Second Stage Inflation

The correct definition of inflation is the expansion of currency supply. However, the term is often used to mean rising prices, which is merely a possible effect of inflation. The term is also used for the entire lifespan of both the inflation itself and its effect.

An expansion of currency supply is never without effect, so to talk of inflation as a process makes sense. In this perspective, there's the first stage, which is the inflation of the currency supply. The increased supply of currency has the effect of elevating asset prices, which in turn gives an illusion of wealth that we can term the second stage of inflation.

That's where we appear to be now after almost ten years of global inflation. There is a general feeling of stability, and those who own financial assets or real estate enjoy a sense of wealth. Asset prices are elevated while prices of everyday goods and services remain steady.

However, once people start tapping into their savings, they will quickly find that there aren't enough buyers to support the elevated prices. Unless central banks come in to support the elevated prices through direct purchase, asset prices fall.

As people start liquidating their savings, money moves from financial assets to physical goods, reversing the second stage. This is the third and final stage. Asset prices fall relative to everyday goods and services either as a right out price decline for assets or as further debasement of the currency.

Either way, the only safe assets during the third stage is gold and silver. They can neither be debased by central banks nor default to their owners.