DrJLT Economics: The Upcoming Crisis with both Inflation and Deflation E009

The upcoming economic crisis can take a unique combination of inflation and deflation for two reasons:

1. The USD, being a fiat currency, is the world’s reserve currency and is held in large quantities internationally
2. The Fed’s incessant QE programs and US’s ever-increasing “stimulus packages” have push the Fed into a corner

If the asset bubbles burst, we’ll get into a “debt deflation” that the Fed has been trying to avoid for 12 years, during which time it has emptied its guns with 0% interest rates: In reaction, it may venture into negative interest rates and completely destroy the USD, which leads to foreign investors to dump their USD and USD-denominated assets and inflation; it may also do nothing, and the US economy will be severely weakened and foreign investors will dump their USD all the same.

On the other hand, if inflation sets in, the Fed has a choice between raising interest rates or do nothing: Raising interest rates will lead to the bubble burst and destroy the bond market, and result in the deflationary scenario in financial markets with inflation in CPI. Doing noting will result in higher inflation.

With these two opening scenarios and two Fed options, we have four possible series of events. Three of them include both inflation and deflation, while one leads to pure inflation, with debt obligations inflated away.

The only possible solution is to (a) Stop QE and reckless “stimulus”, (b) Cut spending, and (c) Reduce regulation. This is impossible to achieve.