In June 2011 Carmen Reinhart wrote a paper for the IMF titled “Financial Repression Redux.” She suggested that the current policy of financial repression could ultimately lead to high levels of inflation. Today, five years later it seems like she couldn’t have gotten it more wrong. In spite of the unprecedented monetary expansion, monetization of public debt and swelling central bank balance sheets, deflation seems entrenched. So why worry about inflation at all? In short, because deflation could actually give rise to inflation.

Deflationary depression sufocates an economy’s production of goods and services. As prices fall, firms find production increasingly uneconomical forcing many of them to reduce output or shut down altogether. This process is fully under way in many industries worldwide, especially among commodity related businesses. Falling output ultimately leads to shortages which induces people and firms to rush and stock up on products that could become unavailable.

This process can stoke up inflation – but not the gradual kind associated with a healthy, growing economy. Rather, deflation can give rise to explosive inflation associated with a general scramble for commodities. With oceans of liquidity waiting for the dams to burst, events will likely take us all by surprise.

Here’s what Elliott Management’s Paul Singer wrote for the Wall Street Journal in August 2012: “”The first whiffs of either commodity inflation or wage inflation … may cause a self-reinforcing set of market events … which may include a sharp fall in bond prices, … fall in stock prices, rapid increase in commodities…”

Most recently, none other than Alan Greenspan sounded the alarm bells in an interview with Brien Lundin posted at “FutureMoneyTrends earlier this month [1]. Greenspan told Lundin that he was particularly concerned with the nearly $3 trillion reserves being held on the Fed balance sheets and referred to them as a tinderbox of explosive inflation looking for a spark. Ominously, Greenspan warned that this excess liquidity will eventually be released into the open market – an event that will lead to rapidly rising prices of critical supplies like food, energy and other resources, and the inevitable collapse of the US Dollar.

These are truly dismal and chilling predictions, but history is replete with precedents of overextended empires collapsing under the weight of unpayable debts. By accretion and by inertia we are slowly moving in that direction; it’s like watching a slow-motion train wreck.

Notes:

[1] “Alan Greenspan in Private… ‘Explosive Inflation Coming.’” – Exclusive interview with Brien Lundin, Future Mone Trends, March 8, 2015 – http://www.futuremoneytrends.com/trend-videos/interviews/alan-greenspan-private-explosive-inflation-coming