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Can Central Banks Save the Largest Debt Bubble in World History?

As the economic devastation resulting from COVID-19 and the decision by some western governments to lockdown their economies continue to play out, the central question among economists is what are the short to medium term ramifications of the:

  • decision to lockdown the economy and civil society; and

  • unprecedented monetary and fiscal stimulus which was injected into the economy resulting from the economic lockdown.

A wide multitude of economic scenarios and opinions have been offered by economic technicians which in some cases:

  • are polar opposites; and

  • have material implications to how individuals should structure their economic affairs and financial portfolios (i.e. the quantity and structure of their assets and liabilities).

Of the scenarios offered to date, the most important economic questions which Australians and individuals around the world require answering are:

  • will the global economy exhibit rising inflation or ongoing deflation?

  • will economic growth rebound strongly, remain mildly flat or continue to decline?

  • will unemployment and underemployment recover strongly or remain elevated?

The answer to these questions will have significant financial implications for various asset classes and will in many cases determine what sort of economic life billions of people around the world will have for at least over the next decade.

The 6 Scenarios of Economic Armageddon

Being aware of the uncertainty of how an economic crisis may proceed, in June 2018, I mapped out six possible scenarios of how the anticipated economic crisis, based on the premise that:

  • Australia has the biggest debt bubble in Australian history at the same time;

  • the world has the biggest debt bubble in human history,

would play out.

These six scenarios were derived using a deflation-inflation Austrian economics model as postulated by Ludwig Von Mises. According to Von Mises, credit-induced bubbles either collapse from deflationary shrinkage of debt (typically triggered from rising interest rates or tightening credit availability) or through the collapse in value of the unit of currency used to underpin the credit bubble (i.e. runaway inflation or in extreme circumstances hyperinflation). More specifically, Von Mises stated:

““There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”[1]

Of the six scenarios which I mapped out in my Economic Armageddon model, three scenarios were based on the economy exhibiting deflation, while the remaining three scenarios were based on the economy exhibiting inflation.

These six scenarios and their detailed explanations were published via in a piece entitled: Six Pathways to Australia’s Economic Armageddon[2] and can be viewed illustratively via Diagram 1.

These scenarios include:

  • Scenario 1 – Debt Deflation Recession or Depression;

  • Scenario 2 – Sovereign Debt Crisis;

  • Scenario 3 – Local Currency Crisis;

  • Scenario 4 – Local runaway inflation or hyperinflation (i.e. high growth, high inflation);

  • Scenario 5 – Stagflation (i.e. low growth, high inflation); and

  • Scenario 6 – Global Currency Crisis.

Diagram 1: The Six Economic Armageddon Scenario Model

The Harry Dent Thesis of a Deflationary Depression

For many years, particularly in the post 2008 Global Financial Crisis (GFC) era, American economist Harry Dent has been forecasting across:

  • multiple books;

  • television and YouTube interviews;

  • newsletters; and

  • public presentations

that the world economy (including Australia) would descend into a deflationary depression on a scale which would rival the 1929 Great Depression in the United States. As noted above, a deflationary depression is scenario 1 of the six-scenario Economic Armageddon model.

For Australia, the Dent thesis would result in the largest collapse in:

  • Australian household debt;

  • the market prices of Australian commercial and residential real estate; and

  • the market value of Australian shares;

which would rival the last great real estate deflationary depression of 1892.

Moreover, Dent has argued that a deflationary depression would result in:

  • systemic bank failures worldwide derived from households, corporates and governments defaulting on existing debts;

  • a collapse in the price of commodities worldwide; and

  • the real value of government issued currency (i.e. fiat currency such as the US dollar) rising therefore resulting in a collapse in the international spot price of gold and silver.

The Dent thesis has attracted a receptive audience in Australia which has led to a section of the Australian community:

  • liquidating all forms of real estate holdings;

  • hifting from owning real estate to renting;

  • holding significant amounts of cash; and

  • owning both government and corporate bonds.

However, the Dent thesis of a deflationary depression makes several assumptions which presuppose that a set of conditions will be met.

These conditions primarily include the shrinkage of nominal global debt from $US 255 trillion (which was the recorded quantum of debt by the Institute for International Finance), which can only result from a deleveraging process triggered by a series of debt defaults that uncontrollably overwhelms both:

  • the global financial system;

  • global and national policy makers;

which results in multiple financial institutions, including Global Systematically Important Banks (or G‑SIBs), going bust.

The Re-emergence of Stagflation?


