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Biflation: Inflation Deflation Economy

Biflation refers to the simultaneous occurrence of inflation and deflation in an economy. It describes a type of Cantillon effect that can happen when central banks implement expansionary monetary policy during a recession to stimulate the economy. This can result in rising prices for commodity assets as newly created money is used to purchase them, while debt-based assets continue to decline in value. The Great Recession provides an example where monetary stimulus led to inflation in commodities and essential goods but ongoing deflation in housing prices until 2012.

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63 views3 pages

Biflation: Inflation Deflation Economy

Biflation refers to the simultaneous occurrence of inflation and deflation in an economy. It describes a type of Cantillon effect that can happen when central banks implement expansionary monetary policy during a recession to stimulate the economy. This can result in rising prices for commodity assets as newly created money is used to purchase them, while debt-based assets continue to decline in value. The Great Recession provides an example where monetary stimulus led to inflation in commodities and essential goods but ongoing deflation in housing prices until 2012.

Uploaded by

Niño Rey Lopez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Biflation

What Is Biflation?
Biflation is the simultaneous occurrence of inflation and deflation in an economy.
Biflation, is essentially a misnomer, since the concepts of inflation and deflation
both refer to general rise or decline in all prices rather than a change in relative
prices between different economic goods or asset classes. Biflation is a
neologism for a type of Cantillon effect which occurs when expansionary
monetary policy is applied to alleviate a recession.

KEY TAKEAWAYS

 Biflation is apparent simultaneous occurrence of inflation and deflation in


an economy.
 It is a type of Cantillon effect that tends to occur when monetary stimulus is
applied to revive an economy.
 Biflation involves the simultaneous decline in prices for debt-based assets
such as home mortgages and related securities along with an increasing
trend in commodity-based assets.
Understanding Biflation
Biflation, a relatively new term coined in 2003 by Dr. F. Osborne Brown, a senior
financial analyst for the Phoenix Investment Group, generally kicks in
when central banks open up the monetary spigots in a bid to stimulate a
stagnated economy. Because the terms inflation and deflation refer to general,
economy wide changes in price, the name of the term biflation is somewhat
misleading because it does not necessarily involve any increase or decrease in
the general price level, but refers to change in relative prices driven by changes
in the supply of money and credit in different markets. It describes a kind of
Cantillon effect that happens when expansionary monetary policy during a
recession results in rampant demand for commodity assets leads their prices to
rise at the same time that debt-based assets are falling in value. 

A Cantillon effect is a change in relative prices resulting from a change in money


supply, which was first described by 18th-century economist Richard Cantillon.
Making lots of cheap money available via banks does not automatically mean
that demand for everything will rise simultaneously. Instead, history shows that
certain assets take favor over others, leading to rising in some areas of the
economy and falling prices in others. 

Because money added to the economy (through lending and asset purchases by
the central bank) or removed from the economy (through debt write-downs and
liquidations) happen at specific points in the economy rather than in all markets
simultaneously, both inflation and deflation tend to occur as processes over time
with differential and sequential changes in prices in different markets. The
resulting relative price changes that occur may confuse observers over whether
the economy is undergoing overall inflation or deflation. 

Biflation is a specific type of Cantillon effect. It happens when during a period of


debt deflation (and resulting recession) the central bank pumps money into the
economy in an attempt to reinflate asset prices. However, despite the central
bank’s efforts, the recipients of the newly created money use it to purchase
commodities and related assets rather than to try and fight the ongoing
deflationary trend in debt markets. The central bank’s effort to stimulate the can
not only fail, but instead can result in a rise in the cost of cost of living as prices
of raw materials and consumer staples may rise, similar to the effects
of stagflation.

In a depressed economy, demand for raw materials used to make things such as


energy, clothing, and food will likely remain relatively high because they are
deemed essential purchases by consumers. People will often continue to buy
them regardless of prices rises, leaving consumers with less money
for discretionary expenses.

Leveraged assets like real estate are susceptible to experiencing price


decreases in such an environment. When economic growth is stagnant
and unemployment increases, people cannot always justify buying a home or
anything else that is expensive and deemed to be non-essential, even if
low interest rates, a key function of increasing the money supply, make it
cheaper to borrow.

The upshot of a strong appetite for certain assets and weak demand for others is
biflation. Suddenly prices are rising in one part of the economy and falling in
another, giving the appearance of a mixture of inflation and deflation.

Example of Biflation
Unprecedented market events caused biflation to occur in the wake of the Great
Recession of 2007–2009. Against a backdrop of high unemployment and a
moribund housing sector, the Federal Reserve unleashed trillions of dollars in
monetary stimulus to jump-start the economy, while pledging to keep interest
rates low.

To be sure, those measures aided parts of the economy, albeit not immediately
across the board. Rather than targeting the funding toward renewed lending to
distressed businesses, for instance, banks and Wall Street institutions who
received the new money first held much of the funding as cash or directed it
into speculative asset classes. Housing prices eventually recovered, but not
nearly as quickly as liquid assets, such as stocks, which attracted investors due
to a recovery in corporate earnings fueled by low interest rates.

The economy saw ongoing decline in sectors such as housing prices, which fell
in many regions until early 2012. Conversely, prices for gasoline rose from 2009
through 2012.1  The price of gold rose dramatically between 2009 and 2011, with
growth slowing in 2012.2  Similarly, many other commodities markets saw rising
prices over roughly the same period.

Special Considerations
Biflation has, in many ways, been exacerbated by globalization. In fact, following
the great recession, many of the assets that experienced strong demand and
inflation were those that trade globally.

For example, rampant appetite for energy and metals from


rapidly industrializing countries, such as India and China, was largely responsible
for boosting prices for many commodities in the years immediately following the
Great Recession. This made essential raw materials more expensive in a period
when many consumers in the Western world found themselves in dire straits
financially, contributing to a dearth of demand for things bought on credit back
home, such as homes and automobiles.

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