Inflation or Deflation? Which is the greater threat?

Cathy Wood from ARK Invest, who says Bitcoin is going to $1 million by 2030, makes an uncharacteristically prescient argument that the greater threat to the global economy presently is deflation, not inflation.

Deflation implies that money is leaving the system, and therefore prices will tumble as capital velocity, or the rate at which money is exchanged for goods or services, recede.

This got me thinking that the high prices we are all experiencing everywhere in the world should be short-lived, if true. And looking at commodity prices in lumber, copper, iron ore, etc, one would certainly expect to see prices of finished goods start to retreat at some point.

The reality is that the central banks who ultimately serve and protect the interests of the wealthiest constituents of the planet have created the systemic cycle whereby economic growth only occurs when these entities flood the system with liquidity, and retreats (or deflates) when they do not.

But with this year’s financial buzzword now entrenched in mainstream media, quantitative tightening, which should be thought of as primary deflation, or “deflation at source”, has resulted in central bank-driven economic contraction. Which we are told to refer to as recession.

I think Ms. Woods could be right about Bitcoin, assuming regulatory oversight were to evolve favourably toward it. But as with many financial specialists, she fails to consider the historical record of nations permitting the ascendence of a competing currency over their own, central bank (governing class) currency.

The only way the Federal Reserve would permit Bitcoin to become legal tender is if they decided that it was time to hand over the controls of social conformity and power to an anonymous bunch of hackers pre-disposed toward evading taxes.

The more likely scenario is that the Fed will use the orchestrated crash of Bitcoin (which will occur simultaneously with the launch of the Fed’s Central Bank Digital Currency [CBDC]) to ban all cryptocurrencies from acting as legal tender.

But I digress.

As central banks reduce primary liquidity expansion through this Quantitative Easing – the equivalent of an NFT rugpull on the broader economy – and interest rates increase, deflation is already underway. This is evident in the three consecutive quarters of stock market declines, employment and wage data notwithstanding.

If such deflationary catalysts persist, economic activity will  continue to contract, and negative GDP growth will become the constant theme among government reporting.

We are working on the assumption that the collapse in commodity prices from their Q1 highs to now pre-pandemic levels is a direct byproduct of QT with the reduced purchasing incentive induced by rapidly rising interest rates. I think Powell’s unflinching ratcheting up of interest rates has indeed dampened the economy, but with commodity prices tumbling, it stands to reason the inflation will retrace as those lower costs pass through to finished consumer goods.

In fact, it is likely Powell’s intention to slam inflation back down to the cherished 2 percent so that he can resume the QE that makes the entire $32 trillion US debt at least serviceable. Without QE, that debt load, at over 120% of GDP, is not serviceable, which is the point at which the USA becomes insolvent.

So yes, runaway inflation has caused a recession. And Cathy is right: deflation is the larger threat.

But both are catalysts toward a resumption of QE, which the Fed will redeploy in explosive measure to satisfy the requirements of the massive US debt, itself driven by the ever-ascending military machine price tag that continues rising as US military operations and commitments continue rising.

The US will, in my opinion, use the launch of CBDC both to somehow cancel its debt, and usher in a new era of absolute government visibility into all of our financial transactions.

What do you think?

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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