  • world central banks to date printing unprecedented amounts of monetary stimulus and committing to injecting more amounts of stimulus into the future in order to prevent defaults within capital markets and among financial institutions; and

  • national and regional governments spending unprecedented sums of fiscal stimulus to prevent defaults of non-financial corporations and households;

it is difficult to conceive of a situation where global debt will shrink in size in nominal terms under these policy settings.

In this context, the conditions required for a deflationary depression to occur are unlikely to be met, especially in the near to short term (i.e. the coming 3 to 18 months).

Rather, ongoing turmoil from the economic lockdown, including a weak recovery and unprecedented levels of money printing by central banks is likely to result in stagflation (which is Scenario 5 of the six-scenario Economic Armageddon model as shown in Diagram 1 above).

Stagflation is defined as stagnant economic growth (i.e. low or even negative growth in economic production) coupled with rising prices[3]. Typically, stagflation manifests itself via a simultaneous rise in both unemployment and inflation[4].

Stagflation has tremendous adverse economic impacts across multiple economic stakeholders, especially middle-class workers who typically suffer a complete or partial loss of income from a stagnant economy while having to pay the necessities of life (such as food, housing, transport and childcare) at higher prices.

Global stagflation last occurred according to official government data during the 1970s in response to two oil price shocks, the first shock being in 1973‑74 and the second shock in 1979.

The first oil price shock was caused by an oil embargo by the Organisation of Petroleum Exporting Countries (or OPEC) which proclaimed an oil embargo in October 1973 as a result of the Yom Kippur war. The oil embargo lasted until March 1974 which resulted in global oil price quadrupling from $US 3 per barrel to $US 12 barrel (or 400%).

This price movement triggered economic recessions in multiple western economies, including the United States of America, during 1974-75. In response, western policy makers decided to sharply cut official interest rates to encourage economic growth consistent with the standard Keynesian economics policy prescription.

This included the United States which cut the Effective Funds Rate (the unsecured interbank lending rate) from 13.5% in July 1974 to 5.13% in May 1975[5] which resulted in simultaneously rising unemployment and inflation (i.e. stagflation).

Stagflation reached its climax after the second oil price shock in 1979-1980 resulting from the Iran hostage crisis which catapulted the oil price to 10 times higher than its 1973 levels.

Stagflation caused a significant disruption within central banks and among economists as simultaneously rising inflation and unemployment was inconceivable within the framework of Keynesian economics and inconsistent with the ‘Philips curve’ (a supposed inverse macroeconomic relationship between unemployment and inflation)[6].

In the current context of COVID-19, preliminary data indicates that a stagnant or sluggish economic recovery is likely in economies such as Australia with unemployment levels likely to remain elevated above pre-lockdown levels well into 2021 and even through to 2022. Such stagnation is likely to be a function of:

  • some economic lockdown restrictions remaining in place – especially as it relates to international travel and overseas migration;

  • the disruptive impact that COVID-19 has had on global supply chains continuing[7];

  • the significant debt overhang which is hampering businesses and households to increase investment and consumption levels;

  • sustained changes in consumer behaviour given both loss of incomes during the lockdown, and future concerns over the health risks posed by COVID-19; and

  • overall weak business and consumer confidence.

Couple these elements with the extraordinary amount of monetary and fiscal stimulus which has been injected into the global economy, the likelihood of rising asset and consumer prices occurring during a stagnant economy is quite high.

Evidence of Stagflation is likely to be Concealed

However, while a sluggish economic recovery from the economic lockdown and significant increases in:

  • the money supply,

  • the size of the balance sheets of central banks; and

  • overall debt levels

is likely to lead to an economic environment of stagflation, evidence of this economic phenomenon is likely to be concealed by governments and central banks via statistical manipulation – especially in the case of inflation.

As noted in a previous article, Inflation Theft Crippling Australians[8], the Australian version of Consumer Price Index (CPI) as published by the Australian Bureau of Statistics does not include all prices within the Australian economy, including the cost of existing housing, land, mortgage interest repayments and capital assets, meaning that the CPI is not comprehensively representative.

Moreover, a series of methodological changes in 1998 including:

  • the inclusion of geometric price indices;

  • the introduction of hedonic regression modelling; and

  • the substitution of land for owner-occupier housing for the cost of a new building (excluding land)

all contributed to suppressing the rate of growth in the CPI.

In addition, evidence of statistical manipulation of the CPI has been well documented in overseas jurisdictions such as the United States of America (USA). For example, economist John Williams from Shadow Government Statistics[9] has produced an alternative statistical series measuring the rate of change in the CPI using the official statistical methodology of the US Government of the 1980s and 1990s.

