Biflation is a relatively new term coined by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group in 2003. It is sometimes referred to as “mixed inflation” but it basically refers to a condition where both inflation and deflation occur at the same time. This seemingly contradictory situation is not a real a paradox but simply appears to be one as a result of faulty logic.
The problem results from thinking that all prices rise in lock-step in times of inflation but this is clearly not the case. It is quite common for electronics to be declining in price (deflation) while oil and gas are increasing in price. Thus we have “mixed inflation” or “biflation” however this is not the primary example of biflation.
The Cause of Biflation
The primary cause of inflation is an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for them rises due to the increased volume of money chasing them. However, in the case of electronics, technology is reducing the costs of production faster than the FED is printing money, thus the price is falling. One of the great gifts of technology is the ability to decrease the cost of living while simultaneously increasing the standard of living. Unfortunately, by printing money the government is appropriating that advantage unto itself, as a form of hidden tax.
Generally, the term biflation applies not to the deflationary effects of technology but rather to the competing forces of necessity vs. luxury items. Thus if incomes are limited, and unemployment is rising, and the price of necessities like gasoline, food and clothing are rising due to monetary inflation that can put downward price pressure on discretionary purchases such as housing and cars while simultaneously prices are rising for necessities.
During the liquidity crisis of 2008, paper assets, began to decline in price first as the derivative market deleveraged and speculators were forced to meet margin calls. This caused downward pressure on all assets while at the same time consumer prices were relatively unaffected as people still needed to eat and drive to work. But as people lost their jobs the downward pressure spread to discretionary spending as people cut back (either due to job loss or potential job loss). As houses were foreclosed on the supply of houses for sale increased and put downward pressure on housing prices. So the downward pressure in prices did not hit the market uniformly but rather rolled through the market affecting different sectors at different times and to different extents. The primary problem people have in understanding biflation is the notion that the economy is homogeneous and that an increase in the money supply will affect all assets equally which is not the case. The printed money flows through the economy starting with the government and then proceeding to government contractors and “entitlement” recipients. Then on to their suppliers etc.
In previous articles like Deflation or Inflation – Which is it? and Deflation or Inflation? Yes. we have touched on how we can see both inflation and deflation at the same time. So we see that even though inflation is apparent in consumer commodities like gasoline, food and clothing deflation could simultaneously exist in certain sectors such as housing and financial assets like stocks and bonds.
- What is Deflation?
- Its Weight in Gold: The Real Prices of Things
- What is Quantitative Easing?
- What is the Real Definition of Inflation?
- Disinflation – What is it?
- What is the Phillips Curve?
- Misery Index
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- The Debt-Deflation Theory of Great Depressions– The credit crunch today is not destroying capital but recognizing that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come. To understand how that works, we turn to Professor Irving Fisher of Yale (1933).
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