Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Possibility of Credit Collapse Deflation

Economics / Deflation Jun 28, 2009 - 08:40 AM GMT

By: LewRockwell

Economics

Best Financial Markets Analysis ArticleDavid Calderwood writes: Recently there's been a spate of articles about the inflation/deflation debate.

According to the dominant view, the inflation the U.S. has experienced these past 75-plus years will inevitably continue and very likely accelerate as the managers running the Fed and U.S. Treasury attempt to deal with a monstrous overhanging debt bubble by cheapening the dollars with which repayment is made.


This logic appeals because the only history anyone can recall is one of continuous inflation. When I graduated college in the depth of the 1982 recession I earned a starvation wage of about $16,000/year as a laboratory technologist. I shudder to realize that in 2008 dollars that's a whopping $35,680.83, a figure many people today would not consider the pittance that it was and remains. Such is the evil of relatively low, creeping inflation; it hides a painful reality of declining living standards.

That gradual inflation was bad enough. Today, however, there's near unanimity that the smoldering inflation of the recent past will burst into the flaming inflation of the 1970s when mortgage rates and bond yields were well into double digits, or even whip up into the firestorm of a Zimbabwe-style hyperinflation as the U.S. dollar burns down to a charred crisp.

Given such consensus of opinion regarding inflation expectations, it may be useful to examine why the potential for a crushing 1930's style of deflation is worthy of consideration.

One of the better exponents of the minority (deflation) view has been, so far, left out. As an occasional guest on financial TV and print Robert Prechter does not have the media cache of Peter Schiff or Jimmy Rogers but he has an approach to markets that is consistent and accessible to anyone willing to do their homework. Possibly his lesser notoriety stems from the fact that his analysis rarely appears for free in the public domain and when it does so it is in conjunction with an overt invitation to subscribe to paid services. One hopes that proponents of the free market are not somehow offended by the presence of such profit-seeking behavior.

Prechter's methods also represent a direct challenge to the way most people understand the world, so despite an interesting track record of forecasting (with stunning accuracy and some acknowledged mistakes), his is not among the names mentioned when the prophets of the recent economic debacle are listed. Those who wish to examine this challenge are encouraged to do so and make up their own minds.

Prechter's position on deflation shows up in the subtitle to his 2002 book Conquer the Crash. In a nutshell, his position is that there's a critical difference between currency inflation and credit inflation, and that as long as the monetary authorities, banks, and public are collectively optimistic and trusting, both currency and credit appear to have the same effects on prices, but that if credit builds up to a fantastic level as now, when pessimism and distrust take over then a crucial difference between currency and credit is revealed.

This is why historical comparisons are so challenging. The same action can have very different effects if underlying conditions change. In the past whenever the Fed plowed lots more fuel into the credit creation machine called the fractional reserve banking system, that system enjoyed conditions that turned that fuel into multiples of credit and it was promptly borrowed and spent. After 1995 a manic level of optimism led to a vast extension of credit outside of that tidy little cartel called the banking system, so people became even more convinced that credit is the same as currency.

All that debt rests on trust. Creditors count those loans as assets, trusting that they'll be repaid. The debtor looks at his Jet Ski or Harley Hog and includes it in his asset ledger, too, and trusts he'll be able to make the payments until the loan is retired.

The trouble is that trust is getting tougher to come by as rising unemployment and declining asset values work together with declining confidence.

One pillar of the inflation-expectation view is that the managers of the Fed can and will exercise the "Helicopter Option" if they decide it's inflate or die. We should never forget that politicians (and Fed governors are clearly politicians) are inveterate liars. Just because they talk about helicopters and bags of cash, it may be instructive to note that as central planners they are continually subject to the Law of Unintended Consequences.

People of libertarian persuasion used to know this. We used to know in our bone marrow that human beings are not machines programmed to yield predictable results from known inputs.

If the managers of the Fed actually started to punch the "zero key" one space to the left of the decimal in their own account balances and use that to purchase an endless number of electronic T-bonds from the U.S. Treasury, what would those holding T-bonds do? Better yet, to whom could those holding T-bonds sell their T-bonds in the open market?

If the Fed becomes the buyer of last resort for the assets that form its own reserves, what exactly are those reserves worth?

Nothing.

The Fed is not an island in the economic ocean. Neither it nor its managers are omnipotent. Does anyone honestly believe that today's central bank managers have discovered what the Alchemists could not? On the contrary, their fraud is on the verge of general recognition.

Depending on one's figures, there is somewhere between 50 and 100 trillion dollars worth of debt in existence today, even now growing exponentially as the Obama Administration takes over as the consumer falters. In this regard credit growth looks like a graph of home prices did two years ago.

This analogy is critical. Inflation has until today, like home prices rises prior to 2005, not significantly reversed since nearly a lifetime ago. As with the reversal of fortune in real estate, an event's rarity should not be confused with impossibility. A prudent person might keep the possibility of a credit collapse deflation on the radar screen. Should the conventional wisdom be in error, the consequences of an historic deflation do not invite casual disregard.

David Calderwood [send him mail] a businessman, artist, and author of the novel Revolutionary Language, selected January 2000 Freedom Book of the Month at Free-market.net.

    http://www.lewrockwell.com

    © 2009 Copyright David C. Calderwood - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules