Inflation, Deflation, Stagflation: Weather the Coming Storm

Two more scenarios on the economic storm building over the United States.

America’s northern horizon is growing dark with a deflationary storm front. Should it hit, it could have severe effects on the United States economy due to the massive increase in debt loads at all levels of society.

But at the same time, we see a forecast of a high-pressure inflationary front approaching from the south. Even though traditional economic theory suggests that massive debt loads are inherently deflationary, increasing numbers of financial weathermen believe the massive debt in America will ultimately be inflationary. Why? Because government economists realize there is only one way America will be able to pay all its bills, and that is to print more money.

Let’s examine the evidence.

Signs of Approaching Inflation

As of March 23 last year, when the Federal Reserve stopped publishing its M3 money supply statistic, the figures on how much money is being created are no longer public. Since M3 was the only number that provided a true picture of how much money was being put into circulation, many analysts criticized the Fed for trying to obscure its actions. You be the judge. During former Chairman Alan Greenspan’s tenure, the money supply was expanded, on average, at a comparatively low 5.85 percent per year. Between November 2004 and November 2005, the money supply ballooned by 8.9 percent. Since the March 23 M3 deletion, the U.S. money supply growth rate has shot up to an annualized rate of 12 percent.

The fact that Ben Bernanke is the new Federal Reserve Bank chairman is also helping the inflation argument. Before taking over, “Helicopter” Ben made himself famous by saying he would willingly drop money from helicopters if deflation ever threatened.

Although operating the printing presses in overdrive may ease national debt payments and temporarily stimulate the economy, the longer-term effects can be disastrous. As more dollars are created, each previously created dollar becomes worth less. Eventually, the higher number of dollars filtering through the economy results in price inflation. In other words, although some people have more money to spend, things cost more for everyone. Additionally, since dollars are worth less, your accumulated savings are worth less too. At a 12 percent growth rate, the nation’s money supply will double in just six years. Will your retirement savings double in six years?

The primary reason inflation has not reverberated more severely is the dollar’s status as a reserve currency. Today, the majority of global trade is denominated in dollars. This means that as global trade has grown, nations have held on to more dollars as opposed to spending them in the U.S. This has mopped up much of the increased dollar supply. Also, since historically the dollar has been fairly stable, many nations have chosen to put their savings into dollars (by lending money to the U.S. and purchasing government bonds, etc.) as opposed to their own currencies. This too has kept excess dollars out of circulation.

However, both of these trends look like they could be shortly ending. The euro is rapidly gaining on the dollar as a unit of global trade. As this trend continues, the demand for the greenback will recede. This is already occurring, evident in the dollar losing a third of its value against the euro since the euro’s introduction. Over the same period, the greenback has suffered from double-digit percentage losses against other currencies such as the Canadian dollar and the Australian dollar.

This loss of value has undermined the dollar’s reputation as a safe store of wealth. Consequently, many nations have decided they do not want to hold so much of their savings (currency reserves) in dollars. Already, central banks in Russia, Qatar, the United Arab Emirates and Syria have all announced intentions to dump dollars in exchange for euros. Sweden’s Riksbank has done the same, while the Bank of Italy, in what was the most dramatic move to date by a G-7 country to slash exposure to the dollar, dumped one quarter of its currency reserves (mostly U.S. Treasury bonds) in exchange for sterling. However, possibly the greatest threat to the dollar is coming from China’s central bank, which has telegraphed its desire to diversify, which would mean dumping at least some of the 1 trillion U.S. dollars it holds.

As more nations shun the dollar, selling their dollar holdings before they become worth less, and as the federal government continues to print more money to pay debts, a seemingly never-ending supply of dollars will begin washing up on American shores. Prices for oil, food and other commodities will skyrocket—especially foreign imports that Americans now rely so heavily upon. Foreigners seeking to spend their dollars before further depreciation will attempt to purchase American-based corporations and assets, further fueling price increases. The average American will be economically ravaged as his inflation-eroded savings lose purchasing power and as wages fail to keep pace with rising prices.

Yet, even while the deflation/inflation debate rages on, a third, more dangerous storm could be in the making.

Stagflationary Mega-storm

Economic analyst and investment newsletter writer Jim Willie warns that the ultimate result of such massive debt loads combined with excessive money creation could be the development of what he terms a stagflation “mega-storm”—incorporating some of the worst aspects of both deflation and inflation.

“The contrast of greater high pressure against greater low pressure will add to the storm differential. Its power will increase, just like a hurricane. Higher pressure will come from … monetary inflation …. Lower pressure will come from the shrinking value of the housing sector, from the diminished credit lines off flat home equity, and from eventual cutbacks in household spending” (Hat Trick Letter, Oct. 6, 2006). James Puplava refers to this impending scenario as “The Perfect Financial Storm.” He says the economic pressures at play are so huge, it is conceivable that the world’s present economic system, based upon the dollar, may be about to end.

As deflationary and inflationary forces butt heads, the U.S. economy could be whipped back and forth like a wind-torn flag on a flagpole.

If that happens, the resulting economic instability will lead to a vicious cycle of consumer spending cutbacks, a plummeting economy and soaring unemployment. Home prices, along with many other domestic-demand-driven assets, will be sucked into a deflationary spiral, likely stimulating a banking crisis as thousands of bad loans must be written off. Yet simultaneously, import prices will soar as the federal government continues to inflate and spend money in a vain attempt to stimulate the economy and keep paying promised Social Security and Medicare liabilities. The dollar will fall further as boatloads of rapidly depreciating greenbacks wash up on America’s shores as America’s foreign debt holders try to spend their U.S. dollars before they become worthless. And as is the case during economic crashes, the middleclass almost always gets hurt the worst.

And where will these events leave the majority of Americans? Without a job, without a home, with little or no money (what little savings Americans do have will be destroyed by inflation), coping with food shortages and skyrocketing food and heating prices.

Sound a little too apocalyptic? The fact is, it doesn’t matter what any one of us may think: The storm is coming.

Setting aside the billowing thunderclouds of economic evidence, the Bible says this “mega-storm”-type scenario is just around the corner. Further, the Bible warns of a time when economic conditions in America become so bad that people will resort to extreme measures to secure food (Deuteronomy 28:53; Isaiah 9:20; Jeremiah 19:9).

The good news, however, is that God always provides a way out to the individual willing to obey Him and live by His way of life. There are steps you can take in order to be protected and even blessed as future economic storms hit America. To learn how to live God’s way of life, please request copies of The Incredible Human Potential and The Seven Laws of Success. For more information on practical steps to help you prepare to weather future economic storms, visit for future articles.