deflation

Default – Deflation – Depression

by

DEFAULT – DEFLATION – DEPRESSION

Inflation is the primary game plan of governments and central banks. Its effects have left their mark on societies throughout history. As the effects of inflation continue to dominate headlines, financial and economic activity is scrutinized and analyzed with the intent of planning, projecting, and predicting it.

Most people think they understand inflation – they don’t – but for now, let’s look the other way. There is a triple-decker bus coming straight at us.

Default can happen three different ways:

1) Credit default

2) Bank failures

3) Asset price collapse

Universal credit default happens when individuals, corporations, and countries can no longer sustain the debt they have assumed on a scale that overwhelms ordinary financial and market activity.

This happened in 2008 with education loans, mortgages, and auto loans.  The price of all this non-performing debt sank into a deep hole, until the government and Federal Reserve embarked on a new experiment of making more and cheaper credit available and buying up the non-performing debt.

Bank failures happen when banks violate the reserve requirements set by the Federal Reserve and are unable to meet the ongoing demand for money from their customers.

Bank failures were a common occurrence during the early 1930s and are evidence of the ongoing risks associated with fractional-reserve banking. (see Fractional-Reserve Banking – Elephant In The Room)

An asset price collapse is more often than not associated with stock prices. The stock market collapse in 1929 is the most prominent example; and it was a factor on three occasions in this century (2000-02, 2007-09, 2020).

An asset price collapse, however, includes all assets denominated in dollars and includes stocks, bonds, commodities, and real estate. We are currently in the early stages of another asset price collapse.

DEFLATION

Deflation is the opposite of inflation; it is a contraction in the supply of money and credit.

The effects of deflation result in fewer currency units (dollars) in circulation and an increase in purchasing power of the remaining units. In other words, your dollars will buy more – not less.

As the deflation takes hold, the prices of goods and services will decline, rather than increase. In and of itself, deflation is a good thing; however, when deflation is severe enough, the result would be a catastrophic economic depression.

Any single one, or combination, of the three types of default (credit default, bank failures, asset price collapse) can result in deflation. This happens because of the huge sums of money involved which are subsequently wiped out.

DEPRESSION

According to Investopedia, “A depression is a severe and prolonged downturn in economic activity.”

The stock market crash in 1929 did not cause the Great Depression. The Great Depression was the result of a flip-flop in Federal Reserve policy.

During the Roaring Twenties, the Fed pursued a generous approach to loans and interest rates. Because of concern about the rampant stock speculation fueled by their own generosity, the Fed became more restrictive and economic activity slowed. This slowdown in economic activity was underway before the stock market crash in October 1929.

It is quite possible that the Fed’s current efforts to raise interest rates could trigger a credit collapse, ushering in deflation and a New Great Depression. (see A Depression for the 21st Century)

MORE ABOUT DEFLATION, DEPRESSION

Deflation occurs when the system can no longer sustain itself on cheap and easy credit. The more aggressive the creation of the credit, the more horribly destructive are the effects of deflation when it occurs.

The effects of deflation are not nearly so subtle as those from the long years of inflation preceding it.

An implosion of the debt pyramid and destruction of credit would cause a settling of prices for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than current levels. It would translate to a very strong U.S. dollar and a much lower gold price.

The most severe effects would be felt in the credit markets and in any asset whose value is primarily determined and supported by the supply of credit available.

Conditions would be much worse than what we experienced in 2008-12.  The biggest difference would be that the changes would result in another Greater Depression on a scale most of us can’t imagine.  And the depression would likely last for years, maybe  decades.

CAN’T THE FED STOP DEFLATION?

They will try, of course, just as they tried and failed in the 1930s. The Great Depression lasted much longer than necessary because the U.S. government and the Fed persisted in efforts to counter the natural effects of deflation.

The effects of a credit collapse and deflation now would overwhelm any efforts by the Fed to re-inflate and stimulate.

