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Will It Be Inflation Or Deflation? The Answer May Surprise You
Submitted by Michael Snyder of The Economic Collapse blog,
Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, we believe that we will see both.
The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get "financial whiplash" as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.
So why will we see deflation first? The following are some of the major deflationary forces that are affecting our economy right now...
The Velocity Of Money Is At A 50 Year Low
The rate at which money circulates in our economy is the lowest that it has been in more than 50 years. It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down. The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession. But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock. This is one of the factors that is putting a tremendous amount of deflationary pressure on our economy...
The Trade Deficit
Even single month, far more money leaves this country than comes into it. In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year. This is extremely deflationary. Our system is constantly bleeding cash, and this is one of the reasons why the federal government has felt a need to run such huge budget deficits and why the Federal Reserve has felt a need to print so much money. They are trying to pump money back into a system that is constantly bleeding massive amounts of cash. Since 1975, the amount of money leaving the United States has exceeded the amount of money coming into the country by more than 8 trillion dollars. The trade deficit is one of our biggest economic problems, and yet most Americans do not even understand what it is. As you can see below, our trade deficit really started getting bad in the late 1990s...
Wages And Salaries As A Percentage Of GDP
One of the primary drivers of inflation is consumer spending. But consumers cannot spend money if they do not have it. And right now, wages and salaries as a percentage of GDP are near a record low. This is a very deflationary state of affairs. The percentage of low paying jobs in the U.S. economy continues to increase, and we have witnessed an explosion in the ranks of the "working poor" in recent years. For consumer prices to rise significantly, more money is going to have to get into the hands of average American consumers first...
When The Debt Bubble Bursts
Right now, we are living in the greatest debt bubble in the history of the world. When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up. We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again. Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.
During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money. The "easy credit" of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.
When the debt bubble bursts, cash will be king - at least for a short period of time. Those that do not have any savings at all will really be hurting.
And some of the financial elite seem to be positioning themselves for what is coming. For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash. That is the most that he has ever had sitting in cash.
Does he know something?
Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens. The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system. It will probably be far more dramatic than anything we have seen so far.
So cash will not be king for long. In fact, eventually cash will be trash. The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.
That is why gold, silver and other hard assets are going to be so good to have in the long-term. In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.
In the coming years, we are going to experience both inflation and deflation, and neither one will be pleasant at all.
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The cure of deflation is inflation and seems to be easy enough for the centeral bankers to fix. But with the velocity of money at 50 year lows, the mechanisms that the centeral bankers use to get that freshly printed money into the real economy seems to be escaping them day by day. In other words, curing deflation isn't going to be an easy task if the velocity of money is zero.
Silly article, nobody can predict the future.
Deflation to bankrupt the borrowers then more inflation.
Right now, people are taking on less debt, not taking the bait. Need more straight up inflation to encourage people to get behind the trend and go levered long. Not until then would there be deflation. First by boom, then by bust. We've been booming awhile but I say there's still more to go. When everyone wakes up to continued inflation and buys with opm to cash in on the obvious then deflation to bust their asses.
Actually, my track record is terrible. I've lived through fourty years of inflation and that's all I can see happening forever. Being of a generally cautious nature I will not overextend myself and thus have close to no debt, a small stash of pms, food and potable water along with some guns and ammo along with some cash. Also have some skills in animal husbandry, gardening, rigging stuff and fixing people up. I think I'm hedged as well as I care to be now. Won't ever be rich with my strategy of covering all the bases but shouldn't be completely busted. I've given up trying to guess what the money changers will do next. They'll do whatever fucks the most of us at the time. Zero sum game and they make the rules.
The article fails to mention the most deflationary factor of all - the simultaneous existence of a Federal Debt Ceiling and bitterly divided government. If a wave of bank failures hits, the FDIC will run out of money and be forced to declare a national bank holiday unless Congress raises the debt ceiling by a 5 Trillion or so.. A Tea Party House and an intransigent socialist SOB in the White House is a very bad combination if the SHTF in the next year and a half. You had better hope and pray that Europe holds its shit together as long as this combination is in Washington.
I'm thinking we have entered Quantumville where the old rules won't apply.
Some will for a period, then fail while others will begin to make sense, then not.
What makes the world-wide Trillions$ of derivatives just disappear or cancel out? Banks & Corps. are so tightly laced to each other that it's an orgy at a very large family reunion.
Banks just say 'faggedabouddit' and go on their merry way? There's a metric shit-ton of bags that someone is going to be left holding that might tighten things up for a while. Banks collapse, credit collapse, business collapse, income ditto...
Welcome to WOPR...No matter how you play the result is the same.
Guess we'll see soon enough.
First inflation, then deflation, then the next inflation cycle.
A bubble is inflated, then deflated. In X period of time, of coarse we will have both. The 1930's deflation only lasted a few years, followed by decades of inflation.
"The cure of deflation is inflation and seems to be easy enough for the centeral bankers to fix."
What cures inflation? Deflation. A cycle has two phases, not one. If it was easy to fix, it would have been fixed by now.
The FED doesn't just print money, someone has to borrow it into existence. The FED is a bank. The FED lends money.
Bernanke said he would drop money from helicopters, but he hasn't done that. Bernanke isn't going to send out checks to people, free of charge.
Bridge collapse..... TRUCK LOL Cover up coming
Note:
Mirror top cord section on both sides of truss are missing.
See rust spots on bridge pictures. At every point the bridge steel twists.
Looks like Deflation to me
<--- Physical dollars
<--- Electronic dollars
I'm betting you'll still need some, initially.
<--- Physical dollars outside the US
<--- Physical dollars inside the US
Capital control might/should stop the flow of actual dollars into/out of the US.