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Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend

Economics / Inflation Nov 18, 2009 - 12:58 AM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleThe jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.

Why do deflationists have it wrong ?

It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble 'should' contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!

The bankrupt banks have not been allowed to go bankrupt, hence the debt is being systematically transferred to the state which has at its disposal the magic money printing press which can vanish the debt away by means of debt monetization.

Quantitative Easing is not just another ordinary policy measure. I have not been calling it the nuclear option for nothing for it's detonation is tantamount to MONETARY ARMAGEDDON! THIS IS NOT BEING RECOGNISED by either the mainstream press or the highly vocal deflationists who did catch the deflationary downdraft of 2008 but now having gained press and investor attention are stuck in a perpetual deflationary loop. The academic economists in the mainstream press, bereft of individual thought have jumped onto the deflationary bandwaggon and applauded money printing as my article of 12 months ago illustrated - Bankrupt Britain Trending Towards Hyper-Inflation?

Perhaps in 12 months time, the flaws in the deflationary arguments will be recognised and again we will witness the re-writing of history where a minor caveat here or there is pulled out of the hat to imply the deflationists were right all along! The answer is simple in that Monetization of debt feeds inflation and once monetization of debt starts it DOES NOT STOP until the currency is DESTROYED!

The reasons WHY x,y,z should happen are always obvious AFTER the market has moved as to WHY it has moved, the trick here to actually MAKE MONEY is to ACT BEFORE the market MOVES as I warned off back in March 2009 concerning the stocks stealth bull market and the relentless contracting corporate earnings mantra at that time- Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470

Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent. IT IS ONLY LONG AFTER THE FACT, AFTER MARKET'S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES.

Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM !

AGAIN NOTE THIS - BE UNDER NO ILLUSION - The central banks will NOT STOP MONETIZING DEBT ! Once started IT CANNOT BE STOPPED ! Forget what the Governor of the Bank of England Says or Fed Chairman, Quantitative Easing is here to stay and therefore INFLATION WILL EMERGE, IT IS ENIVTABLE ! INFLATION IS THE DOMINENT SCENERIO BEING PLAYED OUT NOT DEFLATION, regardless of what ever is stated today.


For instance in the UK - first there was QE of £75 billion which might be enough, then £125 billion is DEFINETLY ENOUGH, later £175 billion NOW £200 billion, Tomorrow? The day after ? The week after ? THERE IS NO END IN SIGHT TO QUANTITATIVE EASING !

RECOGNISE THIS FACT and you can do something a) preserve your wealth and b) grow your wealth. I will touch on this later this week in my newsletter that pulls everything together.


The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months - it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG ! Off course by then those that were led down the blind alley will have not only lose money but not have participated in any of the gains as I pointed out in early April 2008 - That wishy washy commentary does not wash when it comes to monetizing analysis as you are either invested or you are not, there is no wafflly middle ground!

The internet is a great invention of accountability! Okay no one is perfect, no one has a crystal ball, everyone gets something wrong at sometime, BUT IF YOU REPEATEDLY RAM SOEMTHING DOWN PEOPLES THROAT THAT IS PLAIN WRONG THEN WHAT DO YOU CALL THAT ? It is either deliberate propaganda or there is something seriously wrong in the mechanisms that bring about the projected scenarios. LOOK at Nouriel Roubini's academic economist commentary following every dip.

The truth is that the SAME analysis can conclude either way, however it is the process of having to put ones own money on the line which creates the probability of arriving at the CORRECT conclusion. Nothing else, not media events on TV or radio or publicity stunts, nor pandering to fan clubs, but ones reaction to seeing a deployed scenario either leading to ones wealth growing or contracting.

Deflationists such as Dr Doom Roubini and the rest have frightened investors away from monetizing on one of the biggest stocks bull runs in history following the March low, and continue to do so to this very day where near every rally peak has been followed by the crash is coming mantra (Stocks Bull Market Destroys the Crash Bears Again).


In conclusion

The warning of November 2008 of the worst case scenario of Hyperinflation has not only NOT diminished over the past 12 months, but it has been greatly reinforced, where 2010 looks set to the year of INFLATION NOT DEFLATION and 2011 may be Far worse as the Deflationists lose every penny they own and hold in Government Bonds that they so vocally now profess to pile into!

After the deflationary correction of 2008 we are about to witness the INFLATIONARY MEGA-TREND of the NEXT DECADE! the consequences of which are many.

What to Do ?

This is part of a New series on the INFLATIONARY outlook, ensure your subscribed to my always free newsletter to get the full scenario and it's implications in your in box THIS week it will be one of my seminal pieces much as The Stocks Stealth Bull Market Scenario of March 09 and Crude Oil Top of July 08, or the UK Housing Market August 07 Top and Bear Market were before it amongst many others.


By Nadeem Walayat

Copyright © 2005-09 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Jon Holmberg
22 Nov 09, 06:57
High inflation

Dear Mr Walayat

Hi i find your articles very interessting. I live in Sweden and we are thinking of buying a house but the prics here have soared since January 2009 after a small correction in oktober-december 2008, and are almost close to the topp in 2007. We have very low interest rates at present. I believe when they start to rise interest rates the housing souring might take a pause. I read your article about rising inflation and how do you think that will affect house prices ? If we decied to buy a house do you think it is a good idea to lock the interest rate for a long period of say 10 years. Or is the best thing keep on renting as we do now ? Your comments would be highley appreciated.

Kind Regards Jon Holmberg

22 Nov 09, 07:59


I am in the process of completing what will have to be posted as an ebook (FREE) given its size which will include housing.

If you have very low interest rates then yes do lock in them in for 10 years!

I do not know the swedish housing market, all I know the UK is bouncing towards summer 2010, after which it should dip lower again, how far I can't tell at this point.

William Piper
23 Nov 09, 09:40

Why was my question re John Hussman and Paul Kasriel not wortthy of a response?

Monica G
29 Nov 09, 18:41
UK housing market for 2011 and 2012

Dear Nadeem Walayat,

I would be most grateful if you could briefly explain where your past forecasts on the UK housing market for 2011 and 2012 now stand in relation to this new hyper-inflationary scenario. If assets prices are due to soar that should include property as well.

Thank you for taking the time to write your views on the website, which I have been reading for several months trying to educate myself a little on the subject and to make sense of what is going on in the economy.



29 Nov 09, 18:45
UK house Prices

Hi Monica

My scenerio will be completed before the end of December and will include UK housing.

The difference between now and December 2008 i.e. the last forecast, is unlimited money printing. Which I warned off at the time, that the government has at its means the ability to bring nominal house price falls to a halt by printing money.

Again the completed scenerio will be far more accurate as it takes multiple intermarket and economic relationships into account.

30 Nov 09, 04:33
UK House prices

Dear Mr Walayat

Thank you for your inflation scenario.

But can it exist independently of demand?

I was under the impression that the level of indebtedness in the system had finally overwhelmed it!

Unemployment and higher taxes will do the rest.

Yours sincerely

Jennifer heaven

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