Ruffer On Inflation, Deflation And Monetary Instability


Inflation – Deflation: A Manifestation Of Monetary Instability by Jonathan Ruffer,

This review is more ambitious in scope than many quarterly offerings from Ruffer. It will cover more ground than is perhaps wise, and the reason for doing this is that we are looking at the many elements which will determine whether we face a deflationary crisis (to which the answer is a near–certain ‘yes’), and whether the response of the central authorities will result in our long–predicted high inflation coupled with low interest rates (our answer to this is ‘indubitably’). These seemingly inconsistent conclusions arise from our long–held understanding that both inflation and deflation are manifestations of the same thing: monetary instability.

The fall in the CPI inflation figure is important only if it’s a herald of true deflation. Ignore talk of ‘good deflation’ and ‘bad deflation’, and the far–fetched idea that with deflation running at 0.1% a year, consumers will hold off buying stuff until it has dropped in price – presumably by a penny per £10. The issue is whether it is a messenger of mischief to come: the albatross of the Ancient Mariner, the receding of the tide before the tsunami: a harbinger – not the real thing. It does not need publication of a low CPI inflation figure to establish that there are powerful deflationary forces at work in the world’s economies. Where there are deflationary forces, falling asset prices are never far away, and if central bank response to deflationary forces has driven them to high levels ahead of it, then the reversal of this becomes hard to avoid.

We may look back and see that the present phase in the worldwide economy is in a cross–current: the deflationary forces offset by the exuberance engendered by rising asset prices. Remove the latter, and you are left not only with existing deflationary forces, but also with the superimposition of the migraine imposed by financial pressures and thwarted hope. This can be seen in historical example. The fall in Wall Street in October 1929 is the best example of it. The Wall Street Crash was indeed the cause of the Great Depression – something which was obvious to its victims, but which was declared ‘wrong’ in the rewriting of its causatio