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MagicThere is something very strange going on in the Euro economic area. According to all monetarist (or Keynesian) theories, the economic activity in the Euro area is floating in mid-air without any support or means of propulsion! Quick! Quick! Change reality as it does not coincide with the theory!!!

THE DOCTRINE

Monetarist (or Keynesian) doctrine states that in order for an economy to grow, it must be "stimulated" with an "ideal" level of inflation of about 2% per year. Should an economy not reach this magic number (pulled out of their collective derrieres, of course) doom and gloom shall spell for its population. This terrible maleficence is known as "Deflation" which is just another name for "Depression".

THE REALITY

In reality it is just the opposite. We have explained this at large in our articles Deficits Debts And Inflation, Inflation Inflation Inflation, Senseless Inflation And Interest Rates and many others. Deflation is simply less currency chasing the same amount of goods or, if the amount of currency remains constant, a growing amount of goods. Deflation is good because it means that your money can purchase more without doing anything with it. You can stash it under the mattress and the longer it stays there the more it will buy.

Depression on the other hand is a state of affairs where the entire economy has crashed.

The natural state of a sound economy is actually deflation. However, if this economy is manipulated through artificial inflation (brought about by fiat money), it will eventually collapse and may lead to a Depression. In a state of Depression there will be Deflation but even this Deflation would help in these circumstances because it will allow people to buy more for less. Depressions are caused by a fear of borrowing and a fear to lend. It has absolutely nothing to do with Deflation.

Monetarists (and Keynesians) disingenuously and purposely falsely link one with the other. They say that Deflation leads to Depression. This is absolutely ridiculous and they know it. What's going on in the Euro area right now provides proof to this statement.

THE PROOF

The amount of money

If Inflation is more fiat money chasing the same amounts of goods and services, it would be wise to look at how much money is being created over time. One such measure is called M3. In the graph below we can see that roughly between 2013 and Q1 2014 M3 decreased. This is, there was less and less money in circulation. In other words, there was Deflation.

M3 EU

Deflation

If this is true, then this should be reflected in the price of goods and services which should exhibit decreasing prices or at least slowing down of rising prices. If we take a look at the graph below, this is exactly what is going on.

Inflation in EU

Depression

Therefore and according the Monetarist (and Keynesian) theory the economic activity should be dropping like a stone on its way to a full-blown Depression. Let's take a look at what's going on.

Retail Activity in EU

Hummm… Retail Sales are up and up and up. How strange. People are in the midst of worsening economic conditions brought about by Deflation and yet, they feel that they are richer and wealthier and go out and actually shop more. OK. But what about production? Let's see.

Industrial Activity in EU

Hummm… Production does not seem to be collapsing as it should if sales should be tanking… yet it is not! Would it be because sales are not tanking?

COMMENTARY

Here we have the classic practical example which proves Monetarist (and Keynesian) theories as nonsense. The amount of money is dropping, prices are dropping yet people are buying more and the industry is producing OK!! How could it be? Well, it is not. At least not according to the Monetarist (and Keynesian) theory; it is…well… something "else" that's causing it. What that "else" may be is, of course, a mystery.

Here you have a clear choice. You may continue to believe in "something else" (or the Keynesian fiat fairy) or you may come to the realization that Deflation is simply the natural state of affairs of a healthy economy not inundated by funny money (i.e. fiat money).

Of course the picture is not 100% crystal clear. There is "noise" in the data. This could not be otherwise precisely because of all the activities undertaken by the European Central Bank and associated Central Banks. This could not be otherwise, since the economy is limping along (not recovering) from the 2008 debacle thanks, again, to ECB's manipulation. However, the trend holds. And the trend is telling us that Monetarism (and Keynesianism) are well… donkey manure (if you ever wondered why they stink).

CENTRAL BANK FAIRY TALES

Of course! We know what the Central Banks (including the EU CB) are telling you: we need more inflation! Yet, their own data conclusively disproves this idea. Why are then sticking with this lie? Simple: politicians. Politicians need to control the supply of money in order to keep spending. If they do so, they will retain their jobs. And then we have the power elite who control the politicians. They also want free money and the only way to do so is through the power to create it out of thin air. Without fiat money this is not possible. Hence, they perpetuate this fairy tale.

CONCLUSION

The very data from the European Central Bank proves conclusively that their key theories (all of them) are big mammal manure. Yet, not to worry, they tell us. Since June they have implemented new measures to "fight" Deflation and to bring Inflation to a "healthy" level. If you take a look at the first picture above, you will notice that since about June Inflation is creeping up again and there are more "measures" to come. Yes, the economy will likely get a shot of adrenaline and will increase its heart beat. The question is a simple one: for how long can the ECB maintain alive a dying economy on the basis of adrenaline shots? At which point will the adrenaline kill the patient? If we would know this, we would be shorting the EUR. But then again, this is us. Your thoughts on the other hand are yours alone.

Note: please see the Glossary if you are unfamiliar with certain words.

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