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Rising prices and falling asset values gives us biflation

Rising prices and falling asset values gives us biflation

By Neville Bennett

I have mentally struggled with the inflation / deflation conundrum and have decided that the best working hypothesis for the future is "biflation" which explains how inflation and deflation exist simultaneously.

During biflation there is a rise in prices of commodity and earning-based assets and a contemporaneous fall in debt-based assets.

The global environment is flooded by money created by central banks. As many goods and services are essential, there remains strong demand for commodity-based goods: food, drink, clothing, gold, energy and infrastructure.

These goods attract high demand as there is too much money chasing them. Hence inflation.

At the same time, there is massive unemployment in the West, a change in taste towards frugality in consumers, and signs of mounting fiscal austerity. There is massive over-capacity in much manufacturing in the West. Consumers are also squeezed by debt servicing. As other bills rise, and confidence erodes, high end debt-based assets such as expensive jewellery, houses, even shares, lose attraction. Their price deflates as demand weakens.

Biflation’s appeal

The concept aligns well with my inherent belief of a commodity supercycle, and that investment in commodities such as energy, food, and gold and metals should be part of portfolios.

The price of these has been increasing and no let-up is in sight.

Moreover, it is difficult to project a coherent view of the outlook without biflation, the simultaneous existence of inflationary and deflationary forces.

The alternative is to opt for one or the other, or perhaps suggest inflation phases will follow deflationary and then reverse.

These alternatives are not cogent.

As capitalism is a process of “creative destruction”, there is always growth and decay. In modern states, IT and mining capabilities are growing while some industries are phasing out. Sometimes whole districts like Silicon Valley or parts of Australia are in a long boom (which creates inflationary pressures), whilst other districts are part of a rust belt with deflationary tendencies.

Biflation assists in understanding these market dynamics.


Deflation has been a substantial part of the Japanese scene for a generation and it now appears that the US is vulnerable to the Japanese disease. Several members of the Federal Reserve voting committee have changed their position and now believe deflation is a possibility and have consequently voted in favour of more quantitive easing.

The best indicator is the bond market.

Through the earlier part of the year the market was indicating a recovery with a return to normalcy and realistic interest rates. The 10-year bond yield crept up to around 3.85%, but something went wrong, and the market reversed course in April falling to around 2.5%. The cause was the Greek Crisis.

Investors decided to quit the stock market. Small investors fled the market in droves. They felt that US Treasuries were the safest investment. This drove yields to levels previously thought inconceivable. The 2-year has dipped below 0.5%. Thus, many market participants thinks the future is deflation.

Small investors have pulled a staggering US$33 billion out of mutual funds this year. Since early 2008, Americans have invested US$559 billion in bond funds, and have pulled $235 billion out of equities. They have drastically rebalanced their superannuation 401(k) accounts from growth to conservative options.

The US already has collapsing housing and commercial real estate assets. It could look like Japan, where property also fell and the Nikkei dived from 39,000 to 9,200 presently.

The US situation changed in September when the Fed announced its QE2 package. Wall Street had its best months in history.

Inflation in New Zealand

Since 2000, inflation in NZ has been at a compound rate of 2.7% p.a. This is regarded as low, although it occurred at a time of the Great moderation and the Great Financial Crisis when international inflation was muted.

The Reserve Bank’s Inflation Calculator shows how much fixed income people have suffered in a decade. The decline in purchasing power is 24%. The calculator also says that a basket of goods and services that cost $1 in 2000 now costs $1.32.

I wonder about the relevance of the basket of goods and services to households.

I notice that a lot of non-tradable services like rates and electricity are regularly much higher than the CPI. Rates increased by 8.3% in the September quarter yoy according to Alex Tarrant’s story here.  I have also noticed a surge in food prices. My wife could give chapter and verse, but I have noticed that the outlay for a decent barbeque is astronomical. The Consumer Price Index may be cheated by changes in packaging. While a tin of beans might have been 450 grams they have been shrunk to about 300. The same has occurred for other items.

