Many are starting to realize that something’s wrong with the economy on a larger scale than what governments are telling us. Propaganda is at an all time high, and more and more people are beginning to see through it.

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Already, alternative media are warning of a recession on the horizon. However, from my work (which involves a strong understanding of the cycles of history). it’s clear that this financial debt bubble we’re in (the largest ever) is going to burstwith potentially life-changing consequences for most of the population. It will be a worldwide downturn and eventually, a revolution.

“As far back as I can remember, I’ve always been a strong believer in the importance of cycles. You’d better try to understand them, because all of your timing and often your luck is tied up in them.” — Lee Iacocca, past CEO Chrysler, “Talking Straight”

As a business owner or manager, it’s important that you develop strategies to cope with the 180 degree turn from an inflationary environment to a deflationary one. It means you have to understand the ramifications that the changing value of money will mean to your business’ ability to survive.

Thus, a lack of credit supply causes deflation in the long run. The shortage of money circulating in an economy increases the value of the currency. It increases the purchasing power of the currency. The prices of consumer goods and services start falling. Cash is not only the ultimate hedge, but also the only investment that rises in value during deflation. As stocks, bonds, real estate, and commodities are all losing value, the amount of cash required to purchase these assets is falling, by definition. In other words, the relative value of cash is going up. The real burden of nominal debt increases. When there is an unanticipated deflation, the price level falls and the actual debt that the borrowers have to pay in real terms increases. Duri view the full answer.

As the money supply increases, he commercial banks can parlay some of the new money into reserves, rather than investing it. That slows or neuters credit expansion, of course, as you explained. See full list on investopedia.com.

Deflation Increases The Real Value Of Money

We’re heading into a depression that will dwarf in depth the downturn of the 1930s. Depressions throughout history have always been accompanied by deflation.

NOTE: Although I prominently display the US Dollar in this article (because it’s the reserve currency of the current period), the coming deflationary cycle will affect economies worldwide.

What Inflation Has Done to the Economy

Inflation, according to Ludwig von Mises, is an increase in the money supply that is not offset by an increase in the need for money. It causes the value of money to decrease, which causes price increases for goods and services.

A good example of this is the current housing bubble in Canada (it’s ‘popped’ on schedule in 2018) created by next-to-free credit. Mortgage interest rates have never been lower and the prices of houses have never been higher.

Lets look at how we cause inflation.

Banks create money out of thin air. In actual fact, they create debt. They do this through loans. In other words, money comes into the economy when banks create a loan. They simply enter the loan amount as debt in their books and you, the customer get borrowed money on the other side of the ledger. A digital entry appears in your bank account — instant money from nowhere!

You pay interest on that money, That interest gets paid to the bank as revenue and the digital money disappears to where it came from … nowhere (it ceases to exist because it zeros out a liability on the balance sheet). In any event, bank loans create newly “minted” money (today, it’s mostly digital) — money that the banks create out of thin air. Then they charge you interest for its use.

How Does Deflation Increase The Value Of Money

For more detail on how banks create this money, see my post on “How Banks Create Money Out of Nothing!”

When interest rates are really low, people borrow more money (mortgages) and bid up the price of homes. People see it as an inexpensive way to buy the home of their dreams.

Inflation in a nutshell: The increase in the amount of money in the economy causes the value of money to decrease. We realize that lower value through higher prices for assets.

Inflation: money decreases in value; houses rise in price
Deflation: money increases in value; house prices decrease

The good thing is that as long as inflation keeps up, you’re paying back that loan in “future money,” which is gradually decreasing in value. Inflation makes is easier to pay back debt (and that’s why governments like to inflate and amass large amounts of debt — they can pay back that debt in less valuable money in future).

Below is a chart of the American dollar and how inflation has reduced its value by 96% over the past century.

In the chart above, you can see how inflation has been fairly consistent except for the period from about 1920 to 1936 and again around 1940.

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Most currencies today are worth a fraction of what they were when originally created. The US Dollar is worth less than four cents compared to one hundred years ago. It’s why the majority of the population can’t make ends meet and are living paycheck to paycheck. In this gradually deteriorating situation, confidence in the economy will eventually hit rock bottom.

Deflation

Deflation is the opposite of inflation. In deflation, particularly in a credit-based economy, which is what we have, there’s eventually a loss of confidence in the bubble that’s been created, and a slowdown in lending (which has been an ongoing problem since 2007). This leads to less money in circulation and people start spending less and hoarding money (Europeans are somewhat ahead of the North American continent right now in this regard). The reduction in consumer spending leads to job losses, eventually company failures, even lower prices, and we end up in a deflationary spiral that feeds on itself.

Above is the M2 chart of the velocity of money. It comes from the Federal Reserve in the United States (FRED). This is a measure of the levels of currency available in society at a given time (it actually measures how many financial transactions are taking place — higher levels are inflationary, lower levels are deflationary). You can see how the velocity of money has declined since about 1998. Incidentally, that was the warmest year on record, the implications of which I explain in the post: “Don’t Like the Climate? Wait a Cycle.” A reduction in the velocity of money marks the onset of deflation.

Lower prices for goods and services are great for consumers who have cash. But if you have lots of debt, that’s a problem. Because the real value of debt increases —because less money in the economy increases the value of money. In a deflationary environment, you’re paying back active loans with money that is more difficult to obtain (and is actually worth more) than when you took out the loan.

The deflationary cycle in a depression picks up steam until we have a deflationary spiral that historically has reduced prices for hard assets like real estate by up t

Deflation Increases The Real Value Of Money