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Letter Re: Deflation Possibly Followed by Mass Inflation?
Jim,
I believe that we are in for deflation, not inflation.
A simple error that most people make when considering this topic is language
related: When discussing actions of the Fed they talk about ‘printing’ money.
Well, the Fed (actually the Treasury) hardly ‘prints’ any money
at all. In Zimbabwe they print money. Lots of money with lots of zeroes. Here,
they just increase the number of zeroes in a computer. The difference is profound.
When there is a lot of currency floating around then people use it to buy stuff.
More currency with higher values means more currency chasing the same amount
of goods and that means inflation. The currency does not go away. If fewer
goods are on the market, the same amount of currency is there chasing it and
prices go up. The currency doesn’t get destroyed.
In the US the amount of credit used is orders of magnitude more than the amount
of currency in circulation. Credit can be destroyed. If the value of your house
goes down by $100.000, that $100,000 is just gone. It doesn’t exist any
more. It is not in the money supply. This is deflationary. Further, if the
bank repossesses
your house and then sells it to someone else, the difference in sale price
has an effect on the banks ability to lend. If they lose $100,000 on your house
then they have effectively lost the ability to lend $1 Million because of the
fractional reserve system. That $1 Million is not in the money supply any longer.
That is deflation.
And, of course, the amount of money that will vanish in exactly the same way
as part of the derivative mess is orders of magnitude larger than the amount
to be lost due to housing.
As can be seen by looking at virtually anything in the last few years (gas,
oil, corn, gold, wheat, houses, cars, the Dow, etc.), prices for everything
have gone up while there was credit in the system and banks wanted to lend.
Now
there is dwindling credit, severe unwillingness to lend, and a Fed that is
contracting the ‘money’ supply. Value/dollars/money is vanishing
at an unprecedented rate. Prices on everything are coming down hard. This is
deflation. Your dollars are becoming more valuable, not less. Hold on to cash.
I know this is counterintuitive, and I am an abject Austrian regarding economics.
But, the majority of people (including many Austrians) are fooled by the difference
between an expansion of cash and an expansion of credit. Weimar Germany, Argentina,
Mexico, Zimbabwe – these places all created lots of currency and had
rampant inflation. We cannot use that as a model. In the Great Depression we
had deflation because the Fed contracted the money supply. This is well documented,
as are the effects. This is the model we need to use now. The effects this
time around will be much worse, they have the same genesis
and the same result. People will need/want/hoard cash.
Now, once we are near the bottom of a deflationary cycle (I predict 4-to-5
years from now), who knows what the government will do? At that time they may
crank
up the printing presses because everyone will want dollars and no one will
trust the banks. Then all bets are off. Then we could have inflation.
But for now, your dollars are getting more valuable not less. Get what you
need in
order to get through hard times, but, short of a societal collapse a la your
novel ["Patriots"].Some FRNs
in a fireproof box in your gun safe (and not in some bank that may fail) are
your best bet. - Michael W.
