Deflation Sets In, Hyperinflation To Follow

Includes: EU, UUP
by: Katchum

This article is meant to give a status update on the economy, and in particular money supply. We will see that deflation is starting to show up, showing a repetition of the 2008 crisis.

Swiss government bonds (which are seen as a safe haven) are hitting new highs, with yields going as low as -0.1%. People are paying money to buy Swiss government bonds at 2 years (Chart 1).

Chart 1: Swiss 2 Year Government Bond Yield

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The euro is rapidly dropping. Down 1% each day is a pretty big move (Chart 2). Investors are piling into the safe haven status of the U.S. dollar.

Chart 2: EUR/USD

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Even precious metals were dropping signaling deflation. Gold went to a new low of $US 1530/ounce (Chart 3).

Chart 3: Gold Price

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The only asset that is moving up is the U.S. dollar and supposedly "safe" government bonds. This is something we have already seen in 2008. Everything went down and the U.S. dollar went up. The dollar cash index actually went up a lot (Chart 4) and currently stands at 82.

Chart 4: Dollar Cash Index

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Meanwhile, European banks keep hitting new lows after news came out about Japan holding off on additional monetary stimulus. Unlike in 2008, the savings rate isn't going up though (Chart 5). If this trend actually reverses upwards, the real collapse will start because when people save money, debt will be paid off and the currency supply will drop. We see this already in the falling M3 money supply numbers.

Chart 5: U.S. Savings Rate

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It is important to watch the M3 currency supply because they track the broad range of bank accounts (which is discontinued, but can still be accessed through M3 is a perfect measure of inflation in the economy. As we can see, the M3 currency supply is flattening out and starting to drop (Chart 6), signaling that deflation is coming. If M3 drops, it means that the federal reserve can't increase debt fast enough to make up for the people paying off loans.

Chart 6: Money Supply percentage change

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If we take a look at the long term M3 chart we see that the exponential growth in money supply has been stalling (Chart 7). If M3 actually starts contracting again (like in 2008), we could see turmoil in the markets for a second time. This time will be even more disastrous.

Chart 7: M3 Money Stock Long Term

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As Mike Maloney already predicted a few years ago: we get deflation first and then hyperinflation. Watch this video from Mike Maloney to see how it will occur.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.