Inflation/Deflation Caused by Credit Cycles

Inflation and deflation are primarily driven by credit cycles. This is why boom and bust occur so strongly under central banking (unlike gold backed money, central banking can leverage much, much more).

Remember, dollars = debt. That’s the whole point of central banking. Every time someone takes out a loan, the supply of money increases, and the supply of debt increases even more.

Almost all dollar inflation is a directly result of overly leveraged banks. Right now, 95% of all the dollars in the system were created as bank credit. Gov’t issued dollars are only about 5% of the total money supply.

That means that as loans default or get paid off, the money supply shrinks (deflation). Currently, the ARMs that default are directly shrinking the money supply, but they are not enough to counter the new money being created when banks borrow from the central bank (inflation), lend out this debt-money, which gets re-deposited and re-lent (expanding about 100 times throughout the whole process!).

There are other things that cause deflation or inflation (changes in GDP) but they’re very slow and ultimately insignificant compared to changes in supply. When it comes to inflation and deflation, supply is the most important consideration.

But no, inflation is not “rising prices”, it’s “rising prices” that’s an effect of inflation. There are a lot of other effects of inflation under central banking, such as increased indebtedness. Haven’t you noticed that as inflation has raged, indebtedness has risen perfectly in sync with it? That’s because all the new money created required someone to take out a loan first. Inflation is often fueled by speculation, when people leverage their investments.

It’s ironic then, and rather terribly perfect, that right when inflation gets the worst and people really worry about it the most is when they should be worried about deflation, since once credit reaches a critical extreme it can quickly cycle in the opposite direction (loans defaulting decreases money supply, which increases value of money, which causes other loans to be harder to pay off, which causes more defaults, etc.). This is why we had such extreme deflation after 1929.

A correct understanding of money can save you a lot of money.