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Monetary Tectonics: Inflation vs Deflation Tug-Of-War

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    January 11, 2014

    Mark J. Valek, CAIA, Partner & Fund Manager, at Incrementum AG sent a nice email earlier today regarding the inflation-deflation debate. Mark writes ….

     Financial markets have become highly dependent on central bank policies. We sincerely believe that grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors these days. To express our views on this highly relevant topic, we have just finished our Incrementum Chartbook, explaining the dynamics of “monetary tectonics”.

    Attached please find our new Incrementum Chartbook: 50 Slides Illustrating the Tug of War Between Inflation and Deflation!

    We wish you a happy, healthy and prosperous new year!

    Kind regards,

    Ronald Stoeferle & Mark Valek

    Here is the introduction from the 50 page PDF Incrementum Chartbook # 2: Monetary Tectonics

     Our Conviction

    Due to structural over – indebtedness and the resulting addiction to low/negative real interest rates, we are certain that the traditional way of thinking about financial markets and asset management is no longer beneficial for investors. Therefore, at Incrementum we evaluate all our investments not only from the perspective of the global economy but also in the context of the current state of the global monetary regime. This analysis produces what we consider a truly holistic view of the state of financial markets.

    Financial markets have become highly dependent on central bank policies. Grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors.

    We sincerely believe that the Austrian School of Economics provides us with the appropriate intellectual foundation, especially in this demanding financial and economic environment.

    Ronald-Peter Stoeferle, Mark J. Valek

    Here is a generous sampling of charts from the PDF, interspersed with a few comments by me, in italics. Click on any chart for a sharper image.

    History of QE

    Light Years Away From Normal

    Price Inflation Where?


    Where Did the Money Go?

    Price Deflation was Once Common

    What Are Monetary Tectonics?

    I added that box in red. It is very similar to my own stated thoughts, that the US would go in and out of deflation over a number of years. I view US hyperinflation calls as essentially nonsensical. Japan will be first.

    Comprehending Currency

    In a note related to the asterisk, the authors  encourage the interested reader to look up what F.A.Hayek wrote about the concept of the inverted pyramid in Prices and Production.

    Deflating Credit vs. Inflating Monetary Base

    Tug of War

    Once again I see eye to eye with the authors, adding that a busting of the equity and bond bubbles are going to be anything but inflationary!

    This time the asterisk is accompanied with the footnote:
    * Please also refer to another outstanding speech of James Rickards on the Future of Money

    ** Low velocity according to the Monetarist Paradigm

    Total Credit Market Debt as Percent of GDP

    US Bank Credit Growth

    Money Supply Growth US and Eurozone

    * According to the Austrian School the concept of quantifying an exact figure for velocity is questionable, due to several issues, partly regarding the accounting of the money supply and the calculation of GDP. However the demand to hold currency is currently extremely high i.e. velocity low

    I concur with that comment, adding velocity is low because, not in spite of all the monetary printing.

    Conclusion: Inflation Or Deflation? 

    Still Signaling Disinflation

    Final Mish Thoughts

    I appreciate Incrementum AG making these charts available. I especially appreciate the common-sense approach of including credit in their analysis.

    In general, hyperinflationists (as well as many self-proclaimed Austrians) ignored and continue to ignore credit, even though credit dwarfs money supply. Those screaming hyperinflation or strong inflation is at hand, missed the boat and will continue to do so for the foreseeable future.

    Another equity bubble bust is around the corner, and that bust will be anything but inflationary.

    There is much more in the PDF to see, including an analysis of gold,  silver, and other commodities. Inquiring minds should peruse the entire report.

    Thanks again to Ronald Stoeferle & Mark Valek for their superb analysis and charts.



    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.


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