Worried or scared about inflation? You shouldn’t be yet and here’s why.


The talk on the street is that since the US government has gone bonkers in printing money that we should expect hefty inflation in the very near future, some are even going far enough to say we can expect hyperinflation. Should you believe them or not?

While inflation is in part due to an increase in the overall money supply, many people forget the other critical components or ingredients in the recipe for inflation, the velocity of money.  In other words, it doesn’t necessarily matter how much money has been printed, if it’s not in circulation and being spent. Moreover, it’s also important to not forget what people are doing with the money that they already have.

The fact is, we’re currently experiencing deflation, similar to what happened in the 20’s and 30’s following the great depression, and also in the early 50’s. With unemployment numbers soaring (around 16% nationwide) and people saving more, prices are coming down to encourage spending as demand falls.

Check out the last 10 years of inflation and how recently we’ve been experiencing deflation.

inflation rate

Now, let’s get to the details about the velocity of money and why printing more doesn’t necessarily mean we’ll experience inflation anytime soon.

Below, the Chart is showing the log of US M2 money velocity (green), calculated by dividing nominal GDP by M2 stock, M1 plus time deposits. M2 velocity is not stable and correlates with the Employment-Population ratio (blue), an indicator of economic vitality. Both M2 velocity and the Employment-Population Ratio decline in periods of recession (represented with gray bars). The pattern conflicts with the quantity theory of money, which assumes that money velocity will be stable and only loosely correlated with economic conditions.[1]


An interesting note to this discussion would be “There has been no extended deflationary period (longer than 3 years) in the US since the 1870-1892 deflation, when the East Coast banking interests controlled Congress and set up a gold standard which caused a slow, two decade deflation.”[2]

So, if history has anything to say- don’t count on this deflation to last incredibly long. More important, don’t count on the increase in the money supply to spark inflation alone. There are various factors that will affect inflation in the next year or two – the more important factor being capital flowing back into business and employment picking back up. Only when people begin to spend will we see inflation creep back and take away our purchasing power.

Also, Seeking Alpha had numerous other points worth mentioning that will drive inflation in the next few years:

Signals to Watch for a Turning Point

We will spend much more time dissecting signals in the future. In short, we believe the following are some signals on when deflation will turn into inflation are:

  • Total bank lending and consumer credit
  • US Fed aggregate reserves and the velocity of money
  • Unemployment rate and employment claims
  • Commodity prices (oil, gold, metals, agricultural stock, etc.) and the Baltic Dry Good Index
  • Industrial capacity and the ISM index
  • Freight car loadings, car sales, and retail sales
  • Pricing of options on US Treasury rates (especially volatility prices, like Move), the breakeven rate, and 30-year fixed-rate mortgage rates
  • Actual observable prices in department stores and grocery stores (these help to set inflation expectations)

By the time inflation comes and registers on the CPI, it will be too late to re-position your portfolio or hedge for it. That’s why the signals above are important.


  • ^ Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. Seventh Edition. Addison-Wesley. 2004. p.520.
  • Seeking Alpha: http://seekingalpha.com/article/165663-when-will-deflation-turn-into-inflation-and-how-quickly

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