Inflation Fairy Tale: Why It’s Deflation We Should Worry About
In recent years, the narrative surrounding inflation has dominated economic discussions, with central banks and governments focused on controlling rising price levels. However, as seasoned analysts Steven Van Metre and Jeff Snider outline, the real concern might not be inflation, but rather a looming deflationary environment. Their insights challenge the prevalent inflationary fears and suggest that we should be paying closer attention to the signs of deflation that could pose significant risks to the economy.
The Inflation Narrative
Since the onset of the pandemic, we have witnessed unprecedented fiscal and monetary measures designed to stimulate the economy. Governments have deployed substantial stimulus packages, while central banks have maintained low-interest rates and engaged in asset purchases to inject liquidity into the markets. Initially, these measures were successful in preventing immediate economic collapse; however, as supply chain disruptions and consumer demand surged, the specter of inflation emerged, leading to widespread panic about rising prices.
Nevertheless, Van Metre and Snider argue that this narrative is a simplification of a more complex economic reality. They propose that the inflation fears we often hear from policymakers and mainstream media may obscure a more pressing concern: the potential for deflation, a phenomenon characterized by declining prices, reduced consumer demand, and economic stagnation.
The Deflationary Threat
Deflation can manifest in several ways, such as falling wages, reduced consumer spending, and a general decline in economic activity. Historically, deflation has been associated with significant economic downturns, such as the Great Depression in the 1930s. Van Metre and Snider point out that the structural issues facing the global economy—demographic shifts, excessive debt loads, and technological advancements—could contribute to a deflationary spiral.
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Demographic Shifts: Many developed economies are experiencing aging populations, leading to a shrinking workforce and decreased consumer spending. As the share of retirees increases, the economy may face a decline in demand, further exacerbating deflation.
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Excessive Debt: High levels of debt across both public and private sectors can stifle economic growth. When businesses and consumers are burdened by debt, they are less likely to spend, leading to decreased demand for goods and services.
- Technological Advancements: Innovation often leads to increased productivity but can also result in job displacement. As technology replaces traditional jobs, there is a risk of rising unemployment, which could further depress wages and spending.
Monetary Policy Implications
The old adage "inflation is the enemy of the debtor, while deflation is the enemy of the creditor" holds true in this environment. Central banks, mainly focused on managing inflation, may inadvertently tighten monetary policy at the wrong time, stifling growth and prolonging a deflationary trend. Van Metre and Snider emphasize that the tools traditionally used to combat inflation (e.g., interest rate hikes) might not be effective in a deflationary scenario.
Instead, they argue for a paradigm shift in how policymakers approach economic stability. Recognizing the potential for deflation might encourage policymakers to adopt more proactive measures, such as implementing fiscal policies aimed at stimulating demand, investing in infrastructure, and supporting workforce development to mitigate the negative impacts of an aging population.
Conclusion
The inflation fairy tale perpetuated by mainstream narratives often detracts from the real risks of deflation lurking beneath the surface. Steven Van Metre and Jeff Snider’s insights prompt a reevaluation of our economic priorities, urging both policymakers and the public to understand and prepare for the potential consequences of a deflationary environment.
In an age where economic uncertainty continues to grow, a holistic understanding of inflation and deflation is paramount. By shifting the conversation towards the real threats facing our economy, we can better equip ourselves to navigate the challenges ahead and foster sustainable economic growth.
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Turns out Jeff was wrong.
So, how do you guys feel this aged?
"It should be kept in mind, however, that in the US, commercial banks may use their central bank reserves to purchase newly issued treasury bonds, which implies a liability swap from the bank reserve account at the FED to the sovereign account at the FED (US Treasury 2004)." How is this not money printing???
So Steven was "bullish on bonds" here, with TLT coming down a bit to 160 from its blowoff Covid bubble of 2020. Now in late 2022, TLT is flirting with under 100, after an elevator ride almost straight down some 38% over the next two years after this video, and minus 41% from its Covid 170 peak. I think that makes a bear market, not a bullish one.
Well, now here we are in late 2022, we printed money, and we got 9% inflation. Interesting how a one-year lag built up between expansion of the 2021 asset bubbles, and the 2022 CPI jump, requiring the Fed to raise rates at the fastest pace in history.
Over a year later and still no deflation. Man use common sense here people. These guys don't know anything about money printing or the fed apparently or monetary phenomenon's–Milton Friedman. These guys try to be the next Friedman's but you can't improve on Friedman because what he taught was it just is. No way around what he taught. Snyder talks a big game to try and make it look like he knows what he is talking about, but if you focus on what he says, it sounds so intelligent, but so wrong. I mean the way he speaks you would think he is a fed board member and has inside connections with the wealthiest families of the 1700-1800's who own the fed.
1:09:41 I don’t understand why very low interest rates should mean banks aren’t willing to take on risk. Which way does the causation go? If from rates to risk appetite, I don’t understand it. If from risk appetite to rates, then why is there such high risk aversion?
But QE does create some money doesn't it? Fed sends bank reserves to the bank of whoever sold the security to it, and gets a deposit.
that has aged very well LOL
Why is deflation a problem? Just send out $100,000 checks to every Americans and deflation is gone. I am sure you will never answer this question because you don't have the answer.
Deflation on Horizon. you guys got that a hundred percent wrong.
This aged like milk
Looking back on this, we see that the exact opposite happened and these guys had no idea what they're talking about.
MSM/FED…
Heckle/Jekyll
These guys have 0 clue what they are talking about!! Be careful everyone!
This show proved how charlatans they are 1 year later. The only credible deflationist guy is Harry Dent but his arguments differs from them.
SvM is always wrong.
Bondholders are going to get killed.
But wait the Fed is not printing money but they reduce assets (mainly t-bonds) in circulation (available to the public), so they help inflate the asset bubble.
This central banks bookkeeping doesn't matter. If the money spent into the system, the numbers are printed and start circulating in the system. I get this part that they fiddle with the system, but where exactly the money gets spent into the economy and how is it pulled out?
We have a real deflation problem don't we 😀 lol, how about no. We have inflation problem…