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The Achilles Heel Of The Global Status Quo: Deflation
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains.
That the global Status Quo is terrified of deflation is the background of every policy decision and official PR sound-bite. The reason behind this unremitting terror: deflation is the Achilles Heel of the global Status Quo. My colleague Gordon T. Long explains why in the latest of our video/slide programs.
Though central banks are constantly claiming their policies are intended to spark "growth," their over-riding motivation is sustaining the colossal mountain of debt that is the foundation of the Status Quo's wealth and power. If interest rates rise, the debt can no longer be serviced without ballooning deficits (i.e. more borrowing just to pay the rising interest) or the extreme pain of budget cuts--cuts that will necessarily come of discretionary government spending or entitlements.
If liquidity (easy, abundant credit) dries up, the portion of the debt mountain that must be rolled over into new loans cannot be refinanced, and the loans and bonds that have come due/reached maturity will default, toppling the system's teetering financial dominoes.
If asset purchases (i.e. quantitative easing) by central banks taper to zero, risky assets will go bidless and/or yields will rise as investors demand higher risk premiums.
The only way to make debt service easier on borrowers is to create inflation, which depreciates the purchasing power of existing loans and lets borrowers service their debts with cheaper (depreciated) currency.
A world without inflation threatens to collapse the Status Quo's mountain of debt.
Meanwhile, all those screaming in terror at the prospect of deflation should note that deflation is the natural consequence of rising productivity in a competitive economy. What does rising productivity means? It means more gizmos/services are produced with less capital, labor and expense.
In a monopoly environment, the gains reaped by rising productivity are skimmed by the monopoly, as there are no competitors to offer customers better deals.
In a competitive environment, the gains in productivity are passed to the customers as lower prices: in other words, deflation. This is why technology is ruthlessly deflationary: as productivity leaps higher, competitors must lower prices to maintain market share.
Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains. isn't this the ideal environment for innovation, enterprise and consumers? Yes, it is.
Is deflation the nightmare scenario for central banks, debtors, central states, monopolies and cartels? Yes. That all these entities share the same interests--anti-competitive monopolies, governments, debtors and central banks--should give us pause.
Which is more powerful in the long-term--central banks' inflationary policies, or technology, innovation and competition? The central banks (and their legions of media lackeys) claim omnipotence over every force in the Universe, but unintended consequences of central bank distortions, technology, innovation and competition look like the better long-term bet to me.
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Just wait until housing deflates 50%.....depreciating boxes with a roof .....can you say squat and moral hazard..…for once the people have a chance !!!
Until supply chains break and chaos erupts.
Smoke 'em while you got 'em.
''Our monetary system has been picking our pockets for a century.
This is the real scam.
People cannot see the forest for the trees. When you let institutions or people earn interest on the issuance of money such that the mere presence of money means that someone is owed a vig, you have a system which is mathematically and morally bankrupt''
trav7777 2010
people need to look at this chart: we are sooo fucked
http://showrealhist.com/yTRIAL.html
It is hideous that this is hidden! Tyler you should show this
The reason CB's are so terrified of deflation is that it breaks the Ponzi. Deflation is great for consumers but they won't borrow to spend today, knowing that prices will be cheaper tomorrow. Yet the "Debt Money" Ponzi requires always ever moar debt to sustain itself. As discussed here on many occasions, it is the FLOW not the STOCK that matters.
Frankly, Fuck the CB's. the sooner this Ponzi collapses the better.
Consumers won't put-off purchases just because they believe prices will be dropping. If that were the case; nobody would ever buy a TV, computer, stereo, or any other consumer electronic devices because the next model will always be cheaper and/or more powerful.
The reason deflation breaks the Ponzi, is that it makes 'money' more valuable and debt more onerous.
If you can pay-off your mortgage with inflated dollars and sell your house years later for a 'profit,' everything is awesome.
But if your salary is flat or dropping and the value of your house is falling, your mortgage payment becomes harder to pay. Fewer people will want to borrow to purchase a depreciating asset. Consumer credit will be far less used as paying off balances with more valuable dollars is painful.
But, most of all, the Ponzi requires constant and permanent expansion of money and credit. By definition, deflation is the destruction of money and credit. The banking system cannot run in reverse without imploding...
