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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I read it in the voice of Saruman.
The voice of General Zod:
the people will be happy with less.
Deflation is not a monster. Get real ZH. Beginning to spew more and more of the established propaganda aren't we. Only the Fed and their lackeys think deflation is a monster.
You forgot the /s tag at the end of your post... I would say "tongue-in-cheek" but I'd get too excited...
Lagarde called it The Deflation Ogre.
I'm pretty happy with it - but then again I'm not long big banks, big media, big reits, big government, big socialism, etc etc
I'm long big guns. You're a fool if you think they are unnecessary.
I'm a benefactor of two or more of these mistakes because the auto bailout saved Chrysler for the ridiculously stupid macoroni., marchionni I mean. And also I had some trouble with the mortage so harp saved my home . Now I should feel bad that it was necessary but I dont. I am sorry the economy.was trashed by these guys and Chrysler aS bled dry by Mercedes. But I didn't have any say. All I feel is lucky to have made it to this point and.sorry for those that are facing.harder paths than.me.
You got temporary relief, You are still up to your eyeballs in debt. The only way you can actually thrive is with zero debt.
DEFLATION STARTED!http://forum.prisonplanet.com/index.php?topic=80429.msg1584209#msg1584209I can use a little deflation, my mortgage payments just went up $150 more per month.
Every year they come up with some stupid reason to raise it. Last year it was because the price of lumber went up so it would cost them more if they had to replace my house.
Bet your ass though it will never go down even if the price of a 2x4 falls to 10 cents ea.
Hey Banksters! I fucking HATE YOU! man. Its ok for me to suffer but you? You wont suffer one bit will you. Down to the marrow of my bones I spit at thee.
Money will not be printed and given to ordinary productive people. This system enslaves the population through debt and people will use the free money to extinguish debt. They will start escaping their enslavement. They tried this years ago. They sent people little checks of a few hundred dollars each or I suppose even a couple grand if they were poor enough with kids. The result of that was people paid down debt. It cause a small downward blip in debt. That's why they haven't done it again and why it will never be done as anything more than a token gesture or only to the poor who won't be able to choose anything but spending it on their survival.
Yes it will. The FED will print and the government will give a little bit of money to every person, and in turn they will give it all to the wealthy, and in return they'll receive baubles. It will continue in this way until there is nothing left, and the top will have devoured the bottom and center. It won't however, have anything at all to do with free markets, but they'll get the blame nonetheless.
A little bit is the token amount for which I made an exception and it will be a one and done. There will be no helicopter money for masses that could actually allow them to get out of the debt trap and create demand for goods and services. Free money in massive amounts is for the insiders and only the insiders. The one possible expection is if things get real bad and these payments are required just for the masses to subsist. At that point the economy is moving on from debt serfdom to full on slavery and dependence.
The mechanism matters, and you haven't described one. The mechanism in the U.S. will be entitlement reform. It won't be direct stimulus, but instead a streamlining of social services. Eleminating the bureaucracy and replacing it with a simple check. Rember Milton Freidman came up with this originally, and that's how they'll sell it to the more conservative types. It will be the shrinking of government. You're theory about slavery, and serfdom is out of date as well. They aren't intested in you as serf or slave. This will be the first time in history the elites don't need the serfs. They don't need them to fight their wars, or clean their houses, or work their fields. The whole structure of society is about to change, over the next 50 years or so.
"They aren't intested in you as serf or slave. This will be the first time in history the elites don't need the serfs".
Maybe. Visions of dis-topic novels come to mind. I assume you are referring to the trans humanist, A.I. revolution in the pipeline. A depopulated Earth with only the few powerful left seems like a dream or literal nirvana they would want but then whom would they "rule" over? I know you didn't mention depopulation but if the serfs are not needed then they are liabilities. After all, the personality types that aspire to this would most certainly be sociopaths. Wouldn't it be ironic if they finally achieve their version of heaven on earth only to find they're unhappy. No one to push around accept the other sociopaths, what's the fun in that.
"The whole structure of society is about to change, over the next 50 years or so".
A certainty, just not certain how it will change.
I think that depopulation is their goal, but the old saying "be careful what you wish for" comes to mind. People make mistakes even elites. However there is what might be a parallel/ opposite path. Space travel will be evolving at the same time as AI, and there is more than enough work for man and machine in space. The Earth may become the playground of the elites and sparcely populated, and the new serfs all located off planet in difficult, dangerous colonies. There is a strange new world just through this door, but it's one hell of a door.
1. Mr Micawber's famous, and oft-quoted, recipe for happiness:
"Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Charles Dickens, David Copperfield
This guy is the biggest buffoon in the biosphere. Austerity yes, deflation is over.
