The Deflation Monster Has Arrived
Submitted by Chris Martenson via PeakProsperity.com,
As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.
Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.
If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering: What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?
Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.
It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.
The Cost Of Bad Decisions
In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:
Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.
I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:
(Source)
Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation -- via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.
The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.
Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate -- virtually everywhere across the globe.
So the Fed's pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting. Three sets of increasingly bad decisions in a row.
The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.
The Even Larger Backdrop
The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.
Using the US as a proxy for other countries, this is what the lunacy looks like:
As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.
But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.
The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.
So the entire edifice of debt-funded growth is now being called into question -- at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.
At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.
As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:
(Source)
The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?
All of this is really just the terminal sign of a major credit bubble -- a credit era, if you will -- drawing to a close.
I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:
“ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
~ Ludwig Von Mises
Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.
So now we are facing something far worse.
Why The Next Crisis Will Be Worse Than 2008
I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.
It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.
At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.
Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.
Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?
The next thing is to give money to Main Street.
That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.
You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.
Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.
This "helicopter money" spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.
Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.
In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now -- in advance of the approaching rout -- to position ourselves for safety (and for prosperity, too)
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
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Well, that's what happens when Money itself has become the Problem >> https://goo.gl/IoiSjv
Money is not the problem, it's who creates them.
"Whow owes what to whom" ?
We peddled fiction to some folks...
Lower gas prices doesn't "stimulate the economy", that "extra" will just g to pay higher healthcare cost or in the future a climate change tax...The major source of real growth comes from increase in wages and that hasn't happened in a long time.
Bit coin fans, think again!
http://mashable.com/2016/01/15/bitcoin-failure/?utm_cid=mash-com-Tw-main...
++
"Essentially, the very principle of keeping the currency decentralized spells out Bitcoin's own doom."
as well as this http://www.mintpressnews.com/the-us-government-has-an-internet-killswitc...
bitcoin may well be the currency of the internet. as a practical matter, absent the internet, bitcoin is USELESS
I agree with 99% of his analysis. There is just this one part...
"That is, give money to the people instead of the banks."
The Fed can't... And although the government doesn't know that it shouldn't it probably will... And this action will cause a default in precious metals... The supply is too thin already.
+1 if you would take every dime the Fed or Government sends you in a check and buy precious metals.
This is why the Fed is truly trapped.
So to beat the crowd you need to max out your credit card to buy PM's then pay off the card with the helicopter money. When is it open season on bankers? I'll save some credit to buy ammo.
Correct me if I'm wrong, but isn't it Steven Keene? the Australian? who says to give everyone a certain amount--everyone--but to make those with debt put everything toward paying off their debts until debts are paid? So those without debt would get the money, too, just being able to keep it?
Its nonsense - just a money-go-round to extend & pretend, and in suggestion you refer to, a sad attempt to give primacy to creditor rights cloaked in a pretense of philanthropy.
How do governments eventually repay their debt? Through taxation. So they give now (no matter how the "money" was created), and take back later (with interest). Money, not wealth.
As Martenson says, if there was a prospect of genuine wealth creation, maybe theres an out. But there isn't such a prospect in view, and there is no plan to generate/promote genuine (non-debt driven) wealth creation. So its all a farce - more can kicking by Wile E Coyote.
The original "stupid decision" was the creation of the Fed itself. All other decisions they've made for the past 100 years are just bandaids on the underlying cancer.
hopelessly blinkered
Gold, gold, GOLD! Some of you here knnow I'm not the world's biggest gold fan, but if this dude is right, then use your free money to buy gold. I bet the author is right- deflation will be followed by a money printing goosing of Main Street. What happens after the inflation? KaBOOM!
Well it's been fun. Don't let the door hit you in the ass on the way out.
BTFD.
on Gold, Silver, Lead, Copper, Heavy Metals.
Also rice, beans, canned proteins - to protect it all.
Jump Fuckers.
What does Chris mean when he says "Once people lose faith in their currency all bets are off."... ZH members passed that point a long time ago and with the rise in PM sales, many others are too...
WHY IS EVERYBODY VOTING DOWN JURGSTER??? RTFA GUYS!!!
He's RIGHT!!!!!!!!!!!!
The economies before the Fed were actually worse than those after (even including now). The 1870's through the 1920's were just awful. Long, painful downturns interspersed with debt-driven spikes, and massive unemployment. Look at Coxey's Army.
Badmouthing the Fed is fine, but given all the $#!+ before the Fed, I'd say the Fed was only modestly bad.
Yep!
Mate, you're a legend :-)
Debt can also be dealt with through war. Stealing Lybia's, Ukraines and other countries gold has also allowed the can to be kicked along a bit further. But the tribe, those meeting in Davos, they need a lot more. Hence the need for a bigger target, Russia. Faith in the system is that naked guy right behind the Emperor. As Bubbles would say, It's a bit fucked, if you ask me.
Bubbles
I think they play dumb like Bush did.
They aren't going to give anyone money.
The beast system is post human, artificial intelligence.
this system is Antichrist, and the number of the beast is the number of man 6.