The Federal Reserve, in its current attempt to avoid a complete and total rejection of the U.S. dollar, is trying to raise interest rates. Recent strength in the U.S. dollar indicates a measure of success thus far.

Unfortunately, the Fed’s efforts might backfire and trigger another credit collapse. In fact, a collapse might already be underway.

CONCLUSION

We are all hooked on the drug of cheap credit. But cheap credit was not buoying economic activity to the extent hoped for. Now, higher interest rates are choking off more of the activity that would normally have been there.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

The problem is that the bond market is telling us that a credit collapse, deflation, and economic depression are on the horizon. The Fed knows this and can’t do anything about it.

The three Ds – default, deflation, depression – are upon us. If you are focusing on inflation, you need to look the other way.

(also see Effect Of Deflation On The Gold Price)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

No Fear Of Inflation; Threat Of Deflation

by

FED HAS NO FEAR OF INFLATION

The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.

Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.

The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.

Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.

Read more

Asset Price Crash Dead Ahead

by

An All-Asset Price Crash (AAPC) might be the next “Wow! Can you believe it?”

In the meantime, whether it be stocks, bonds, gold, or oil, investors are licking their chops and counting their profits before they are booked. And, they have reason to gloat. Let’s see what all the noise is about.

Read more

Cash Is King Right Now, Not Gold

by

CASH IS KING FOR NOW

Amidst the fallout of stock markets crashing worldwide, gold (silver, too) and oil imploding, and the scare of coronavirus, the dollar itself stands tall. That is not what some were expecting. Nevertheless, unrealistic expectations abound today, so let’s see what we can learn from this.

When investors sell en masse, they generally turn to cash as a resting place for their money. Cash for most people today still means US dollars. This implies an increase in demand for US dollars.  Gold investors and their advisors seem to have been expecting just the opposite.

Read more

Gold Price – US$700 Or US$7000?

by

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to decline from its current level and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility? 

Read more

How Government Causes Inflation

by

We know that inflation is the debasement of money by government. The effects of inflation show up in the form of rising prices over time. The rising prices are a reflection of the loss of purchasing power of the currency involved. For our purposes, that means the U.S. dollar.

The chart below depicts increases in the Consumer Price Index, year-to-year, dating back to 1914…

Read more

Inflation Is Not Our Biggest Threat

by

You wouldn’t know that by listening to current commentary on the economy.

There is a bigger threat, though. But first, there is some clarification about inflation that is necessary.

Most people infer rising prices when they hear the term inflation. That is not correct. The rising prices are the ‘effects’ of inflation. The inflation, itself, has already been created.

It is not created, or caused, by companies raising prices. And it is not created by ‘escalating wage demand’.

When someone says “inflation is back”, they are referring to rising prices. Yet they are wrong on two counts.

First, as we have previously said, the rising prices, generally, are the effects of inflation.

Second, the inflation isn’t back; because it never went away.

From my book INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT:

“Inflation is the debasement of money by the government. 

There is only one cause of inflation: government. The term government also includes central banks; especially the U.S. Federal Reserve Bank.” 

The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.

The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.

Yet they are not independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle.

There are two specific terms which describe our own actions and relationship with the Federal Reserve – obsession and dependency.

We are bombarded daily with commentary and analysis regarding the Fed and their actions. Almost daily we are treated to rehashing of the same topics – interest rates, inflation – over and over. And we seemingly can’t read or hear enough, i.e. obsession.

But are we reading or hearing anything which will help us gain a better understanding about the Federal Reserve? And what, if anything, can we realistically expect them to do?

We are also hooked on the liberally provided drug of cheap credit. Our entire economy functions on credit. We are dependent on it. And without huge amounts of cheap credit, our financial and economic activity would come to a screeching halt.

A credit implosion and a corresponding collapse of stock, bond and real estate markets would lead directly to deflation. The incredible slowdown in economic activity leads to severe effects which we refer to as a depression.