Based on Williams’ statistical work, growth in the CPI based on the official methodology of the 1980s was running at approximately 10% per annum prior to the COVID-19 economic lockdown as opposed to the approx. 2% per annum officially admitted by the Trump Administration.

The dichotomy between the Shadow Stats’ 1980s and contemporary measurement of the CPI is illustrated in Diagram 2.

Diagram 2: Shadow Stats – Measurement of the Consumer Price Index using 1980s Methodology[10]

Moreover, as reported by Zerohedge[11] in May 2019, Joseph Carson the former director of economic research at Alliance Bernstein detailed how methodological changes implemented by the US Bureau of Labor Statistics (BLS) have suppressed the growth in the USA’s version of the CPI via statistical changes which now accounts for:

  • product substitution;

  • a greater degree of quality change across goods and services and

  • a faster introduction of new outlets or ways people shop

have led to core inflation being recorded by 0.5% to 1% lower.

Zerohedge also documented research by the staff of the Federal Reserve which found that previous adjustments in the late 1990s by the BLS in which only using prices from the rental market were used to measure sheltering costs and not prices from the owner occupier market removed the largest single ‘driver’ of cyclical inflation. This adjustment also reduced the volatility in reported inflation.

This research found that where annualised house price gains were greater than 10%, core inflation should have been 2 to 3 times higher during the 2000s during the formation of the pre-GFC house price bubble.

It is important to note that while criticism of the CPI within the Australian context is quite limited to a number of select voices, the fact that consumer and political polling surveys over the past decade continue to register that the ‘cost of living’ is one of the most pressing problems in Australia, means that further investigation into the measurement of inflation is required – potentially via a federal parliamentary inquiry.

Can Australian Property Prices Fall during Stagflation?

On the real estate front, it is important that while an economic environment of stagflation means that the global debt bubble is not likely to shrink, it does not guarantee a particular debt distribution across either the Australian or global economies.

If monetary and fiscal stimulus continues to be rolled out in ever larger quantities to support Australia’s private debt bubble, a reallocation of debt from private sector asset classes such as real estate and share equities could be transferred to a growing federal and state government bond market.

In such a circumstance, asset classes such as Australian real estate (both residential and commercial) may fall in price from current levels if the quantum of debt dedicated to the real estate sector falls (even though total debt remains constant or grows overall), although not to the scale or the speed which a deflationary depression would precipitate, meaning that a 40% to 80% fall in Australian residential and commercial property prices would be unlikely as some commentators have predicted.

This was a point which I made during my March 2019 national television debate against Christopher Joye when I said[12]:

“We can intervene to stabilise the housing market, but that comes at a cost and I have spoken to numerous politicians about this, the cost is the confidence in the currency, confidence in the dollar because we have record foreign debt.”

“If we can do QE, if we do zero interest rates, if we do massive fiscal stimulus as Chris said, can we avoid a massive collapse in the property market yes we can… but at some point the dollar will crash.”

Considering Japanese Deflationary Stagnation

The thesis that the Australian economy is likely to experience stagflation in the post-COVID-19 economic lockdown environment has been countered with arguments that the Australian economy may manifest the same behaviour as the Japanese economy.

Japan, since the collapse of its colossal asset and debt bubbles in December 1989 has experienced multiple decades of deflationary stagnation (i.e. an economy with weak economic growth and either low levels of inflation or even deflation as measured by their CPI), despite multiple and continual rounds of fiscal stimulus and a radical program of QE and negative nominal interest rates by the Bank of Japan (i.e. Japan’s Central Bank).

Some such as Martin North, principal analyst at Digital Finance Analytics have suggested that the recent injections of fiscal and monetary stimulus in response to the COVID-19 lockdown and any further subsequent stimulus may not result in inflationary pressures similar to what has transpired in Japan over the past three decades.