My reading of the outlook for households is for inflationary expectations.

The RBNZ will raise interest rates when it thinks their effect will not kill the recovery. Higher interest rates will translate into higher housing costs. Transport costs will definitely rise as oil supply is quite tight, but world demand is rising. Higher petrol prices are to be expected. Transport affects many other costs.

Clothing prices have been relatively cheap for some years owing to globalisation. But cotton has shot up in price, and sharp increases are in the pipeline. Bloomberg reported last month that Chinese clothing supply would increase by about 30% due to rising costs. Cotton futures have surged by 70% this year. 

My guess is that food prices will rise. This is quite complicated, and many readers will have expert views, but my impression is that fruit and vegetable growers are price-takers, and are beaten down by supermarkets. The growers will struggle with static prices but rising costs. Supermarkets may increase their profit margins. In the area of dairy and meat, it appears to me that prices are linked to international prices, and I expect an increase here. In groceries and beverages I expect increases, although competition may work in some areas like wine.

International push

Demand for food is rocketing world-wide.

There are many drivers. On the supply side, there is rapidly increasing completion for water, increasing transport and cultivation costs, uncompetitive seeds, competition for land from non-food crops (like cotton and bio-diesel) and rising land prices. Demand increase is also multi-causal, but I would pick the demand of the burgeoning middle-classes in the emerging countries as a prime mover.

US farm prices have had their biggest increase in a generation. Cotton surged 76% and wheat by 48%. The S&P GSCI Index added 27%.

Elsewhere, tea and coffee prices are going through the roof.

There is tremendous investment in mining and infrastructure which is very inflationary. Oil, coal, metals, fertiliser, lumber have enjoyed huge price rises and industries improving future supply are having to pay hefty prices for labour and materials to overcome bottlenecks. This Financial Times article gives a good impression of an inflationary commodity boom coming our way. 


* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.

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Neville Bennett says - "Since 2000, inflation in NZ has been at a compound rate of 2.7% p.a"

This is the figure that Statistics NZ quotes but as any normal NZ'er well knows food, council rates, electricity and petrol prices have been increasing at a far faster rate than 2.7% p.a.


Andy , you are correct in your assertion.

The reality is that Stats NZ is influenced by politics , to the extent that certain items are deliberately left out of the CPI Basket . This is done for domestic policy reasons as well as to keep the international investor community sweet.  

These excluded items are things such as rents and house prices which saw compounded increases of around 8% per annum .

The effect of leaving just these two items out is immense , but foolhardy , becasue we all have to live somewhere .

Like mushrooms we are left  in the dark and fed bullsh...


With a scary acceleration and accumulation of worldwide negative events on many fronts a serious depression scenario is the REALITY.

People stop using your daily mini games - stats, %, charts and history books – the world changed forever - use your own brains !


Colin Clark's magisterial 1967 book, "Population Growth and Land Use", analyses numerous positive feedback loops in economies as populations are rising, that go into reverse when the population growth levels out or falls. This is even more significant in its economic effects, than resources like oil becoming scarcer and more expensive.

I am only saying what I do here, not to argue for "more growth", but to try and alert people to the kind of tough political options we are going to have to confront, that will go way beyond superannuation liabilities. The end of growth, either planned or unplanned, means serious recession and falling income, not equilibrium at the "status quo".

The development of free markets and the creation of wealth requires, along with
a culture that encourages trust and co-operation; "connections" via transport
and communication, between potential participants in exchange and trade. These
connections can be the result of proximity (through density), as well as by
roads and other transport infrastructure.

There is a limit to how much density is achievable as a substitute for transport
infrastructure, because the production of low-density rural areas, especially
food, has to be transported to the workers in urban industry. There is actually
a correlation between the "density achieved" in urban areas throughout history,
and the provision of roads.

Population growth is one way in which densities are increased, and "demand
pressures" result in rural land being used more intensively and efficiently.
Population growth disturbs a certain "status quo" that might have existed
previously, where rural production levels were regarded as "satisfactory" to
both the producers and the consumers of the produce.

