Debt, Propaganda And Now Deflation
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Dorothea Lange Negro woman who has never been out of Mississippi July 1936 Looks I have to return to the deflation topic. I’m a bit hesitant about it,
[See the full post at: Debt, Propaganda And Now Deflation]You had it right first. Now it’s all over, as you predicted. It’s just creeping in slowly like the Blob. But they don’t really believe it, or they think they can ward it off with garlic or something. In the USA I get the feeling it’s something they think happens to other people but not to us. I find it hard to understand how we are supposed to keep standing when everyone else falls down? On the other hand I don’t think it’s getting here tomorrow. The holiday buying season should be interesting!
At the risk of getting all religious, I’ll just repost this from my comment on the day’s debt rattle articles. Really, the Fed hasn’t begun to fight.
Ah, the holiday buying season. I wonder, will PM’s be included in drastically discounted Black Friday sales, or mightn’t it be better to wait until the new year for deeper discounted bargains?
Ok so here is how i think it will go down.
The U.S. will probably raise rates in the 1st quarter to give some juice to the banks….it will however set off a massive global financial crisis (part 2 lets say)….the fed will the go back to ZIRP and resume QE (QE4) and they will again try and kick the can down the road…im 50/50 on whether they will be successful this time.
Illari, what do you think?
Btw Illargi,
I urge you to check out this talk give by Dr. Seyyed Hossein Nasr, given in the 90s, called The Misgivings of Progress and it’s Impact on our Environment.
Hes probably one of the greatest muslim thinkers in the West, and this talk really is profound.
The stock market is the mirror through which most everyone sees the economy. Although virtually nobody consciously understands rising share prices as inflation, it’s always increased ‘value’ and on some subconscious level rising share prices equate with those cousins of inflation growth and confidence. Bernanke made no secret he intended rising stock prices and the reason he wanted that, to boost confidence. It’s all one big mixed up mash up of illusions.
It’s a shame in a way the Great Depression was foretold by the stock market crash. For that lead people to think falling stocks caused the deflation, ie. the Great Depression, Bernanke included to some extent and so he built his career on the idea. The stock market crash was coincident with the great deflation not the cause of it. However belief is a very strong thing so nobody in American will believe in real serious long term deflation until stocks deflate. Which is why I perhaps wrongly think QE infinity is just around the corner.
Fed head Dudley I think it was called the October stock market bottom to the second with his suggestion that QE should perhaps not end that month. The most effective use of Fed words that I can recall in recent times. The October swoon had no underlying justification on a liquidity basis so the snap back has been historic. Along with help from Uncle Abe’s boys at the BOJ. A hint the size of a 500 pound weight dropping on the Yellen’s Fed’s head. How can they not take the hint? In the mash up of illusions the first and last one is if stocks don’t fall deflation won’t ensue and the system will live another day. How can they resist.
Retail is way down year over year, so we can expect glowing reports for the season to be revised ever downwards. New construction all around t-town, but only about a third of what was headlined. Continual short falls in Tulsa proper budget, like the holes in all the existing retail strips, hard to pull back previous infrastructure spending poorly spent.
Rapier,
My father always said the stock market crash was when the wealthy found out the Depression was already here for the rest of us. I recently read that Ford and GM bought up thousands of used cars in 1926 and scrapped them as there was a perceived glut of used cars affecting new car sales. Kinda sounds like “Cash for Clunkers”, doesn’t it. Also, the years 1924 to 1930 saw massive money and infrastructure exit from the car manufacturing arena. Perhaps a hint of what was to come?
Thank you for a great, straightforward, cogent article.
In rough terms, “inflation”, or what they call “expansion” under a debt/money model, is simply an increase in the number of promises in circulation. Debt means you promise to deliver something in the future. More debt=more promises.
Deflation, or lack or expansion/actual contraction means the number of promises starts to decline. That’s deleveraging. So…problem? Why not just let them decline? Well, if the number of promises declines, collateral is removed from the system, collateral that backs some multiple of other promises. So those promises disappear. In addition to promises disappearing by being paid–what Abe and Benanke don’t want to allow citizens to do–eventually you have someone who simply defaults and doesn’t pay at all. Then their $200k house, or whatever the collateral is, gets marked to it’s forclosure price, $80k. The $120k loss of collateral value is then multiplied by 30:1 leverage for a theoretical $3,600,000 loss.
This default on promises leads to the next guy owed to default on HIS promises until the number of promises declines to a more realistic level, generally way, way down from the peak. Historically 90% down as measured by most stock declines.
