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Deflationary Depression or Hyperinflation?

Economics / Economic Depression Mar 04, 2009 - 06:15 PM GMT

By: Brian_Bloom

Economics

Best Financial Markets Analysis ArticleIn summary, the following analysis / argument concludes that Depression is a far more likely outcome than Hyperinflation.

The mathematics of inflation is as follows:


  • Money supply (inventory of money) X velocity of money (number of times money inventory turns per year) = GDP
  • GDP may also be expressed as: Volume of goods (and services) in inventory X inventory turn (# of times inventory turns over per year) X Price of inventory

What we are experiencing at present is that velocity of money (and therefore rate of turnover of inventory per year) is slowing at a faster rate than money supply is rising. This is causing downward pressure on prices. (Price deflation). In turn, this is causing downward pressure on credit (ability to service and repay outstanding loans) and downward pressure on new loans. (Banks are not lending).

In turn, this downward pressure on new lending is causing a relative shortage of dollars and, in turn, this is causing the US Dollar to rise. (See chart)

However, the reduction in velocity in money (which flows from a slowing in the rate of consumer purchasers) can only continue up to a point before the entire system breaks down. People still have to eat and go to work every day and travel, etc. This implies that there is a necessary floor under the rate of turnover of transactions which needs to hold if the entire system is to hold. The battle is between the collapse of that floor (leading to a world-wide depression) and a bounce from that floor (facilitated by all the government rescue packages).

No one can tell for certain if the floor under the velocity of money will hold or collapse. If it collapses, we will have a Depression accompanied by deflation. If it holds then – whether we have hyperinflation – will depend on whether the governments keep throwing yet more money at the problem thereafter.

The ultimate problem is that the engine of the world economy is no longer capable of pulling it. In simple English, the question is: Will there be sufficient industrial activity across the planet to generate the economic wealth required to feed, clothe and house the masses. (And a definition of the masses is difficult to agree, because we now have 2 billion additional people in China and India who form part of the new world economy, and 2 billion people in Europe the USA and Latin America who form part of the old economy).

Clearly, if there is double the number of people who need to be accommodated and we have passed Peak Oil, then the answer to the question of hyperinflation vs depression vs healthy economic growth will depend on one thing and one thing only: Will we find a new energy paradigm that is powerful enough not only to replace oil and coal, but that can provide DOUBLE the energy that oil and coal were able to provide in combination?

That is the core question which my novel, Beyond Neanderthal, attempts to address because solar and wind by themselves will not cut it; and neither will nuclear fission (for various reasons, some of which are less obvious than others)

In my view, there are three energy paradigms that hold out some hope:

  1. Hydrogen – which is a long way away from commercial reality.
  2. Electromagnetic energy scavenging from the environment – which the physicists are dogmatically arguing is impossible
  3. Gold in modified format may be able to store electricity scavenged by both solar and wind – but this, too, is in the realms of “hypothesis” at present

With the above in mind, the core problem is this: If the governments of the world continue to throw money at the economy without addressing the world’s need for a brand new energy paradigm that is far more economically powerful than the fossil fuel/nuclear paradigm, then there will be too much money chasing too few goods and the price of the goods will rise (inflation). And this also assumes that the banking industry will continue to operate smoothly.

At this point in history, the evidence suggests that the banking industry needs a massive overhaul, and the evidence further suggests that Gordon Brown is holding out a tentative hand to the USA to make a power grab (a joint UK/USA initiative – similar to that which occurred at Bretton Woods in 1944 when the UK/USA cast their power base in concrete by substituting a gold standard for a US dollar standard). What Gordon Brown is now suggesting is that the UK/US consortium jointly leads an initiative to bring the world’s banking infrastructure under (UK/US?) control.

The bottom line, in my view, is this: If the UK/USA can grab control of the world’s banking industry then they will, without a shadow of doubt in my mind, allow the world to go into Depression. Despite all arguments to the contrary, the country that once governed half the world (UK), and the country that once drove the industrialization of the modern world (US) are not governed by stupid people. Those in ultimate control understand very well that hyperinflation is the natural result of flooding the world with paper money and that gold is the natural antidote to this. They understand that if the gold price rises they will lose their iron control over the world economy. The only way for the UK/US to remain in control of the world economy is to gain iron control over the entire world’s banking system and ensure that fiat currency remains the currency of choice.

