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How Deflation Is Inflation

Economics / Inflation Jan 04, 2010 - 03:20 AM GMT

By: Shelby_H_Moore


Best Financial Markets Analysis ArticleLet's squash the debate between deflationalists and hyper-inflationalists. Here follows the math that shows how we get the equivalent effect of price inflation (and skyrocketing gold price) when there is deflation on a debt money standard.

In short, purchasing power is decreasing during deflation on a debt money standard. That has a similar wealth destroying effect as price inflation. Purchasing power is decreasing because private sector (non-government) share of total debt is decreasing, as well for a more complex second reason. What deflationalists miss is that although totals are deflating, the composition of those totals are changing and there is a transfer (theft) of wealth from the private sector to those on the coattails of government and stimulus lost to waste, failure, and corruption.

Given a fiat money standard, where all money is debt, then as is the case now, there is deflation when the total (private+public) levels of debt and real production (GDP) are declining. Simultaneously, the private sector's portion of total debt and GDP is declining. While the public sector's portion of total debt is increasing and faster than its positive contribution to real GDP (i.e. negative marginal utility of debt, aka MUOD), because the government is always less efficient than the private sector at allocating spending. Thus by simple algebra, the private sector's portion of total debt is declining faster than the total debt is. And thus, the private sector's portion of total purchasing power (i.e. portion of total debt, since debt is money on fiat standard) is declining while the total production of goods and services is also declining faster than total debt is, both factors contributing to a reduction of purchasing power for the private sector.

Note that a reduction in purchasing power is the same effect as holding a negative real interest rate asset during price inflation. Thus, we can conclude mathematically that prices do not have to rise, to get the effect of price inflation on the private sector. And thus we know the reason why gold is a hedge against negative real interest rates (click to see very compelling chart!), and not a hedge against inflation or deflation (which this article proves are ambiguous).

Given this deflation on a debt money standard, if the MUOD is negative, then prices rise because real GDP declines faster than total debt. Irregardless of whether MUOD is positive causing declining prices, or negative causing rising prices, the algebra of the preceding paragraph shows that the private sector's purchasing power is declining, and thus that deflation (on a debt money standard) is the equivalent effect of price inflation (while the private sector holds negative real interest rates paper).

The fact that the above is difficult for people to understand and the private sector is fooled by the total level of deflation, is what prevents the private sector from immediately jumping to gold to stop the destruction caused by the government run amok, i.e. climbing the "wall of worry" in the gold bull cycle. This is why the government and central banks are most concerned about "inflation expectations", i.e. how long the private sector can be fooled. Eventually, the private sector does move to gold, because the public sector's cannibalization of total purchasing power (total debt) eventually becomes unbearable.

The above logic is only true on a debt (fiat) money standard, where the government is determined to fight the private sector decline/defaults by increasing the public sector debt and spending. Whereas, on a gold+silver money standard, it is generally impossible for the government to expand the total debt once the private sector has decided to hoard its gold+silver and reduce debt. Thus, on a gold+silver money standard, deflation actually results in an increase in purchasing power for the private sector. For example, this was true in the non-depression from 1929 - 1933 as people were becoming more prosperous, until FDR confiscated gold and took the country off the gold standard domestically, enabling the depression to start in 1934 and loss of purchasing power which ended in severe shortages and rationing by WW2.

Thus until the government is willing to emulate the restraint of a gold+silver money standard and thus stop increasing the public sector's portion of the total debt (i.e to stop compensating for private sector defaults), then it is mathematically insured that the private sector's purchasing power will decline and negative real interest rates will persist. Positive real interest rates would be a means for the private sector to increase its purchasing power, thus can not exist until the government restrains itself.

