Navigating Inflation vs. Deflation: Economic Insights

Picture this: you’re on a plane, 45,000 feet in the air, and the pilot announces three of the four engines are failing. The winds are howling, and the cabin is tense. That’s the global economy right now—teetering on the edge, with a staggering $337 trillion in global debt acting like a storm ready to rip it apart. I’ve spent years digging into economic trends, and one thing’s clear: the inflation versus deflation debate isn’t just a buzzword battle—it’s a lens into our financial future. So, why do we feel compelled to pick a side?

The Inflation-Deflation Tug-of-War

The world’s financial system is a complex beast, and the inflation-deflation argument is its beating heart. On one side, you’ve got folks warning of skyrocketing prices—think hyperinflation nightmares where a loaf of bread costs a wheelbarrow of cash. On the other, there’s the deflation crowd, pointing to a potential collapse where asset prices tank, and money vanishes faster than a magician’s rabbit. Both sides have compelling stories, but here’s the kicker: they’re often missing the bigger picture.

I’ve always found it odd how people cling to one narrative as if the economy were a simple yes-or-no question. The truth? It’s messier. The global economy isn’t a light switch—it’s more like a tangled web of debt, policy missteps, and human behavior. Let’s unpack this, starting with the debt monster.

The Debt Mountain: $337 Trillion and Counting

According to recent data, global debt hit $337 trillion in Q2 2025. That’s not just a number—it’s a ticking time bomb. The COVID-19 years supercharged this debt spiral, with governments worldwide printing money like it was going out of style. The result? A surge in liquidity that unleashed inflation in the West, something we hadn’t seen in decades. But here’s where it gets tricky: that same debt is now dragging down economic momentum.

Debt is one person’s liability, but another person’s asset.

– Economist

This quote hits the nail on the head. When you borrow money, you create an asset for someone else—like a bank or an investor. But when that loan goes bad, poof, the money disappears. This is why a spike in bad loans could shrink the money supply, pushing us toward deflation. During COVID, governments tried to “print” their way out of trouble, flooding markets with cash. Spoiler alert: it didn’t work. Inflation spiked, but the underlying debt problem only grew.

Think of it like trying to fix a leaky boat by adding more water. The boat’s still sinking, just with a fancier splash. The real issue is that no one—not the Federal Reserve, not the Treasury—knows exactly how much money is floating around, especially in the Eurodollar market (dollars held outside the U.S.). This lack of control is a recipe for chaos.

Why a Gold Standard Isn’t the Answer (Yet)

I’ll admit, I’m a fan of the Austrian School of Economics. Thinkers like von Hayek and Rothbard make a strong case for sound money—currencies backed by something tangible, like gold. But let’s be real: trying to slap a gold standard on today’s economy would be like performing open-heart surgery with a butter knife. The global financial system is so interconnected that forcing it back to gold would tank everything overnight.

Gold and silver are great in theory—they’re true money, immune to the whims of central bankers. But in practice? They’re a security nightmare. Imagine hiding bars of gold under your mattress while dodging criminals or, worse, government confiscation. History buffs might recall the 1933 gold confiscation in the U.S.—not exactly a warm fuzzy moment. Plus, gold’s already climbed from $35 an ounce in 1970 to over $4,000 today. It’s doing its job without a formal standard.

Some argue for a sudden “reset” where the dollar gets devalued against gold, like in 1933. But here’s the catch: we’re not on a gold standard anymore. Devaluing the dollar against gold today would be like rearranging deck chairs on the Titanic. It’s not fixing the core issue—excessive debt.

Money Supply: The Wild West of Finance

Ever wonder how much money is actually out there? Spoiler: nobody knows for sure. The Federal Reserve and other central banks have lost track, especially with Eurodollars and other global currencies. Over the past 50 years, the world’s financial system turned into a free-for-all, thanks in part to the repeal of the Glass-Steagall Act in 1999. That law once kept Wall Street’s wildest impulses in check, but its removal unleashed a global party of debt and speculation.

If you put the government in charge of the Sahara Desert, in five years there’d be a shortage of sand.

