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August 20,2009
By James Stephenson
Deflation is
not just cost of
living, but also
declines in assets
values and debts.
Deflation
started in 2008 with
declines in stock
prices down (40%),
houses (20%)
and commercial real
estate. In a credit
crisis, falling
prices trigger more
selling as we saw in
late 2008. As people
scramble for cash,
falling asset prices
actually reduce the
supply of potential
liquidity or cash.
Don't be fooled by
the "bear market
rally" which will
end. As the credit
contraction
continues, prices
will be slashed to
stimulate sales at
any cost and
deflation will be
seen
in cost of living
and consumer prices.
The "problem" is too
much debt built up
over 25 years - up 80% since 1990. The
entire private
sector ( i.e.
taxpayers) is in
trouble.
-
On July 30th
2009, US
Government debt
totaled $11.7
trillion, or
roughly $38,000
for every man,
woman, and child
in the country.
-
Total US debt
including
government,
consumers and
corporations is
$52 trillion -
or
about $600,000
for every family
of 4.
-
Total issued US
debt of $52
trillion does
not count US
derivates ($253
trillion) or
government
guarantees for
bank and
brokerage
accounts,
pensions and
Medicare.
If we assume a debt
of $52 trillion with
interest payments at
5%, the annual
interest alone per
family would be
$30,000. Obviously,
with average household
income of $50,000.
that is impossible
to pay out
of income.
But this debt must
be liquidated
somehow.
So, with debt impossible to pay,
consumers and
corporations will
need to walk away
from about half the
debts - or $25
trillion. If that
happens it will
result in massive deflation!
The deflation began
with declines in
mortgages, bank
lending, wages and
Federal and State
tax
revenues. Revenues
in this fiscal year
are down 17% while
outlays are up 21%.
The entire world
is in an
economy-wide
deleveraging process
that will last for
years.
Financial history
clearly tells us
that credit booms
are always followed
by busts.
The government
and investment
advisors who put in
the stimulus plan
are the
same "experts" who
did not see the
financial crisis
coming in 2008!
The book
"Black Swan" says
-
"People who
were driving a
school bus
blindfolded (and
crashed it) should
never be given a new
bus. The
economics
establishment
(universities,
regulators, central
bankers, government
officials, various
organizations
staffed with
economists) lost its
legitimacy with the
failure of the
system. It is
irresponsible and
foolish to put our
trust in the ability
of such experts to
get us out of this
mess. Instead, find
the smart people
whose hands are
clean".
For the Government to
believe it can
change a
depression/deflation
by spending a
lot more money is an
illusion - like a
giant Bernie Madoff
Ponzi scheme.
The
stimulus/rescue plan
will not work. The Government
cannot borrow and
spend its way out
of a depression!
You can't cure
too much debt by
issuing more debt.
The only solution
for
depression/deflation
is to curb government
spending and reduce
debts and taxes.
But, in 5
years or so, after
the debt is reduced
to a manageable
level through
foreclosures and
default, and thus
the deflationary
forces have played
out,
hyperinflation could
start due to the
massive trashing of our currency
by printing too much
money.
Thomas Jefferson
said: "A government
big enough to give
you everything you
want, is big enough
to take away
everything you
have".
Editor's Note:
Robert
Prechter, Certified
Market Technician,
and the founder of Elliott Wave
International,
shares the view that
the deflationary
forces are
unstoppable. See his
Conquer the Crash
and
Elliott Wave
Principle and
The Elliott Wave
Theorist .
For more information
on Deflation see:
1.
What is
Deflation and
When Does it
Occur?
2.
Price Effects of
Inflation and
Deflation
3.
The Primary
Precondition of
Deflation
4.
What Triggers
the Change to
Deflation?
5.
Why Deflationary
Crashes and
Depressions Go
Together
6.
Financial Values
Can Disappear in
Deflation
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