As population densities increase, and rural production increases, a number of
efficiencies are realised.

There is increased competition, and reduced oligopoly, monopoly, and monopsony

Increased specialisation becomes possible, because of a viable number of
customers for the products of the specialist. "External efficiencies" are
realised by increasingly networked producers.

Economies are realised in infrastructure, social institutions, and government.
Roads, bridges, harbours, etc, can be utilised by increasing numbers of people
without capacity increases being immediately necessary. The same goes for
churches and clergy, courts and lawyers, hospitals and doctors, other
professionals, government bureaucracies, public buildings, educational and other
institutions. This also allows for important advances in sanitation and health.

Labour productivity growth occurs, and less additional "capital" is required for
each additional unit of output. The utilisation of land and resources previously
underutilised, is a "substitute for capital".

Nevertheless, return on capital increases, AND capital formation is also
increased. A rising population results in increasing returns to existing
investment, encouraging more investment. Less investments "go bad", because
there is a rising number of customers for whatever products or services the
investor and his competitors provide. More production capital is utilised (and
even worn out) before it becomes obsolete.

The products that result from new investments, inventions, and efficiencies, are
easily absorbed in a rising population; as are the redundancies and relocations
that might be necessary. Younger people, of which there are more, are more
mobile and receptive to change. The increases in wealth creation and demand,
make society more amenable to changes in employment patterns as the result of
advancing technology and methods. There are more valuable "positions" to go
around, so that change is less regarded as a threat by those occupying positions
of advantage.

Younger people tend to accumulate capital, while older people tend to "draw down
on it". Larger families result in pressure on the parents to save more, and on
the children to provide for themselves because their inheritance will be split
more ways.

(Note: Julian Simon added a further thesis to Colin Clark's: that a higher
population includes both more inventive geniuses, and more people to purchase
and enjoy the fruit of those creative geniuses).

A high proportion of government spending is inflexible to rises and falls in
population. This spending is more efficient if population is higher. Much
government spending is extremely difficult to reduce even when falling
population justifies it.

If population is falling, there is much greater pressure on politicians to cheat
by inflating the money supply, as the fewer numbers of young simply cannot
sustain the taxation levels necessary to keep the government running, apart from
the burdens of caring for larger numbers of elderly.

Younger people are rendered less able to save, capital is "drawn down on",
returns on investment decline, more investments fail, investment declines.

Population increases demonstrated beneficial effects in Holland in the 1500's,
Britain in the late 1700's, and Japan in the late 1800's. Holland and Japan were
economic successes while importing most of their food. A LOWER percentage of the
workforce in agriculture, correlates to wealth increases. These increases in
population and in wealth, result in a freer, more mobile society.

Ancient Rome in its decadent phase, illustrates the effects of falling
birthrates, including increased taxation burdens and monetary debasement.

Declining populations, in ancient Rome and in Europe in the 1400's, brought
about a simultaneous shortage of workers, and yet lack of demand. Many people
clung to their source of diminishing income, becoming protective and demanding
restraint of competition; others had serfdom imposed upon them by the
government, their freedom to relocate and change their livelihoods being
removed. These seemingly contradictory effects are the result of a reversal of
the "virtuous cycle" described earlier, that occurs when population is

France, in the period from from the revolution onwards, also illustrates economic decline
consequent on falling birthrates.

In underpopulated lands, and where population is falling, the people themselves
become more "protectionist" in sentiment, and more vulnerable to illusions
regarding "planning" and regulation of production and prices. This only worsens
the vicious circle of decline.


That's bollocks, and I've told you that before.

It confuses the meaning of wealth.

Wealth, is the expectation that your tokens thereof, will but you good and/or services in the future.

If the future can't supply them, then your tokens are not wealth.

If the raw materials needed to supply those goods and services are finite (they -almost without exception - are) then at some point you have a problem.

That point will be at the top of the gaussian curve, as far as you can keep the plateau going to the right, before the decline.

