Deflation + Inflation = Stagflation

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Hi Mr. Armstrong,

Deflation has been described as a peacetime phenomenon. You say we are in a period of deflation and yet the world seems to be at anything but peace. If your war model turns up in 2014, do you expect inflation?

ANSWER: The traditional concepts of DEFLATION and INFLATION are typically incorrect as we have the same problem with everything – one-dimensional thinking. The importance of understanding this shift from PUBLIC to PRIVATE confidence is truly monumental for it has impacted even our concept of these two forces,.


Prior to the Great Depression in a PRIVATE WAVE, if interest rates rose it was considered bullish and a confirmation that the trend was still bullish because people were still borrowing for they say they could still make a profit. If we look at the Call Money rates taken from the NYSE, we can see that rates peaked with every bull market peak and declined with every collapse. Rates followed the trend.

Post-Great Depression in a PUBLIC WAVE, the same fundamental has been reversed relative to its interpretation. Today, lower rates are thought to be bullish and rising rates bearish. Why? We now sell stocks with rising rates because we are saying it is government that does not want stocks to rise and when they decline, they hope to encourage people to borrow. The interpretations are all based today on what government wants us to do. This is part of the socialism that must collapse. You will see that rising rates will be bullish not bearish for rates will rise today as the bid for capital rises in any natural bull market.


We are currently in a deflationary trend because the cost of government is rising and this is producing draconian laws and escalating taxes. This is NOT a deflation because the private sector is contracting as is the case during a crash such as the Great Depression or what we saw after 2007. The deflation in this case is not because of a loss of disposable income from a contraction in private asset values, but because the cost of government is rising still reducing the disposable income. The effect is the same, the source is not. Hence, we are experiencing still the 50% decline in liquidity. Numerous hedge funds are closing because of the collapse in liquidity and that is “normally” associated with a market decline as disposable income declines. The cause of this trend is rising costs in government. Rare stamps of Italy have dropped in value as the clamp down on money in Italy has caused the local collector market to drop because people cannot spend income. The dealers at major auctions outside of Italy confirm the Italian clients are no longer buyers.

Roman-Hoard-Britain (2)


The traditional concept of war is rising inflation as government spending rises. This was the case from the US perspective only because the US did NOT experience the deflationary aspect of war. What is that? When war is in your own country, it is DEFLATIONARY. Why? Because you destroy the infrastructure and money hoards. The biggest Roman hoards are always found from periods of war. Europe did not experience inflation but deflation. The inflation comes AFTER war for the rebuilding.



What we are truly deeply entrenched within is STAGFLATION where you will see assets rise, economic growth decline or remain flat, rising costs of government as they continue to raise taxes reducing disposable income, yet rising prices as those costs rise,  Hence, the inflationary rise comes not from demand nor from a shortage of supply, but from the rising demand for a greater share of the pie from government.


If what we see is rising civil unrest, this typically destroys demand within the economy as people hoard their money, and start saving it for a rainy day. The inflation during a war unfolds if the infrastructure remains intact as it did in the USA during WWI and WWII. Destroy the infrastructure and the game changes.