Since the collapse of its debt bubble in December 1989, Japan has experienced:

  • nominal gross domestic product (GDP) growing by 62.7% from 1989 to 2018 or an average 2.16% p.a.[13];

  • constant GDP per capita growing 34.31% from 1989 to 2018 or 1.18% per annum[14];

  • a rise in the unemployment rate from an average of 2.55% between January 1980 and December 1989 to an average of 3.97% between January 1990 and December 2018[15];

  • a rise in the general government gross debt as a % of GDP from 64.30% in 1990 to 234.98% in 2017;[16]

  • a rise in the assets of the Bank of Japan relative to GDP from 5.36% in 1996 to 73.42% in 2017[17]; and

  • a sustained fall in residential real estate prices of 44.1% between March 1991 and December 2018 according to the Japan Real Residential Property Price Index[18];

  • a sustained fall in the Nikkei 225 index (i.e. one of the main Japanese stock market indexes) by 41.2% from its 1989 peak (Index value 34,050.78) to the end of 2018 (index value 20,014.77)[19]; and

  • inflation, as measured by the CPI, between 1990 to 2019 averaged only 0.47% per annum, which included 4 distinct periods in which the CPI recorded a negative print (see Diagram 3)[20].

Diagram 3: Japan’s Annual % Inflation Rate[21]

As can be seen with the listed statistics above, significant and repeated injections of fiscal and monetary stimulus did not:

  • keep Japan’s private sector debt bubble intact;

  • prevent a sustained collapse in share equity or residential real estate prices; and

  • create runaway economy-wide inflation as measured by Japan’s CPI.

However, in the case of Japan, several important economic factors also transpired during this period which go some way to explaining the above phenomenon. These factors include:

  • the size of Japan’s ’active population’ (between 15 to 64 years old) shrinking from 59.73 million in 1989 to 59.64 million in December 2018[22];

  • an increase in the proportion of the Japanese population 65 years old or older rising from 12% in 1990 to 28.4% in 2019[23];

  • a reduction in Japan’s labour force participation rate from 62.6%[24] in 1990 to 61.4%[25] in December 2018;

  • negligible 2.5% growth in Japan’s total factor productivity as measured in constant prices for Japan between the years of 1990 and 2017[26];

  • a fall in Japanese household debt as a percentage of GDP falling from 69.5% to 58.62% in 2018[27];

  • a fall in Japanese corporate debt as a percentage of GDP falling from approximately 143% in 1996 to 101.2% in 2018;[28] and

  • a significant increase in the savings by Japanese corporations[29] which led to these corporations investing significantly abroad thus resulting in a recurring and persistent capital account deficit balance[30] (or alternatively a current account surplus).

These factors explain that shifts in population, demographics, labour force participation, productivity, debt levels and savings invested outside Japan contributed to its stagnant economy with weak domestic demand which can go some way to explain why runaway inflation has not been observed in Japan.

Although, it is important to note that the flow of monetary stimulus via QE into financial assets such as the Japanese:

  • government bond market;

  • corporate bond market (including Exchange Traded Funds);

  • share market;

also contributes to our understanding as to why a sharp rise in the Japanese money supply has not resulted in runaway inflation as measured by Japan’s CPI.

Measuring Inflation in Japan

However, when considering to what extent have deflationary or inflationary pressures manifested themselves in Japan over the past three decades, it is critical to note that similar integrity methodological challenges in measuring the CPI as noted above in the cases of Australia and the United States also exist in Japan.

For example, the Statistics Bureau of Japan (SBJ)[31], notes that Japan’s CPI, which was launched in 1946, does not capture all prices within Japan (especially asset prices) by virtue that the CPI, has, since 1952, been:

“calculated based on retail prices obtained from the Retail Price Survey (RPS).”

Moreover, the SBJ concedes that the measurement of the CPI is consistent with the international standard established by the International Labour Organisation (ILO) at its 17th International Conference of Labour Statistics which was held in Geneva in December 2003 thus it is highly likely that:

  • the SBJ has been underestimating the rate of inflation within the Japanese economy, similar to the United States and Australia as noted above; and

  • Japan has not experienced deflationary stagnation to the extent which is believed by the international economics community.

Purchasing Power of the Japanese Yen

Nevertheless, to fully understand the extent in which the Japanese economy has experienced inflation over the past three decades, it is important to observe the:

  • growth in the money supply in Japan; and

  • deterioration of the purchasing power of the Japanese Yen.

The money supply in Japan, which can be measured in various dimensions such as M1, M2 and M3 has experienced substantial growth since 1991 as noted in Table 1 below consistent with the continual rounds of fiscal stimulus injected into the Japanese economy and which has been financed through multiple rounds of QE.

Table 1: Growth in Japan’s Money Supply expressed in Japanese Yen[32]

Although, the recorded CPI suggests that this substantial increase in Japan’s money supply has not led to runaway inflation within Japan, the purchasing power of the Japanese Yen has fallen substantially in the process when measured relative to an ounce of gold.

