The Inflation Deflation Debate - Which Will We Have?
By Delwyn Lounsbury - THE DEFLATION GURU
Most people are in denial over the inflation deflation dilemma. They think government will bring inflation roaring back with QE1 and QE2 (Quantitative Easing -Government stimulus like buying bonds and printing money). Inflation is all they have know in their lives. Thus, they are not prepared for the inflation deflation change-wave and GREATER DEPRESSION. Our grandparents know what I am talking about. They lived through the depression. They knew borrowing and credit can get you into big trouble. In 1929 household debt as a percentage of GDP was close to 100%. It approached that level again in 2008. Now, as frightened people and smart businesses try to de-leverage their debt the level has dropped to 92%. The problem is government continues on a debt-fueled stimulus binge.
President Obama, Benjamin Bernake and Timothy Geithner don't understand that the cause of the crisis is too much government robbing the private sector of it's creative juices. Their solution is trillion dollar spending programs, Obamacare and bigger government. This has been the biggest worldwide credit inflation of all time. We have only known incremental inflation robbing retired responsible savers and making speculators in the inflation deflation wealth transfer the winners. Not any more. The Austrian School of economics says all credit inflations end in a deflationary bust. This one will be called the GREATER DEPRESSION.
Think of the inflation deflation economy as a methamphetamine addict. The longer one takes meth and the more meth (inflation) taken, the sicker things get (hair and teeth fall out - sores develop all over their face). If they stop taking the withdrawal is brutal and painful. But they live. If they don't stop shooting up - they die. So it is with the economy once it starts out on the inflation road. It is going to end badly either way. The only cure for inflation is a deflation. The worst kind of inflation is the credit inflation we have had, as apposed to pure paper money or fiat money inflation. The cold turkey the world will have to experience to get the monkey of ponzi money off our back will be monstrous and brutal. The 1930's depression times three!
This has to do with the long wave cycle of inflation deflation.
I'm going to ask you a question.
What year (approximate) was the peak of our standard of living and why? I ask this all the time and never get the right answer.
It was 1966 - 1967. Why? It only took one wage earner to afford and support a household then. Mom didn't have to work like. Children got attention, care and family values. Not like today. Things have degenerated. Morals and ethics have gone by the wayside. Crime and gangs are on the increase. The husband and wife are too busy to spend time with the children.
Society is imploding. Disinflation is now mutating into deflation which will mutate into the GREATER DEPRESSION. The price effects of deflation are simple to see than inflations effects. Deflation will cause outright across the board declines in both goods and investment asset prices. This decline will happen in a few years time rather than the 80 years it took inflation to reach the unsustainable pinnacle we hit in 2000. It will be brutal. Get prepared for the next phase of the inflation deflation climax! Cash will be king.
The whole problem with inflation deflation cycles is they are leading us into the GREATER DEPRESSION which will probably bottom in 2016 and last until 2020 and wipe out many people and businesses.
Credit inflation deflation cycles always end badly. Think CRASH. The unwinding of acredit inflation is the worst because of all the foreclosures, car repossessions and bankruptcies. Credit inflation is much more dangerous than currency inflation. It is a mania right up there with tulip bulbs. A balloon going to pop!
The only cure for inflation is deflation. No refuting this one. The question is when. NOW! We are 10 years into the GREATER DEPRESSION. The peak was year 2000 when we had the dot com top & bubble bust. The NASDQ stock market has not even gained back 50% of it's loss since 2000. Look at a 10 year chart of QQQ the NASDQ stock exchange index if you don't believe me.
Inflation is also a form of government bankruptcy. Modern day governments borrow and create money on top of the tax revenue they bring in. They purposely spend more than they bring in with the intent to pay it back with dollars worth less down the road. That is outright fraud and they know it. This is the big cheat and lie going on. You are being duped.
For years my real estate business card had this printed right on it - INFLATION SURVIVAL COUNSELING. Now it's going to be DEFLATION SURVIVAL COUNSELING.
Only those who had money to invest in investments that win in the inflation deflation wealth transfer like real estate and stocks made out. The government was purposely screwing those that saved for retirement and the elderly on fixed incomes. They knew the money would be worth less each and every year. They planned on it.
Inflation can be disguised because it usually is a slow process. It can change from price increases in goods and commodities over to increases in value of investment assets thereby confusing even the experts. Keep in mind that the general price changes are effects of the cause - which is increased volume of money and increased amounts of credit.
The old saying was - "Only government can take a usefully commodity like paper - put ink on it - and make it worthless."