[PS: I did not down-arrow you]
Exactly, and it is still is happening. Like so many here at ZH, they still believe the CHS and Mish Kool Aid on "deflation" from 6 years ago that never came.
EVENTUALLY.....yeah, okay, thanks....we're still waiting.
Nailed it, Spot
philipat, this is a good point, but I disagree on this: "The reason CB's are so terrified of deflation is that it breaks the Ponzi. Deflation is great for consumers but they won't borrow to spend today, knowing that prices will be cheaper tomorrow. "
the really terrorized are the over-leveraged. specifically, US Stocks held on the top of huge amounts of debt denominated in USDs. and as long as this is not discussed even in ZH, the ponzi will continue without being even addressed properly
I miss trav7777.
You got it Centerline, Watch when Letters of Credit are suspect between banks, etc. Supply chain breaks will have rippling effects up and down the chain.
He forgot mention that the increases in productivity which have been achieved through automation and Artificial Intelligence services results in fewer jobs. This is the beginning of a downward spiral.
As consumer spending further decreases, manufacturers need more automation to lower costs in order to outcompete their competitors, again lower prices, more jobs gone.
A very vicious spiral
I remember raising this issue in econ grad school - after initial attempts to blow me off (professorial bullying) I never got an adequate answer. Should have asked a Marxist, I guess.
The best answer I got was that technology will create new products and advertising, new "needs" What was the demand for PCs in 1980? Cell phones in 1990?
PCs and Cell phones are made in automated factories offshore. Who in the western nations will have an income to buy the new products and services.
Income is flat, and consumer credit is all used up. Now what?
Not really. Technology frees labor up for other entrepreneurial endevors. Labor saving technology is why we have such an abundance of goods and services available today. Labor saving devices also allow people to be more productive so they can earn higher wages, increasing consumer spending. It's not more jobs gone. It's more jobs going to previously unfulfilled demand. Any unemployment is only temperary as those who lost their jobs find new markets developing to soak them up. Markets that previously didn't exist because competition for labor might have driven prices too high before. If it caused a downward spiral, the industrial revolution would never have happened.
There is the real economy, and there is the gambling casino of financial institutions. The real economy says "Cheap oil....OK!" ...while the casino economy says " I don't give a sweet goddamn, as long as my bets come home to poppa"
Right now the casino is shitting its pants. This is good for the real economy....since the only way to get a gambler off your back is when the mafia come to collect and they got nothing.
I toast the bonfire of the vanities....see you guys in hell.
So, according to some, I am supposed to hate it when I buy things on sale and rejoice when prices go up.
Ummmm... no.
Sure. And buy cheap Chinese made crap and then bitch when your job goes overseas as well. If we are too self obsessed to see how what we do today effects our future, then we are hopeless.
OK. Random babbling that has nothing to do with my comment. Next.
The Chinese crap is getting better, they've lost millions of jobs to the robots too.
These days the question is whose robots can do the job cheaper?
Even if the manufacturing comes back to the USA, a robot will be doing the work, not a human, so what difference does it make.
Robots are the new Wetbacks.
What's it gonna look like when 75% of the population is out of the work force?
uh...abouit like it looks now?
uh...abouit like it looks now?
Who builds the robots?
Yes, Oldwood. Been saying this for years to every Jap-car-driving asshole (include Korea, etc now) and their BS arguement about those piece of shit cars being better quality... fuck that.
When you don't make the shit you buy, eventually, you or your kids will be job less. Period. That's how it ends.
Creepy,
Just don't buy it on credit and have the value continue to fall making worth less, perhaps increasingly less, than you owe on it.
Competition is a sin.
-John D. Rockefeller
Bankers will commit blasphemy and hand out money to citizens to get inflation if they have to. I once saw a market force in a book from the 20th century that I was reading. That was before FRAUD and fascism destroyed all the nation-states that now make up the NWO.
Passing out wads of money sounds good but they have to have a good legal fiction as an excuse and it'll have to be a believeable lie that they can get congress to sign off on....
The Council on Foreign Relations is urging its membership to come up with a means of getting currency directly into the consumers hands. Their credit based/fractional reserve scheme has hit the wall. Pretty hard to fight deflation when your currency is created by being loaned into existence.