Gold increases in purchasing power during negative real interest rates, which thus logically brings us full circle to the fact that gold+silver money standards increase the purchasing power of the private sector during retrenchments of the business cycle. Proof of this is in the fact that holders of 10 year Tbonds during the 1800s gained roughly 33,900% more real appreciation than those in the 1900s. Interest rates were more than 5% in 1800s and less than 4% in 1900s, while prices declined by 51% from 1800 to 1896 versus an increase in prices by 6,667% from 1913 to 2009:

Appreciation 1800-1896: 1.05 (x^y key) 96 = 108 ÷ 0.49 = 220 = 22,000%
Appreciation 1913-2009: 1.04 (x^y key) 96 = 43 ÷ 66.67 = 0.65 = 65%
Appreciation Ratio: 220 ÷ 0.65 = 339 = 33,900%

If it seems hard to believe that we had 339 times more prosperity in the 1800s, consider the delayed truth of delayed gratification and reversion to the mean. There has been a massive boom in technology in the 1900s, massive increase in the supply of cheap energy, and a massive transfer/parasite of natural resource wealth from the third world to the developed nations by the fiat system. Payback is going to be beaach. Currently the public debt is 141% and the private sector is 416% of GDP, but the public debt will climb another 283% if unfunded promises are funded, not to mention snowballing $trivillions for bailoops and stimulost, with the upper limit of $quadrillions in derivative promises in the private sector. The secular top in gold will occur when real interest rates go positive, then we will know the mess is done.

Gold is appreciating in all currencies, with a repeating staircase of breakouts. Pattern says we are at the start of a major breakout that projects to 25 ratio of gold to dollar index, or roughly $1600-$2200. A dip first back into the green rectangle is underway, as was the case in Dec. 2005, currently driven by the Fed's improbable promise to stop quantitative easing. If real interest rates rise enough to go persistently positive, then we will know the Fed is serious, however the Treasury has recently pledged unlimited funding for the F*Maes and the House has passed another $4 trivillion bailoop.

The reason we are in the mess is because of positive real interest rates and a bond bubble since 1980 (in synergy with real estate demand pulled forward by 30 years with 30 year mortgages compounded by orders-of-magnitude derivative distortions and a welfare state), which should have been impossible on a debt money system with no precious metal component, except the free market feedback loop of rising gold and silver prices, that regulates interest rates and debt levels, was delayed for decades by the unlimited selling of paper gold and silver on the future's and worse OTC derivative markets-- paper market abominations that did not exist before 1971. The upside leverage for physical gold and silver investors is thus violently scary.

I suggest you give very careful thought to who knows how much you have and where it is stored. I have knowledge of those who think that physical gold and silver investors who will profit from the derivatives fraud should thus not have their property rights respected. These people may think they are for the rule of law, but if they succeed they will cause anarchy. I think there was one Treasury or Fed official who promised that those who hoard gold will have "their hands burned up their armpits". They want us to be impoverished relative to Chinese people's increasing accumulation of physical gold.

Disclaimer: consult your own investment advisor, some deflationalists even duplicate the performance (50±6%) of flipping a coin.

By Shelby Henry Moore III

short bio, I have published articles on,,, I am the sole or
contributing programmer of numerous (some million+ user) commercial software applications, such as Corel Painter, Cool Page, WordUp,
Art-O-Matic, etc.. I have an education in engineering and math.

Disclaimer: My writings are my personal opinions, not to be construed as statements-of-fact. Do you own research. Licenses to think and communicate have never interested me too much, so I am not a licensed research, journalism, investment, legal, nor health professional. Please consult the proper authorities for all matters covered in my writings. I disclaim all liability for what you do after reading my writings. No one can predict the future, and if there is a physical world investment that never loses value, I haven't found it yet in my 44.1 years here on Niribu.

© 2010 Copyright Shelby Henry Moore III - All Rights Reserved

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Shelby Moore
06 Jan 10, 10:06
Bankster methodology

I am the author of this article, and I came across some additional info

since publishing that I think is relevant and important.

Bankster methodology:

Tangentially, the dollar and gold/silver COT short positions are

apparently both approaching record levels, and are opposing bets, so

something has to give way.

Shelby Moore III
08 May 10, 07:26
Inflation is the (increase in the) quotient of non-productive to productive

There is a fallacy that if people produce less, then they have less money to spend, thus deflation instead of inflation. There is a total of goods and services in any economy, and a reduction of this total means everyone has less if shared equally. This means those who are producing the same, will demand the same share as they had before others produced less.