Deflation is the exact opposite of inflation. It is the Fed’s biggest fear. And it is a bigger threat at this time than progressively more severe effects of inflation.

The U.S. Treasury is dependent on the Federal Reserve to issue an ongoing supply of Treasury Bonds in order to fund its (the U.S. government’s) operations. During a deflation, the U.S. dollar undergoes an increase in its purchasing power, but there are fewer dollars in circulation.

The environment during deflation and depression makes it difficult for continued issuance of U.S. Treasury debt, especially in such large amounts as currently. Hence, the resulting lack of available funds for the government can lead to a loss of control.

The U.S. government is just as dependent on debt as our society at large.

The following excerpt is from my new book ALL HAIL THE FED!:

“When something finally does happen, the effects will be horribly worse. And avoidance of short-term pain will not be an option. The overwhelming cataclysm will leave us no choice.

As severe as the effects will be because of previous avoidance and suppression, they will also last longer because of  government action. The cry for leaders to “do something” will be loud and strong. And those in authority will oblige. 

But don’t look to the Federal Reserve for a resolution. They are the cause of the problem.”

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold Prices – Inflation vs. Deflation

by

GOLD PRICES

Inflation is the debasement of money by government. The expansion of the supply of money and its subsequent loss in value results in an increase in the general level of prices for goods and services.

Deflation is characterized by a contraction in the supply of money and a decrease in the general price level of goods and services. (What we are currently experiencing is called ‘disinflation’ which is a lower rate of inflation.)

The purpose of this essay is to clarify and explain accurately what to expect regarding gold prices if deflation occurs.

According to Wikipedia: “Inflation reduces the real value of money over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of money.”

The United States Government, via the Federal Reserve Bank, has been  practicing inflation regularly for over one hundred years. They are good at it. Their efforts have resulted in a ninety-eight percent “reduction in the purchasing power per unit of money.”

The reduction in purchasing power of the U.S. dollar is reflected in the higher price of gold.

In 1913, with gold at $20.65 per ounce, twenty U.S. dollars in paper money was equal to twenty dollars in gold. Today gold is at $1270.00 per ounce, more than sixty times higher than in 1913.

The higher price for gold does not mean that gold has experienced an increase in purchasing power. Rather, its higher price reflects the decline in purchasing power of the U.S dollar.

Deflation is different. It is the exact opposite of inflation.  And the results are different as well.

As we said earlier, deflation is characterized by a contraction in the supply of money. Hence, each remaining unit is more valuable; i.e. its purchasing power increases.

Government causes inflation and pursues it for its own selfish reasons.  A government does not voluntarily stop inflating its currency. And it certainly isn’t going to reduce the supply of money. So what causes deflation?

Government causes deflation, too. Deflation happens when a monetary system can no longer sustain the price levels which have been elevated artificially and excessively.

Governments love the inflation they create. But with even more fervor, they hate deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function.

Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently.  It would translate to a very strong US dollar.  And a much lower gold price.

Those who hold US dollars would find that their purchasing power had increased.  The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Gold and the US dollar move inversely.  So do bonds and interest rates. If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

Inflation leads to a U.S. dollar which loses value over time; hence, this is reflected in a higher gold price.

Deflation results in an increase in value/purchasing power for the U.S. dollar; hence, this is reflected in a lower gold price.

Those who expect gold to increase in price during deflation are wrong for several reasons.

Gold is not an investment. And it does not respond to the various headline items that journalists and analysts continue to repeat erroneously. It is not correlated with interest rates and it does not respond to housing statistics. It is not influenced by world events, terrorism, or the stock market.

Gold is real money. The U.S. dollar is a substitute for real money, i.e. gold.

If deflation occurs, there is no other possibility except for lower gold prices.

(to read more about gold and its relationship to the U.S. dollar, see here)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold Price $700 Or $7000? (revised and updated 1/13/2019)

by

GOLD PRICE $700 OR $7000?

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility? 

Read more