Again, all the “money” is the system is debt, or promises. Which from the state of the energy production, infrastructure, and manufacturing, can NEVER be fulfilled. Or, as Greenspan admitted in 2005, “we may have already committed more fiscal resources to the baby boom generation in its retirement years than our economy has the capacity to deliver,” https://www.nytimes.com/2005/03/03/politics/03deficit.html?pagewanted=print&position=
Conclusion: the promises, this DEBT, can and will not be paid. And because the problem is debt, it cannot be cured by debt, whether deficit spending, “bailouts” (which are usually loans and/or extensions, as per Greece) or otherwise. Because our money IS debt, unbacked fiat worldwide, it cannot be inflated away–or at least under the current system. Nations COULD create a system of firing the central banks, taking over the presses and printing national (not debt-backed) currencies and handing them directly to workers as Wiemar did, but the present system isn’t built that way, and there’s been no movement to change that. That means the level of promises will contract through default, which is “Deflation.” Money supply = Debt supply, and both contract in unison.There is one other option: the system is failing because most collateral is already been financialized and levered into the system. That’s why there’s a world-wide scramble for anything that might be secure collateral. And in a Deflation, “real goods”, that is, raw materials, markets, factories may not retain value, as consumption–therefore demand and sales–are slashed. Prices of iron, copper, oil, malls, may already indicate this. So fleeing into hard assets is a mixed bag.
BUT–if the system wished to–and it may not wish to–it COULD decide that gold, a completely useless object for which there is no end consumption, would be worth multiples of the present price. With its value arbitrarily decided higher by the nations/banks who can find no other imaginary collateral with which to back existing leverage (thus having no other choice to save themselves) then the system is re-collateralized.
How high? History has been through this many times before. 10-20% of the system backed by “real” collateral will do–even as the price of that “real” collateral is totally “un-real”-ly and “arbitrarily” re-set to a number also detached from reality (as per mining costs, for example). I don’t claim to understand it, but historically that’s what humans do. They need collateral, and it’s not like they can just decide OIL will be $3,000/bbl, or wheat is $100/bu, or houses, or 16′ sailboats, or winter hats. They either don’t serve, or would completely dis-order the economy of trade and commerce for real goods. So they choose collateral that no one “uses” or “consumes” and therefore the change in price doesn’t lead to mass deprivation. Then the “price” of the currencies all adjust to compensate, and it’s rough but not fatal. In a messy way, that’s what Roosevelt did by confiscating and repricing gold. Price inflation in the U.S. started the day after. –But then he did wipe out mountains of banks and their liabilities at the same time. https://www.gold-eagle.com/article/puncturing-deflation-myths-part-1-inflation-during-great-depression Gold is, or has historically been the contact point, the doorway, between imaginary “financial” reality of human promises and the world of real goods. Time and again that door is bolted shut by different powers, only to be forced open again to serve its purpose of re-establishing balance between financial and economic reality.
So the debt problem can be re-set several ways. As we hear, the BRICS would like to re-value gold and carry on with having real ecoomies, real trade, and real human progress. The U.S., not so much. But then, since when has any nation or power center ever VOLUNTARILY re-set their economy to give up power? And yet it happens. Over and over again.
I guess we’ll see.
Eventually I agree that we will have deflation and then eventually I agree that gold will be a good investment. But the first must happen before the latter. Why? Because during the deflation people will be forced to sell anything and everything they have in order to try and pay their debts and or survive. That means that gold will decline right along with every other commodity as everyone will be trying to sell it for USD (can’t buy a loaf of bread w/ gold – at least not in the US). Now once the deflation ends and inflation begins in earnest then that is when you buy hard assets (including gold) with the dollars you’ve been saving.
My problem is that this is taking way longer than I ever thought possible. It’s why I rarely visit TAE anymore because the message hasn’t changed for 10 years while very little has happened, at least here in the US. Through my reading here and elsewhere I got out of the markets before 2008 but because I thought the whole thing was going down I didn’t get back in and missed out on doubling my money. Also, my wife told me to buy TSLA at $75 but I thought, that’s already overvalued for a company that doesn’t turn a profit. Look at where that got me. So next time there’s a “correction”, as soon as they announce QE4 I’m going all-in in the stock market. Some may call it picking up nickels in front on a steamroller but that steamroller is moving damned slowly and there are huge piles of cash laying on the road.
I say let deflation ring. At least all the underemployed youth who own no homes or stocks will have cheaper homes, cars, and gas to buy.
@ Dr Diablo,
I nominate (again) Depleted Uranium as the new uber-collateral.
Make it worth 50 times what gold is (whatever that might become).
The biggest financial powers already have plenty of it, so they wouldn’t have to fight this plan.
It’s pretty nasty in it’s current default role of a tank-busting munition, which burns on impact, creating uranium oxide, which is water soluble, gets into the food chain, and causes deformed babies and cancer for thousands of years in Iraq, or Gaza, or Afghanistan…
It’s rare enough, readily identifiable, costs a whole lot to make, and there is ultimately a limited supply. It lasts forever, too.Oh, all-y’all, look at 2 things in that Dorothea Lange photograph of the woman who never left Mississippi.
First, she has a truly beautiful look upon her face.
Secondly, she is holding her withered left hand in her strong right hand.
I suspect she had a left brachial plexus injury at birth, caused from pulling hard and down to the right, on her head, to get her left shoulder out from under her mother’s pubic bone.
This injury used to be more common.
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