Energy is the key one, because no other activity - economic activities included - can happen without it. Not a one.

So at the point that energy peaks, you're at the peak of wealth-underwriting. Put more people on the planet, and you are just dividing the remaining available wealth amongst more heads, so less wealth apiece.

Less people therefore equals more wealth per head. End of stroy.

There folk are nots - it's not a case of "not understanding the economic fundamentals", it's a case of "the economic fundamentalists are idiots".

Case in point - one such bemoans the fact theat Pike River wasn't open cast - blames it on the greenies/commies/lefties/whatever;.

The CEO actually stated that open cast wasn't a technical option. Why?

Because it takes energy to remove a mountain range, and what you are after is?


If it takes more energy (dozer, truck, digger fuel etc) to remove the mountain range, than the coal gives back, then it's an energy loss. Any energy you invest in the process, lowers the EROEI (the Energy Return on Energy Invested). As does deep-water drilling, and shale or lignite conversion.

It doesn't matter how much energy becomes worth, it's still an energy-loss operation, and as such, will never happen.

Economists don't acknowledge this, nor any physical limits, and so have to be seen as temporary experts in a transient period.

We did all our growth on the back of easily extractable energy, and that period is over.

Which is why Nevilles wee tome is timely - from here on in, it is a case of the people crowding aft on an ever-sloping, ever sinking deck, and the rates of acceleration in either direction are worth noting. They won't change the sinking, but they're worth noting, gives you a handle on the time you have left.

Even at the peak of the easy energy pickings, we're in debt to an unsustainable degree. To think you can solve things by adding more people, somehow making contested land 'cheaper' to one contestant, and by ignoring natural capital comlpetely, is deluded.

Seriously deluded.



powerdownkiwi and PhilBest why are you guys not try to understand each other and talk on a different level. ? I think your ways of thinking is inspirational for many in your own right. It is a shame - so much great potential  lost.

Just a Christmas thought.



Excellent as usual Neville. Biflation is a great idea, much better than stagflation.

I love the distinction between debt based assets and income based assets, definitely food for thought there.

On the subject of inflation measures I believe Stats NZ adjust as best they can for subtle changes in quantity and quality and I doubt they are politically corrupt or incompetent. I assume the relevant US authorities are probably politically corrupt and potentially incompetent too.

I have not as yet got round to constructing a personal cpi index although I suspect it would be quite easy if I kept some supermarket receipts. As I posted previously I have part ownership of a property in Nelson:

Rates in 2010/11    $13055

Rates in 2004/5      $7685

The building is unchanged.

There does not appear to be much to do about this except sell it and put the money into other assets. I doubt the local council understand how destructive this is or are even aware they are a factor in the town's commercial decline.


Rates in 2010/11    $13055

Rates in 2004/5      $7685


So... the 6th root (6 years) of 13055/7685 is 1.0923... or in other words 9.23% increase year on year.  Wow.  9.23% year on year is also 70/9.23 or 7.58 years for the doubling time.  So after approx 7.5 years more, at this rate, your rates will have doubled again.


Hmm, will this happen?  Will your rates be $26000 in the 2016/17 year?  I wonder (I don't know either way of course).  The thought is scary because I know my income hasn't doubled in the last 7.5 years.




Neville, Rodney Dickens used a cute term recently when discussing a serious house price bubble that happened in the early 1970's. During the next few years, there was serious inflation, during which house prices SEEMED to "not fall" - they rose slowly or stayed flat. But because everything else was rising at double figures, "REAL" house prices were actually coming back to normal median multiples.

Rodney described this process, as "washing away our house price bubble sins" with monetary inflation. This is possibly what some central bankers are trying today.

But I remain frustrated at the total inability of mainstream economics to analyse the role of land supply regulation in all this. There is actually enough historical evidence, especially from Britain since they did the "planning" thing before anyone else did. The role of this "planning" in the peculiar kind of economic blight that infests the British economy, especially in certain regions, should now be as clear as day. The papers of the LSE team of Paul Cheshire and Stephen Sheppard have popped the final pieces of evidence into place in my mind.