This correlates to Virgo which is the only sign represented by human body, it's the natural 6th house.
Fixed star Regulus in 2012 moved into Virgo, it was in Leo for 2168 yrs that is the both Leo and Regulus are King. So the King moves into the sign of man this system comes out of humanity, man becomes God and Regulus will oppose God which is Pisces.
In short Man becomes God and is at war with God=Antichrist.
Just look at the drones with their iphones and all that entails.
Henry Kissinger has been cloned his clone is living in a hospital and once he is an adult Henry's memory
will be inserted into the clone and old Henry will die. That's what Ariel Sharon was waiting for but died before
this technology was available. They are very close now, they can clone and they are working memory pathways with a cloned mouse.
Deflation is here. But every step of the way my wage deflates faster than prices deflate and I still can't afford to buy anything.
Consumerism is for people who can't add up. Damn!
Click here bitchez. There's no obligation. It's free bitchez!
Yea, he ought to know by now... ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" We're entering the FED-induced deflation right now. Money will pile into US Treasuries as it leaves more risky areas of the world. The US gov. will ramp up spending to take advantage of this 'free money' just like they did before. Then, the next Ka-Poom comes if/when that 'safe haven' money leaves the US. That provokes the next QE. It'll be a doozy, at least $2Trillion/year. I'm pretty sure I've already seen this movie.
PMs, like lead, brass and gliding metal?
Bitcoin is a distraction from the real money ( GOLD )
Any questions?
No. Bitcoin, like the Federal Reserve Bank, had obvious problems from the start that would make certain people rich and leave the end-ponzi holders broke. Many recognized these problems from the start, but no one would do anything about them. Chickens do come hme to roost.
Gold and Silver have no problems as long as you hold them in your hand. And they stay in your hand, unlike electroncs which you really can't "hold" anyway.
Sell your shitcoins, buy phyzz, and be man enough to admit you were wrong,
thanks for the link. to wit:
"Hearn writes that there is one questionable recent decision by Bitcoin in response to the traffic-deterring fees, in which users can pay to reach the front of the queue. By the time the transaction goes through, the fee could change, so Bitcoin is soon rolling out a feature to change your payment amount after sending it up until it appears in the ledger"
sounds like HFT to me
"change your payment amount after sending it"
That is not HFT - it's theft. Oh wait, that is HFT.
Lead developer quits Bitcoin saying it 'has failed'
http://venturebeat.com/2016/01/16/lead-developer-quits-bitcoin-saying-it...
Thanks for the link r c.
"Two Chinese miners, which verify bitcoin transactions and add them to the ledger, control over 50% of the block chain."
Ouch!
^^^^^^^^ This.
Paging the Fonstar Brigade....
Still here! I'm vigorously defending the $370 zone right now with about a dozen bids across two exchanges. I'm picking up lots of nickels as the price bounces around. No, Bitcoin hasn't broken. It's still operating fine. Not perfectly, I will admit, but no less well than the occasional ATM troubles your banks have. Whenever there is congestion on the Bitcoin network that slows down the transactions, people just switch over to one of the alternate cryptocurrencies if they have to pass value faster. Ron Paul's competition in currencies at its finest! Yes, my gold and silver coins are still within hand's reach as well.
Good for you babkjl ! No reason not to trade as long as you are nimble and know the risks. The price is always moving and the BC market never closes - excellent for traders. I worry about those that stash large amounts in BC for a rainy day.
"as long as you are nimble and know the risks"
my main issue with the idea that bitcoin will become the global currency. If my technophobe granny cant use it, it has a limited utility.
Woo Hoo.
Nobody knows what Au & Ag are worth in the long run.
/s/
If you're going to pick a level that's a really, really good one.
Yeah Mike Bitcoin failed...it is more like you failed to get your paws on the control of the blockchain. Isn't that what you mean Mike?
In this episode of "As The Bitcoin Turns"......
Will the romance continue after the honeymoon has ended?
"“I bet his public and immature tantrum where he says he sold all his coins (!!!) has nothing to do with the fact that he was hired by R3, a consortium of 42 banks with billion dollar funding that are launching their own 'blockchain' as a competitor to Bitcoin. “"
https://www.reddit.com/r/worldnews/comments/416lpx/lead_developer_quits_...
I'd argue the only major source of real growth left comes in the form of fraud.
That is what has been going on since 1971, supersized since 2008.
Fraud and endless war. Though war is also a fraud created by banksters.
Yes, only way to make money now is to dig deeper into your pockets.
<< Yes, only way to make money now is to dig deeper into someone elses' pockets >>
If the Money-Copter visits me, I'm going to use it all to buy Silver.
My guess is that will be some sort of card, like an EBT card. You will only get to spend on a certain subset of items. Which is perfectly fine. Use it for food, rent or mortgage payments. That frees up your income to buy silver.
I was opting for PMs mostly for the statement it makes.
A domestic only jubilee!!!!
All credit cards, all student debt, auto loans, mortgages, small business loans...
Not F#@k!n& corporate debt, that is all due immediately.