Causes of Inflation and Deflation

In 2012, inflation proceeds gradually in the United States because of unemployed resources.  At full employment, inflation accelerates.  But then, as the Fed and the banking system reduce the growth rate of credit, the threat of deflation will reappear (as in 2006-07 and 2012).  Because the reserve currency system generally leads to a rapid increase in global purchasing power without a commensurate increase in the supply of goods and services, the systemic tendency of the reserve currency system is inflation—generally in the prices of investment assets, commodities, and speculative vehicles like art and antiques.  Yet the process can dangerously work in reverse, causing deflation, especially when the Fed tightens, or there is panic out of foreign currencies into the dollar (the Asian Crisis, 1996-2002, and the Euro Crisis—2012). Illiquidity abroad causes foreign official dollar reserves to be resold or liquidated in very large quantities, reducing the global monetary base—as occurred in 1929-33 and recently in 2007-09.