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Economy , US Markets

"This Is More Than a Deflationary Moment"

by Brian Whitmer
Updated: May 08, 2020

"Deflation? Yes, please -- I like low prices!"

On the street, that's a common sentiment re a rare economic occurrence called deflation.

But deflation isn’t just falling prices. It’s also about the evaporation of money – which makes it lethal for those who aren’t prepared.

This is one of the most critical topics in our society today. You can get started on your preparation by watching Chief Global Strategist Brian Whitmer in this compelling 4-minute clip. Or, you can sign into Club to watch the full 6-minute video.

We're suddenly hearing a lot about deflation in the news and there was a New York times article in April that I thought really captured the mainstream view on this topic. The headline reads, "What the Negative Price of Oil. Is Telling Us," and the subtitle is even more interesting. It reads, "We're in a deflationary moment that surpasses anything seen in most people's lifetimes." So first of all, kudos to the New York times for even mentioning deflation. It's been off the radar for a long time. There is one word I would change in that subtitle, and it's the word moment. This is not a deflationary moment. This is a trend. This is a deflationary environment that has been building for a long time and it's very likely going to be with us for the foreseeable future. So I want to take some time to kind of dig into this with a few charts.

Most people know about the crash in crude oil, right? We saw that May contract go negative last month. These other commodities don't get enough attention. Nearly every energy commodity, nearly every agricultural commodity has been collapsing, right? Sugar, cocoa, soybeans, lumber. We've got cattle and hogs shown on this chart. The reason that the press is finally talking about deflation is because prices are suddenly falling and many investors, many economists even, they falsely equate deflation with falling prices. This is a complete misunderstanding. The terms inflation and deflation relate to money and credit. Inflation is simply an expansion of money and credit deflation is a contraction of money and credit. Falling prices like we're seeing on this chart are merely a symptom of deflation. If you're waiting to see falling prices, you're behind the curve already and so contrary to that headline in the New York times, the negative price of oil isn't telling us anything about deflation.

Now, there are some things that tell us a lot about deflation. For widespread deflation to occur you need two things. The first thing you need is a buildup of money and credit and this next chart shows the money side of that equation. This is the monetary base in the U S we had a gradual rise until 2009 and then that near vertical spike following the financial crisis and we may very well have peaked. The credit side of the equation is even more important. Credit utterly dwarfs the monetary base U.S Private credit, it's around 70 trillion today that compares with about 3.8 trillion monetary base. This is an unprecedented build up of credit and it's a big reason why deflation will persist. Now, the other precondition for deflation, the other thing you need, which is actually more important than anything else, you need a social mood trend that is waxing negative.

Another way to say that is you need the mood in society, the aggregate mood to be moving from optimism and toward pessimism. That is what causes borrowers to stop borrowing. That's what causes lenders to stop lending. That's what causes credit to contract and that's what makes deflation persistent. We have that precondition in place now as well.

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