Creating arbitrary boundaries across which serious price discontinuities form, is obviously to forego free market efficiencies. Cheshire and Sheppard have estimated these effects to have a similar NET impact on public welfare, after the claimed "benefits" are taken into account, to a 4% income tax. Recently, they said that this figure would be much higher if they brought their analysis up to date to include the recent bubble period.

Furthermore, Cheshire and Sheppard identify serious land price volatility as a consequence; while the recent bubble has been the most serious, Britain has had a much more volatile house price cycle for decades, than most nations. The spread of the "planning" fad to other nations, has resulted in similar volatility.

Britain now has less floor space per person than Japan, their housing stock is the "oldest" in the OECD, their first home buyer average age is 37. The shortage of homes has been calculated in the millions, with NO house price boom ever having been accompanied by a "construction" boom, and the "busts" being "busts" in construction as well as prices. The cost of "social housing" is of course grossly inflated.

This is where we are all headed if we do not "get it".


Neville, it also occurs to me to put to you, the momentous consequences of Alain Bertaud's studies on "Spatial Distribution of Density". I respect you and think that you may "get it" where many others have failed.

"Urban Planning" is being done with intentions of "increasing urban density", so as to theoretically reduce people's travel distances by car, and increase the amount of walking, cycling, and public transport use.

Bertaud points out, as do Cheshire and Sheppard, that virtually NONE of these theories EVER engage with what land price markets are going to do in response to their regulatory tools.

Recent papers in planning and urban policy journals have started to refer to "dense sprawl" and "dysfunctional density". This is an encouraging start, but all of these authors seem to advocate a TIGHTENING of the regulations that in fact CAUSE the density to be accompanied by dysfunction. Bertaud gave everyone the answer in his papers from the early 2000's, and he has been ignored. Besides failure to analyse the effect of regulations on land markets, everyone except Bertaud has failed to analyse the effect on "The Spatial Distribution of Density".

Inflated land prices (with a significant price component that is nothing to do with ECONOMIC rent) result in the "spatial distribution of density" being distorted in the direction of LONGER average travelling distances and REDUCED public transport use. Furthermore, the various options for "location efficiencies" on the part of households and firms are reduced by the inflated "land price" input signal in those location decisions.

You can see this in Auckland and every other metro where Demographia has identified serious housing unaffordability. (Google Earth allows you do do this anywhere). In the non limited metros, all the density is clustered close to the CBD and other nodes of amenities, and the "sprawl" tapers off imperceptibly into the surrounding countryside. But in Auckland et al, you have an unrelenting sea of rooftops and tarmac right up to a kind of "city wall", and empty fields beyond. Furthermore, because of the inflated land prices, the areas closer to the CBD are LESS DENSE than they are in the non limited metros. The effect of the limits and the inflated land prices, is to push the "centre of gravity" of the population FURTHER away from the CBD and other travel destinations.

Bertaud refers also to the "density graph slope" and its significance. It naturally slopes down evenly from the inner susburbs to the outer ones. The steeper the slope, the more efficient "the spatial distribution of density". The "slope" in Portland, Los Angeles, and London, being three metros long affected by urban growth planning, is nearly FLAT. The "slope" in Curitiba, Brazil, an extreme case of "Smart Growth" planning, actually slopes the WRONG WAY. Bertaud claims that the slope of the graph in urban growth limited metros WILL steadily be rotated in the WRONG direction as long as the regulations remain. Interestingly, the former planned cities of the USSR also had density graphs sloping the wrong way, which is one reason why their whole economy was so inefficient.

But it is obvious to me that we in the West are repeating the same error, through allowing a "planning" class that does not remotely understand economics, to shape our cities, and our cities are the most important part of our economies. The recent Government Paper on our cities futures, got it right on the importance, but might as well have been written by economic illiterates, in its failure to engage with precisely what the planners have failed to engage with already.


Good calming down analyses Phil - on a 32 degrees hot day here in Kaikoura.

