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
Note: We are a compensated affiliate of Elliottwave International, meaning we may receive a commission if you use our links to their site.
Leave a Reply