They need to come up with something fast because we are one severe downturn away from a big change. It won't be long before a major Western nation "goes off the reserve" and starts issuing social credit currency or goes totally hard money.
What part of "Helicopter Ben" do they not understand? Granted, "Heli-Yellen" is quite off putting, but times is tough.
I, for one, do NOT want to experience a glance upskirt as HeliYellen leans out of her HELLicopter to toss cash.
One of the Europen central bankers admitted that the fractional reserve system isn't used. Banks just get a promissory note from the borrower and then adjust the borrowers checking account balance to reflect the loan, voila, money is created.
A means of getting money into the consumers hands directly? That's called a
fucking job!
Or welfare I guess.
it's actually not that hard to figure out, they should be able to manage
those shylocks don't "hand out" anything, ever
Steve Keen is smiling.
http://www.debtdeflation.com/blogs/
That is my new mascot, Deflator, the 700lb gorilla. He sits on banksters like a whoopee cushion...ppppfffftttt.
deflation is the right arm of strength!
I thought that was an FAL-FN?
Thank you for the episode of "That 70s rifle".
Atlas squelched
<--Atlas queefed
<--Atlas felched
A.I. is massively deflationary ... and thats why all those rich Bastards are against it !
Rise of the ROBOTS
R2D2 go and destroy the Rich .... Beep beep, destroy the rich fuckers and bankers .... die scum die ( Man, that A.I. learns fast ... LOL )
It is deflationary but the last ones standing will be the rich.
Taxes give US money its value, since people need US dollars to pay their income taxes. Not gold or rubles but US dollars.
The Singularity is deflationary only when measured in Population Index, which is certain to be one of the highest-traded markets of our robot overlords in 2049.
I got suckered in here by the bigfoot picture.
That's Michelle Obama.
I came to rant, too.
The funny part about all this is that we will have deflation caused and driven by an external factor whom we thought was our friend, the Saudis.
The ECB is already screaming bloody murder over any sign of possible lowering of ANY prices. How are broke people going to afford gas? According to the ECB, it doesn't matter, because it is deflationary.
You can't fight lower oil prices with a new round of QE. But, the morons at the helm of the central banks will try, and that will cause the most fucked up situation ever.
You're already seeing planted stories about "What would ISIS do to Saudi Arabia?", which clearly imply that ISIS is a western psy-op, and they will do anything to jack up oil prices, including sending ISIS after the Saudis.
I'll be getting the pop corn.
PC prices never seem to rise and the odd thing is they never fall because they always offer more. That is to say today's computer is already out of date and ready for black Friday sales but tomorrow computer can be purchased at today's price - all you got to do is wait.
I guess they are an example of competitive production.
But labor costs become a smaller part of the price of a pc.
Only 2% of the cost of an Iphone is labor
http://www.epi.org/blog/apple-iphone-profits-dwarf-labor-costs/
Indeed, when it comes to PCs, cellular phones, and just about any other technology... every year you get more product for the same money. Otherwise deflation would occur.
When all those O&G laid off employees start defaulting on their debt we'll see deflation gain momentum more in some states then others:
Texas Comptroller: State can expect slow, moderate growth
http://www.bizjournals.com/houston/news/2015/01/12/texas-comptroller-sta...
The last ten minutes exemplify the fine line between comedy and tragedy. Some funny shit.
“the portion of the debt mountain that must be rolled over into new loans cannot be refinanced”
Debt instruments should mirror their credit exactly. If usury from one loan is rolled over into another, the math goes exponential. The debt instrument then demands more from the money supply than is possible in a natural world.
bonds that have come due/reached maturity will default, toppling the system's teetering financial dominoes.
Yes, private bank finance has chains of counterparties. If one person defaults, then another person does not have income to pay their debts, and so on as the dominoes start to accelerate. This is primarily because the debt instruments do not mirror the money supply. Bankers will never say, “Hey I forgive the debts that I made grow with unnatural math.” Instead a “harvest” is required as people transfer real assets to extinguish the debt contract. Usually, Creditor has power of Debtor.
A world without inflation threatens to collapse the Status Quo's mountain of debt.
So, why is our money supply 97% banker credit? Debts can be paid down with a sovereign currency. This money type will cycle into and out of debt instruments, drawing them down.
www.sovereignmoney.eu
Yes, inflation does help the debtor. But creditor finance is taking so many gains over debtors, mild inflation is fair play.
deflation is the natural consequence of rising productivity in a competitive economy.
