to the builder pocket. The lender has lost money, the builder has exchanged money for the house, and the homeowner has gained the house for free. His gain, directly offsets the lender’s loss. There is no change to the money supply. The money had moved, not disappeared.

In the case where the lender foreclosed on the house, then the lender had in effect purchased the house. The homeowner is out of the picture. There was an exchange (money for house), even though the lender did not seek such exchange. But again, no money had been lost because of debt default.

This should explain that the debt default can not be the cause of decrease in money supply. Andy should also note that the credit had not disappear either, because it is equal to other claims on wealth, i.e. it is indistinguishable from paper dollars that function as money in our system.


See my response to Chris’s post. RA

Chuck January 2, 2014 at 10:19 pm

you forgot to add into the mix….PMI – not sure where that money will go to, but likely the lender….and all the Credit Default Swap derivatives…..not sure if they are still doing those at AIG… anyone?……

Andy Gutterman January 3, 2014 at 2:04 am

I’m confused. In our fractional reserve system banks create money by issuing loans out of thin air, then go looking for the reserves to back the loans up.

So a bank issues a loan for $550K to the homeowner to buy a house, from another seller. Bank gets a mortgage which it holds in its account, homebuyer gets a house, and the seller gets their funds.

House = mortgage.

The accounts balance. A year passes. For whatever reason the value of the house has dropped by $200K and the new owner has lost his job. He defaults entirely. The bank takes over the house but is unable to sell it for anything close to the loan. They let it go for a net $350K.

$550K – $350K = $200K loss.

What happened to the $200K? Is it still in the system somewhere, we just can’t figure out where?

Or does money supply decline by $200K?


Chris B. January 3, 2014 at 2:24 am

“What happened to the $200K?”

The $200,000 is in the previous owner’s pocket. The “loss” is merely a re-valuing of an asset. The “value” is not money – it is a guess as to what someone is willing to pay for a tangible item. Money can never disappear unless it is physically destroyed. Value/Equity can disappear in the blink of an eye. During the Weimar inflation, all those Marks were still in existence, and during the Great Depression all those dollars were still in existence as well. Assets simply became re-valued relative to the amount of “Money” available to the market. All the “Dollars” being used to inflate the Markets will still exist when the house of cards comes crashing down – they will simply be re-distributed while assets are re-valued. This will take some time and plenty of pain to sort out.


Ah, yes: plenty of pain. For a minute there, you had me thinking you believe that, in the turbulence of a quadrillion-dollar bust, Obama-trained helpers would be able to do the re-distributing and revaluing by rejiggering everyone’s balance sheets, adding or subtracting zeros wherever needed. RA

mava January 3, 2014 at 3:20 am

According to my understanding, Andy, yes. Once created, money is not destroyed by a default. At best, the money can be destroyed UPON the full payment of the credit.

So, if the homeowner repays the debt, the bank is supposed to destroy that loan money balance (not the interest, of course, or any fees).

But in a debt default, all the money survives at the very least, and possibly more get created to bail out the lender. They system is inherently inflationary.

Of course, different people have different definition of inflation / deflation. With my definition (classical) there can be no deflation. But if you define deflation as decrease in prices, then of course, you can say that deflation happened every time the prices fall.

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