Our bedfellow for the past 100 years, insidious infectious inflation, has its roots in both increased money creation & credit creation. All that funny money is chasing limited goods and services. That is inflation deflation. Not rising or falling prices people. Get it straight. Rising prices are just the symptom. Also while I'm thinking about it, it's war on terrorists not war on terrorism. You can't have a war on an idea.
95% of all U.S. paper money is in other countries. There is a heavily traded derivative market called euro dollars futures and options. Euro dollars are short term debt instruments (90 days) on the futures and options exchanges. No. Not the Euro – it is based on dollars in Europe. This market trades billions worth of contracts each day of the week. You see, people and businesses holding dollars are hedging interest rate risk with these derivatives. The price is sky high right now. But, when (not if) interest rates go back up these instruments will crater. You can expect 15 to 20 percent interest rates on 90 day safe government Tbills and euro dollars in the future as things become crazy and the world gets wound up around the axle of deflation. People will be borrowing at any rate just to stay afoat. Today short term interest rates are almost zero that is why euro dollars are trading near the record highs.
What is deflation? Low interest rates actually mean there is little demand for money. It is a symptom of a weak economy. Low interest rates on T Bills, Bonds and real estate are the canary in the coal mine. Proof the economy is deflating. The almost zero interest rate on T bill rate also means there are no arrows left in the Fed's quiver to goose the economy. Game over! Money is on sale and no one wants it. M-3 Total money supply is dropping - See Graph.
America has exported heaps of inflation to other countries with all the dollars we created. We lived high-on-the-hog. When oil, gold and most commodities are purchased they are priced in dollars. The dollar is the reserve currency of the world for this reason and due to the fact we had the largest and safest capital markets. Remarkably, the dollar will probably strengthen in the world markets in the coming troubling times. Safety first.
So, we bought raw resources (real things) with chits of paper and later computer entries zapping through fiber optic undersea cables at light speed that were loosing value. We got to drive the big gas guzzler cars. We got to eat the steak, live the high life and aspire to the Hollywood lifestyle at the expense of the rest of the world. No wonder the other countries hate us. They are jealous. This is all ending. China is the next empire. Write it down.
You can plan on a 90% drop in prices of real estate, stocks, corporate and municipal bonds, commodities (yes gold maybe in half and silver especially since it is an industrial metal) and antiques/art/collectable items. This will be a nightmare.
I expect "Antiques Roadshow" to go off the air. You can't eat that old stuff.
Anyway, inflation is a wealth transfer from creditors to borrowers. Governments, borrowers and investors in the right assets are winners in the game. Everyone was paying back debt or rolling it forward in bigger and bigger bailouts in inflated money on a worldwide basis - not just in the U.S. We were using our houses equity like an ATM machine. Those on fixed incomes and the retired are the ones that were hurt most.
Banks have just about quit lending. People have slowed down their buying, going out to restaurants or traveling. 106 motels and hotels are in foreclosure in the San Francisco Bay Area the papers reported recently. We just had a worldwide bank lock up.
The banks were not even lending to each other let alone borrowers. Deflation is slapping inflation around when it comes to the inflation deflation debate.
To my way of looking at it, this same kind of bank lockup was the cause of the 1930's depression. Banksters & lenders saw that the money they had lent out during the Roaring 20's would be worthless in 10 years time at a 10% inflation rate per year. So, they all started clamping down out of fear. They called in loans coming due and would not lend out new money. Everything went bust. And that was a time when gold coin money still circulated. Also, government wasn't 1/3 of the economy sucking tax money at a 50% plus rate from private job growing businesses along with you and me like a big parasite.
WORLDWIDE DEFLATION is upon us. CASH WILL BE KING. It's going to be called the GREATER DEPRESSION because this one will be three times as long plus three times bigger than the 1930's depression. You need to prepare now! This is serious! In the inflation deflation struggle, deflation is winning. Just look at real estate. Just look at the money supply graph below. It's dropping like a rock. What is Deflation? Asset prices will be down 90% from peak by 2016 and even gold may drop in half.
The inflation deflation economic cycle probably peaked with the 2000 dot com stock mania bubble climax peak. The deflation phase may not bottom until 2016 to 2018. At that time most of your assets may have lost 90% in price and unemployment could be 30%. Even the price of gold may drop in half. CASH IS KING in deflation. Japan has seen deflation for 20 years and now the rest of the world is catching the epidemic. You cannot stop the pendulum from swinging. Deflation economics will continue until the inflation is wrung out of the system in this Greater Depression.
Copyright 2010 by Delwyn Lounsbury - THE DEFLATION GURU
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