The working class, or those who tend to take out loans are under drain pressure already. Deflation makes them have to pay Creditors even more than was promised at the beginning of loan contract. Deflation improves Creditor (private banking finance) position to even more superiority than it already has.
A competitive economy should have people’s productivity vector back to themselves rather than being siphoned away into oligarchy. There should be a leisure dividend as a function of “increment of association.” That is, improved productivity due to invention and higher efficiencies should not vector to financial capital. They didn’t earn it, invent it, and are parasitic to the process.
In a competitive environment, the gains in productivity are passed to the customers as lower prices: in other words, deflation.
How about the gap? This phenomenon is well known to Social Credit theory. Production waste and Usury are passed on in prices. Workers cannot buy their output with their wages, so there is a gap between prices and wages. So, once again finance is taking rents on the commons; these rental gains are buried in high prices.
Is deflation the nightmare scenario for central banks, debtors, central states, monopolies and cartels? Yes
Gold systems are inherently deflationary. International Capitalists loved the deflationary aspects of metal money, as upon every deflationary cycle, real assets could be harvested. This is how land got put to land, and we ended up with mega farms. Much of today’s industry has come under finance control. Large inefficient mega corporations get cheap loans and are thus given a leg-up on smaller more nimble competitors.
The real problem is the mountain of debt has gotten so big, mostly through re-hypothecations and other financial games. This means that a harvest cannot happen. A jubilee will expose private usury (banker credit) finance as being parasitic – and they don’t want to be exposed. A good parasite can lead the host to drink and do its bidding. Government is parasitized and is not representative of the people. We do not have a republic, but instead a financial oligarchy – a form of feudalism.
Polls say over 50% of the workers are happy with their jobs and &0% of young people, after around $75,000 dollars per year the value of money to a worker begins to drop. 50 million on food stamps isn't very good.
Deflationary Downward Spiral Diagram:
http://www.google.com/imgres?imgurl=http://www.investinganswers.com/imag...
You know what else is deflationary? [massive] DEBT.
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Let's be clear, exact... and very simple.
If you borrow in order to buy before you earn, you create more demand NOW (when you are buying), and hence higher prices.
But you also create less demand LATER (when you are replaying debt), and hence lower prices.
Simple as that. So, in other words...
DEBT ALSO CAUSES DEFLATION... eventually.
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Of course, the part I left out above (to keep it simple), is "the in-between times", meaning "between when you (and/or governments) start borrowing, and when you reach maximum debt and have to stop borrowing (either because nobody will lend any more to someone as deeply in debt as you/they now are, or because you/they barely have enough of your income left over after paying debt payments to survive.
To people who ignore (or don't understand) consequences, this in-between debt-growth time is also often called "party time" and "boom times".
But actions have consquences, and eventually when the time has arrived when debt must be paid off (or at least not grow any more), enormous sums are money are spent to service debt, not buy goods and goodies.
Which means... much lower demand.
Which means... lower prices.
Which means... deflation.
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So the article is correct, but the more dominant deflationary force today is... the massive debt level.
And so it is. But hey, the debt is entirely fiat, so... screw them! Woops! Did I say that? I've never been in debt, and don't appreciate having to bid for goods and goodies against an entire planet full of people with plastic in their wallets, who cared little or none about the price of goods and goodies they wanted to buy (and bid up), as long as their credit card or loan application would be accepted.
Well, people like me were royally screwed for a lifetime by debt-maniacs. Time for those folks to pay off their debts, collapse demand, collapse prices, and give us frugal and responsible non-debtors a chance to buy at reasonable prices.
Sorry, did I say that too? I must have been dreaming.
Debt is inflationary.
Paying debt off is deflationary.
Accumulating debt is inflationary. Yes.
OK, this is misleading:
It is more accurate to say that central bankers _believe_ that their policies _do_ create growth, and if you aren't seeing enough growth, that only proves that things would be much worse without these "stimulative" policies.
Deflation has been our mantra for years. Why the late comers think that they've spotted something new is beyond me. It has never been a question of if the economy would spiral into deflationary crisis... just when.
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...