Thus the price for those who produce less, will rise. Price has to match where the supply&demand curve intersect. Whether this occurs via monetary inflation or not is irrelevant to whether prices will rise due to a drop in production. Monetary inflation is only relevant as to whether the price rise will be paid by those who are productive, instead of by those who are not. In other words, monetary inflation is a method of theft. And monetary inflation disincentivizes production, and thus can cause inflation to accelerate.

Realize again, that inflation and monetary inflation are not the same. Inflation is the (increase in the) quotient of non-productive to productive. Monetary inflation is a way of stealing net worth from savers (producers) and re-distributing it to others (those who get their hands on the new money first, which is govt and bankers).

Shelby Moore ("author of this article")
24 Sep 10, 06:30
End game

Shelby aka Jocelyn wrote:

"> recruit the work force of countries with a “surplus” of workers.

> How to get the people who work for us in 30 years to accept our currency?

Gold has the highest stocks-to-flows ratio, thus has highest marginal utility of any commodity on earth. Next is silver. Platinum, Pd, Cu, etc have very low stocks-to-flows ratio and are not suitable for store-of-value function.

Problem is the nation-state doesn’t like capital flight, and is “cooperating” with G20 to shut out tax havens. In USA at least, gold is taxed on capital gains, yet gold’s function is only to remain level with the per-capita production, i.e. purchasing power. Thus gold can lose purchasing power parity value after taxes.

Flows means periodic mining production and industrial draw-down. Stocks means readily available above ground supply. For example, silver's above ground supply is very high (≈20 billion troy oz), but it is mostly in jewelry, silverware, electronics, etc where the recovery cost is higher than (or significant portion of) the value of the metal.

The best strategy is to invest in productive assets that have pricing power in inflation and deflation. Buffett wrote about this criteria.

The best investment is in knowledge. It is portable, doesn’t suffer from inflation, and can not be taxed.

Also knowledge can not be stolen. Most often a thief wouldn't even know what to do with it.

> the only possible outcomes, long-term, are hyperinflation and sovereign default

Hyperinflation requires the fiat issuer to continually supply more fiat to the masses, i.e. any stampede to commodities is inherently limited and will reverse when there are no more buyers. Hyperinflation destroys the creditors, so it won't happen if ever, until the power broker banks who own the political class, have dumped their ownership of loans on the public.

The more likely outcome is that budget deficits will increase for years to come, because each halving of the interest rate (e.g. 1%, 0.5%, 0.25%, 0.125%, etc) halves the cost of the debt service. This destroys the private sector while increasing the size of the public sector, i.e. the marginal utility-of-debt went negative in USA in 2008. Companies hire up to 10 developing world workers for the price of 1 westerner, to fight against this deflation squeeze, which then increases the demand for basic commodities by up to 10 times, causing simultaneous inflation in "things we use" driving real wages of westerners lower, exacerbating deficits in a feedback spiral.

There doesn't have to be any default until the people who suffer from it, run away from such a broken system, but what can they run to? Gold? There is no mathematical way to make the net-worth of even 10% of the people whole in gold-- moving to gold would bankrupt the massive dead-weight in the global economy.

Unfortunately, inexorable creep towards world war is all I can see at the end game. Please tell me it isn't so?"

Shelby Moore ("author of this article")
25 Oct 10, 22:21
0.8% unemployment

In my above article on how Deflation is Inflation, I made the point that savers in 1800s were 33,900% more profitable than savers in 1900s.

I wanted to cross-link to Howard Katz's article that has added some new insights about the 1800s where we were on a more honest money system:

"The original lie was that of the Great Depression, which was actually a period of great prosperity for the vast majority of the American people. That lie was so successful that it was elaborated over and over. Each time the vast majority of the public fell for it...

...For much of this period (up to the 1870s), there was not even a word for unemployment because the phenomenon did not exist. This was true in spite of the fact that through most of this period people from all over the world poured into the U.S. in large numbers, many of them working for very low wages and displacing Americans from their jobs. A good example would be the year 1906, in which immigration was completely unrestricted and unemployment was 0.8% (according to Historical Statistics of the United States, Colonial Times to 1954, published by the Commerce Department). That is, unemployment today is more than 10 times what it was for the year 1906!)"

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