 “Climate Change” will unavoidably shift entire population. I doubt if we can master that task. It seems for a number of years we are already cleaning up all the time – running out of money.


Good posts PB.

Makes a note to self to read more of Bertaud. I sort of switched off the last time when he started talking about shopping malls. I hate the places and they are socially dead, because they are taking what should be public space and putting into private ownership. I have predicted that they will decline or collapse as institutions, and I suspect that this will be closely linked to the reversal talked about by Clark. I think supermarkets and mega stores will also pass.

Which makes me wonder how all this fits into Neville's article.

I also suspect that commodity price bubbles will eventually burst when industrial demand drops, which it also should if Clark is correct.

Clark also talks of infrastructure. Well NZ was founded on transport by sea, and that doesn't require much investment to maintain.  I for one won't be surprised if we see a return to the 'scows' .


Great posts Phil, very interesting stuff from Bertaud. New Zealand local/city planners - a case of the blind leading the dumb.


I read somewhere, 'The things you want are getting cheaper.  The things you need are getting dearer.'

Compare: 1 main course at a restaurant == 1 variable speed rechargable drill from Bunnings.

Compare: 2 weeks rent == Intel Atom powered netbook with Wi-Fi, bluetooth, etc.

Compare: 2 tanks of petrol == 1 Android smart phone with GPS, Wi-Fi, bluetooth, etc.



Great article Neville. I work in the chemical and metal commodity supply business and your observations are right on the money. Global supply is getting tighter for all these while demand is increasing. Add QE and you have a perfect storm for major price increases. Your insightful analysis on debt based assets is very interesting and IMHO any serious investor ignoring either of your arguments will find themselves treading thin ice in the years to come.


So what's the bi-flation formula, Neville ,for headline v core inflation or ,in this instance, bi-flation?


It sounds like QE flooding the commodities mkts.


The easiest way to explain it is that we will see rising prices in everything we need while seeing depreciating values in everything we own. I just bought a used car for an ingot of silver; this is the initial symptoms of world-wide hyperinflationary pandemic. The end game will be the US losing its reserve currency status. So when you see Gold and Oil rising don’t think of it as much as inflation but USD deflation. That is why it’s critical the NZD rises in kind or we will have to pay the US inflation tax!


Via Leith Onselen, I just spotted THIS disturbing paper from the "Bank of International Settlements":

"Aging and Assett Prices". Demographics alone are going to drop the bottom out of asset prices.


Since Biflation is a new concept I will leave it as Blufflation until it proves right.


There is actually good news for NZ out of the above described scenario in that NZ is and is seen as Internationally as commodities producer ( dairy, forestry ,meat, leather etc) therefore our currency is very likely to appreciate over long term against US , Euro , GBP much like  and helped along by the AUD (However we should not be surprised to depreciate far further against AUD).  

Also no doubt Baby boomers retiring and selling down housing inventories will help to depress real house price increases for 1-2 decades to come.


For those who are interested in "the demographic crisis", this is one of the best non-academic essays I have ever seen:

But stay happy.


happy or not, this puts it well :

nothing like reality. Beats faith-based systems every time.


Biflation can be used to great effect by the government.  Think about calculations such as the consumer price index.  When some items are coming down in price while others are going up in price the resulting index kind of averages them out and says that prices aren't moving much at all.  This can be used to tell the populace that everything is alright, when in fact it isn't.  The thing is, the things you need such as food, shelter, energy are all going up in price.  The things you don't need are coming down in price; TVs, phones, consumer electronics as a whole.  This would sound all pretty much OK as long as people are buying both things they need and things they don't need.  The fly in the ointment is that effective wages are dropping (they have been dropping in the US since the 70s).  The buying power of the average Joe is dropping.  Those who were comfortably off are earning (effectively) less year on year.  So their discretionary spend is dropping.  The excess is no longer there.  When given a choice between buying things they need and things they don't need, the things they need always win.  The larger the portion of the essentials (the things they need) someone buys, the more they will notice the rise in prices.