– Economist

This quote sums it up perfectly. Governments and central banks have been pumping money into the system to keep the party going, but it’s created a balloon that’s ready to pop. COVID was the ultimate stress test—governments borrowed like crazy, pushing global debt up by 30% in just five years. That flood of cash didn’t just inflate prices; it obscured the economy’s true health, like putting a Band-Aid on a broken leg.

Now, we’re seeing the fallout. High interest rates, meant to tame inflation, are squeezing borrowers. Subprime auto lenders are going bust, and private credit markets are showing cracks with more payment-in-kind deals—where borrowers pay interest with more debt instead of cash. It’s a red flag that screams trouble.

The Role of Bad Debt in Deflation

Here’s a simple way to think about it: when a bank makes a loan, it creates money. When that loan goes bad, that money disappears. This is why a wave of bad loans can shrink the money supply, leading to deflation. U.S. banks look solid on paper, with an average 14.1% Tier 1 capital (a buffer against losses), compared to just 9% in 2006 before the financial crisis. But don’t get too cozy—things can unravel fast.

The table above shows banks are better capitalized today, but there’s a hidden danger: shadow banks. These non-bank financial firms hold $1.7 trillion in assets, about 13% of total bank assets.Hannahs. They buy loans from banks, bundle them into securities, and sell them to investors. This spreads risk around, but if those loans go bad, the whole system feels the pain. Shadow banks are less regulated, making them a weak link in the chain.

Back in 2008, the financial crisis showed us that risk doesn’t just vanish—it moves. Shadow banks took on risky loans, and when they imploded, the ripple effects nearly sank the global economy. Today, with asset prices stretched and fundamentals weakening, we could be on the brink of another rough ride.

The China Factor: A Global Wildcard

Here’s where things get even wilder. Some argue that China’s role in the global economy—once seen as a growth engine—could now be its downfall. The COVID years exposed vulnerabilities in global supply chains, and China’s economic stumbles are adding fuel to the fire. A weakening China could fracture supply chains, spiking prices for goods even as deflationary pressures hit assets. It’s like being stuck between a rock and a hard place—inflation and deflation at the same time.

I’ve always thought there’s an irony here. China was supposed to lift the world economy, but its missteps, from COVID to debt-fueled growth, might be what drags us down. This isn’t about pointing fingers—it’s about recognizing how interconnected our world is. One country’s stumble can send shockwaves everywhere.

Can Governments Reset the System?

So, what about the fabled “economic reset”? Some predict a dramatic overhaul where currencies are revalued or backed by something new. But here’s the harsh truth: governments are flying blind. They can’t quantify the money supply, let alone control it. A reset sounds nice, but it’s like trying to rebuild a plane mid-flight. The COVID money-printing spree proved that throwing cash at problems only kicks the can down the road.

• Liquidity injections fuel short-term relief but long-term pain.
• Asset liquidation events are likely before any reset happens.
• Central banks are losing grip on global money flows.

Perhaps the most unsettling part is that governments might try to manipulate markets to delay the inevitable. Propping up stock markets, for instance, can mask credit market stress, but it’s a temporary fix. When the music stops, the fallout could be brutal.

What’s Next? Navigating the Storm

So, where do we go from here? The inflation-deflation debate isn’t about picking a side—it’s about understanding the chaos. My take? We’re in for a bumpy ride. Deflationary pressures from bad debt and slowing growth could collide with inflationary spikes from supply chain woes. The result is a messy, unpredictable economy.

For investors, this means staying sharp. Diversify, but don’t bet the farm on gold or crypto thinking they’re foolproof. Gold’s a hedge, not a savior. Crypto’s volatile and unproven. And those “safe” bank stocks? They’re only as strong as the loans they’re tied to. Keep an eye on fundamentals—employment, retail, housing—and don’t get suckered by market hype.

We shall not grow wiser before we learn that much that we have done was very foolish.

– Economist

This quote resonates deeply. The past few decades of financial recklessness have set us up for a reckoning. But there’s hope. By understanding the forces at play—debt, money supply, shadow banking—we can make smarter choices. The economy may be a stormy sea, but with the right navigation, we can weather it.

In my experience, the key is to stay grounded. Don’t chase the latest hot trend or panic over doomsday predictions. The economy’s complex, but it’s not unknowable. Keep learning, stay flexible, and maybe, just maybe, we’ll come out of this stronger.