The price of ounce of gold in Japanese Yen in July 1991 was 51,062.59 Yen and by 31 March 2020, the price of risen to 175,162.30 Yen representing 243% increase in the price of gold in Japanese Yen terms or representing a 70.8% fall in the purchasing power of the Japanese Yen relative to gold (see Diagram 4[33]).

Diagram 4: 30 Year Gold Price History in Japanese Yen Per Ounce

Implications for Australia

While Australian analysts such as Martin North suggest that Australia may replicate Japan’s experience with deflationary stagnation, closer analysis suggests that Japan’s economic history over the past 30 years was due to a series of unique population, labour market, productivity, debt, savings and investment forces.

Given Australia’s current population, labour market, productivity, debt, savings and investment profile and domestic economic public policy settings, it is unlikely that the forces which have shaped Japan over the past 30 years will display themselves in Australia over the coming 18 to24 months.

Thus, the probability that Australia experiences deflationary stagnation appears to be relatively low if not remote.


The 64-million-dollar question which economists and investors are pondering is whether future economic conditions will be of a deflationary depression, stagflation or another economic scenario consistent with the various scenarios I outlined in 2018.

For the Dent thesis of a deflationary depression to play out, global debt must shrink from its current size of $US 255 trillion and in the process a massive wave of debt defaults must occur which will financially destroy a series of corporations, households and governments that ultimately culminates in financial institutions, including at least a major G-SIB, declaring insolvency and going bankrupt.

At this stage, an unprecedented scale of monetary and fiscal stimulus committed by central banks and governments respectively in response to the COVID-19 economic lockdown is being deployed around the world to ensure that major defaults and thus a deflationary depression does not occur.

To date, such actions have been successful in preventing major debt defaults and thus deflation, however such actions:

  • do not occur without consequences; and

  • may not necessarily continue to be successful into the future.

Under current policy settings, global debt is likely to grow in nominal terms in the near to short term. A growing debt overhang will likely stagnate economic growth and the exploding money supply, (which is the traditional definition of inflation) will lead to rising prices, primarily among financial and hard assets such as precious metals, land, shares (equities), fine art and other collectables.

The Japanese model of deflationary stagnation which has manifested itself over the past three decades does not appear to be relevant to Australia given a series of unique factors which are unlikely to manifest themselves in Australia in the coming 18 to 24 months.

In the Australian context, a redistribution of debt away, for example from households and towards governments is likely to lead to moderate falls in prices of certain categories of real estate, however these falls are likely to be well short of catastrophic projections of 40% or more.

Given these factors, the Dent thesis, at least in the near to short term, will be proven to be incorrect if world central banks are able to save the biggest debt bubble in world history.

Whether the central banks are able to achieve such a feat is unlikely to be known for some time as this particular feat, given its scale and global dimensions, is unparalleled in human history.

John Adams is the Chief Economist for As Good As Gold Australia


[1] [2] [3] See Sy, W., (2018), “Decades of Stagflation and Cartoon Economics”, [4] Some analysts such as David Brady have suggested that the global economy may enter into ‘hyper‑stagflation’ until 2023, which is a combination of stagnant economic growth and hyperinflation. Brady’s explanation can be found at the following link: [5] The Effective Funds Rate data can be viewed at the following link: [6] Note that Stagflation was ultimately defeated in the United States through a severe tightening of monetary policy by US Federal Reserve which led to the Effective Federal Funds rate reaching 22.36% on 22 July 1981. [7] Note that the disruptive impact which COVID-19 has had on global supply chains is a supply-side shock similar to the oil price shock of the 1970s in that COVID-19 and the rising oil price will lift the cost of production, especially for manufactured goods. [8] [9] [10] [11] [12] The Adams-Joye debate hosted by Peter Switzer on the Money Talks program can be viewed via the following link: My remarks can be heard at the 19 minute 16 second mark. [13] [14] [15] [16] [17] [18] The Japan Real Residential Property Price Index is an index published by the Bank of International Settlements and republished by the CEIC. See the following link: [19] [20] [21] The data for Diagram 3 was solicited from the FRED database of the Federal Reserve Bank of St. Louis. See footnote 8. [22] [23] According to the Reserve Bank of Australia, an ageing of the population results in a fall in income and consumption. See the following link: [24] The 1990 value of the participation rate can be found at the following link: [25] The December 2018 value of the participation rate can be found at the following link: [26] [27] [28] See the following article – Japan is listed at number 16: [29] [30] [31] [32] Data from Table 1 has been sourced from the FRED database of the Federal Reserve Bank of St. Louis [33] Diagram 4 is sourced from

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