From my perspective, whilst the people sitting at the control panel are highly intelligent, they are not sufficiently intelligent to pull it off. Ultimately, what is driving their actions is not brains – but ego and Neanderthal testosterone. For the reason articulated below the Depression which they are ultimately planning for will become unmanageable from the top down.

The reason is that the old paradigm of converting the earth’s raw materials into products is no longer viable. We are running out of conventional resources to support the world’s population.

It follows, therefore, that if humanity is to survive, these men (and women) will have to fail in their grab for ultimate power – and I have no doubt in my mind that they will fail.

What those who are grabbing for power are “assuming” is that 80% of the world’s population will expire and the remaining 20% will be able to live the life of Riley thereafter.

What they are forgetting is that competition sharpens the wits and lack of competition dulls the mind. We absolutely need to move to an era where raw materials are eventually manufactured and/or modified using nano-technology; and this will require a quantum leap in thinking in addition to a new and far more powerful energy paradigm. There is also an open question as to who will be in the 20% that survives. The facts seem to suggest that those in ultimate power are about to be blindsided by climate change. If CO2 is not causing climate change (which the evidence strongly suggests it is not) then the entire planet’s energy and agricultural infrastructure will need to be overhauled. In particular, because 90% of the world’s population lives in the Northern Hemisphere, it is that 90% which is at risk; and that 90% includes the entire population of the UK and the US. The testosterone addled egomaniacs are arrogantly refusing to accept that humanity is a subset of nature and is wholly incapable of controlling nature – one way or another. We could not cause climate change by adding CO2 and we cannot manage climate change by subtracting CO2 – in particular if CO2 was not causing climate change in the first place.

In my mind, there is a necessary but not sufficient condition that needs to be satisfied in order to ensure humanity’s survival over the coming decades. That condition is that ego and testosterone needs to be somehow brought under control.

In my mind, the way that these are going to be brought under control is for those who think that they are in control to be reduced to a state of helplessness. This will facilitate a final recognition that E Pluribus is the only way to ensure Unum. The world of the future will not tolerate any master/servant relationships.

In my mind, the most logical manner in which those in control will be reduced to a state of helplessness is if the world experiences an economic Depression which cannot be overcome without reliance on entrepreneurial flair that is allowed free rein in open competition. That happens within a system called “Free Enterprise” which the authorities (on both sides of the floor) are instinctively seeking to suffocate at present.

Let us hope that this happens before the era of Global Cooling finally arrives and renders us impotent to act because society’s leaders failed to anticipate it and to plan for it.

By Brian Bloom

www.beyondneanderthal.com

Beyond Neanderthal is a novel with a light hearted and entertaining fictional storyline; and with carefully researched, fact based themes. In Chapter 1 (written over a year ago) the current financial turmoil is anticipated. The rest of the 430 page novel focuses on the probable causes of this turmoil and what we might do to dig ourselves out of the quagmire we now find ourselves in. The core issue is “energy”, and the story leads the reader step-by-step on one possible path which might point a way forward.  Gold plays a pivotal role in our future – not as a currency, but as a commodity with unique physical characteristics that can be harnessed to humanity's benefit. Until the current market collapse, there would have been many who questioned the validity of the arguments in Beyond Neanderthal. Now the evidence is too stark to ignore.  This is a book that needs to be read by large numbers of people to make a difference. It can be ordered over the internet via www.beyondneanderthal.com

Copyright © 2009 Brian Bloom - 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.

Brian Bloom Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

David
05 Mar 09, 04:21
Deflation - Inflation

Congratulations for your article.

Deflation looks more likely than inflation given massive overcapacity in terms of products and services over the world, coupled with massive cut in credit and consumers fears (leading to a higher savings rate). However, deflation means lower fiscal entries, which can lead to states defaulting (at least if they do not have their own central bank (e.g. Europe). Hence, to have gold can help.

That said, in the US, there could be inflation at a given stage given Bernanke's policies. But I guess he is not so naive as some people may believe. He just wants to save the banking system.

Would you recommend to buy gold? Or do you think it is a trap?

Also, do you believe there could be a crash in the purchasing power of the $ and Euro going forward and that a new monetary system will be needed? In such a situation what could this look like? A new currency based on a panel of currencies and commodities including gold?

My biggest concern is a crash of currencies, wiping out the modern world as we know it, with bonds going down the drain, and most stocks also, alongside cash of course.

In that scenario, better to have real estate, without debt, and a bit of gold...

Thanks to let me know your views on the above.

Kind regards

David


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