http://www.businessinsider.com/a-major-deflationary-red-flag-in-the...

If the chart below doesn’t grab your attention then few things will. In my opinion, the performance of the dollar is the surest evidence of the kind of environment we’re currently in. The surging dollar is a
clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping th... and should be setting off red flags for equity investors around the world.

The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely
high. The recent 16% rally in the dollar is a sign that investors are
once again worried about the continuing problem of debt
around the world and they’re reaching for the safety of the world’s
reserve currency – the dollar. As asset prices decline and bond yields
collapse this is a clear sign that inflation is not the near-term
concern, but rather that the debt based deflationary trends continue to
dominate global economic trends.

This is exactly the kind of market action we saw leading up to Lehman Brothers. In 2008 the dollar rallied as signs of deflation began to sprout up. This was an instant red flag for anyone who understood
the deflationary forces at work (and a total surprise for the
inflationistas). The dollar ultimately rallied 26% from peak to trough.
Coincidentally, the dollar had rallied 16% from trough to peak just
prior to the Lehman collapse when the dollar surge accelerated.

Of course, the inflationistas will argue that gold is rising in anticipation of inflation. In my opinion, this is incorrect. First of all, if inflation were a major global concern the Goldman Sachs
Commodity Index wouldn’t be almost 65% off its all-time high and just
33% above its 2009 low. Second, and perhaps most importantly, bond
yields around the globe wouldn’t be plummeting if there were rampant
inflationary fears. For a much more detailed analysis on the reasons why inflation is n....

As for the gold rally, I think it’s clear gold is rallying in anticipation of its potential to become a future reserve currency. The potential demise of the Euro has become a rally cry for inflationistas
who don’t understand that the Euro is in fact another single currency

system (like the gold standard) which is destined to fail. In the
near-term, the rise in gold is likely justified as fear mongering and
misguided governments increase demand for the yellow metal. Ultimately,
I believe investors will realize that there is little to no inflation
in the global economy and that the non-convertible floating exchange
systems (such as the USD and JPY) are fundamentally different from the flawed currency system in place in Europe.

Debt deflation continues to plague the global economy. Thus far, policymakers have been unable to fend off this wretched beast and I attribute this largely to the widespread misconceptions regarding our
monetary systems. This extends to the very highest levels of government
and the misconceptions regarding the EMU, the Euro and the vast
differences in their monetary system have only exacerbated the problems
and are likely to further worsen the global deflationary threat. The
ignorance on display here borders on criminal in my opinion as
governments impose harsh injustices on their citizens due entirely to
their own lack of understanding.

I’ve mentioned repeatedly over the course of the last 18 months that government responses to the credit crisis were misguided and unlikely to resolve the structural problems. I’ve also mentioned that this was
something I have sincerely hoped I would be wrong about as the
consequences have the potential to be enormously destructive.
Unfortunately, the policy responses have been so tragically misguided
that I now believe the global economy is on the cusp of a potential
double dip. And as Richard Koo says, the second dip has the potential
to be far worse than the first because investor confidence is shattered
(which is clearly the case on the back of the recent market crash).
Policymakers are doing little to rectify confidence and have in fact,
through their ignorance of the way in which our monetary system
actually functions, only increased the global risks in the economy. The
dollar is the surest sign of the lack of faith in the policy response
and an enormous red flag for risk markets. Allocate accordingly.

PS - There is a video going around called “Melt-up” and it is receiving a HUGE amount of attention on the internet. It is regarding the recent melt-up in stocks and how the U.S. is about to enter an inflationary spiral and a currency collapse. I would recommend to the good readers here at TPC to
ignore this video. It is 100% factually incorrect
(well, more like 75%) and full of the same fear mongering
misconceptions that fuel the asset destroying portfolio strategies of
well known inflationistas (we all know the names). Videos like these
are based on the same misconceptions regarding the monetary system that
have actually led to the current debacle. Positioning yourself for
hyperinflation and a U.S. dollar collapse has been a recipe for
disaster and will continue to be a recipe for disaster as debt
deflation remains the single greatest risk to the global economy.