This guy is one of those nobodies.
As in "Nobody saw this coming at the time"
Remember when everyone pretended we were having Hyperinflation?
Now it's deflation?
L O L.
Remember when everyone pretended we were having Hyperinflation?
Now it's deflation?
L O L.
Oh, yea. And PM's save us either way. ;0
Yen Cross is serving : BYOF> focaccia bread. and olive oil.
Pompa, dopul et nevasta nata. On SundayThe age of debt fueled growth is over. Growth has reached its limits.
Who is to blame? The FED and other central banks? Perhaps. But ultimately it lies with stupid people that wanted to buy stuff they don't need with money they don't have to impress people they don't like.
As to the question of where to store wealth. I chose agricultural land. Yes, there is always the chance the gov could take it from you but I believe that would be long after the confiscation of other options (401k, savings accounts, pm if they felt so inclined). So we have about 1M in good tillable bottom land in the Midwest as a large part of our "wealth", as well as PM, cash and the stock/bond/investment casino. On a good year that land brings in over 30k in rent which is nice safe income.
Quick! To the money-copter! https://youtu.be/SVFPPYBG0Gs?t=479
I already signed up for my spot at the local FEMA camp Good news is my disability and food stamps payments will go up when i move ih, and I get my own private trailer with free cabler. Bring on the disorder.
Just don't get on any trains. Remember, all that had to be done to stop the holocaust was bomb the rail road tracks. The delay to do so, stop the train by this one simple maneuver and then only once. It was the DELAY to release the prisoners before they succumbed to harsh conditions (referred to as a holocaust in any event) and that made the confiscation of wealth, capture and imprisonment in work camps as free labor so obviously an inside job.
You want a bed at a No Star Hotel.
"Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
'relax,' said the night man,
We are programmed to receive.
You can checkout any time you like,
But you can never leave!
https://www.youtube.com/watch?v=Qgyfn_eHfoo Eagles Hotel FEMA
https://www.quora.com/How-were-railway-employees-involved-as-Nazis-used-...
.
Excuse me? I thought this had already happened.....
Those BBC "Who owes what to whom" swirlographs don't include the Eurozone TARGET2 balances - where most EZ party animals have run up a 600B Euro tab on Germany's credit card. The cute graphic shows only 120B owed by Italy to Germany. That's a laugh. Add on another 200B Euros in Target2 owed by their CB to the Bundesbank, and then you are getting closer...
In the unlikely event the people receive a large QE, some think they would pay down debt. Many would but more would use that QE to go further into debt to start a legal or illegal business or to improve their lifestyle. Human nature. We all seem to want more, no matter what.
I have no debt to pay Down, so it all goes into PMs.
Sheep will not go into PMs.
Everybody is reading too much into it.
It's nothing more than the approaching end of the game of Monopoly.
The guy or gal running the bank always wins.
My older sister taught me that lesson when I was 7.
Chris,
A decent article. I think it really sucks that your "contributions" always end with "Pay me to read the rest of the story".
A great public servant. You should run for congress.
I would not classify them as stupid FED decisions....They accomplished exactly what they were intended to do.
Kind of like all the bankers climbing in the last lifeboat of the sinking Titanic. All the middle class has drowned and the lifeboat is tipping dangerousy. Fuck 'em I say.
Sellyourcrap.com. So many TV commercials advertising new ebay type websites tells you we're at the end of a bubble. Prices are dropping on all collectables.
Chris is clearly a smart guy, but to sell the idea that we're in the state that we are in is simply a confluence of "bad decisions" removes the nefarious aspect and criminality of the offense. The Federal Reserve in and of itself is just a giant "fuck you" to humanity.
The process will likely play out as he describes (with or without the helicopter money to Joe Sixpack), but it was designed as such from the beginning. The goal has been the same all along: collapse the system and usher in a one-world government and a one-world currency.
Chris is a fellow scientist from down the street. He has gone from peak oil to now peak prosperity. I told him he was wrong about peak oil, and I have been proven correct. There is so much excess oil that one could walk from Iran to America on top of full oil tankers.
Like the global warming crowd who got their science wrong and switched to "climate change," Chris has switched from "Peak Oil" to "Peak Prosperity." In reality he is selling doom porn.
It may turn out that Chris is right this time. I'm not arguing against his thesis, I'm arguing against his cashing in, carnival-barker style, on his selling of doom porn. Had he studied harder in class he could have made his money selling the public something they desired more than the capital in their pockets. Von Mises would have been proud.
Now, if you'll turn your attention to your right we have a six-legged chicken. The chicken was discovered....
For those of you that follow crude oil, natural gas, 10y t-note and dollar index
https://sasafuturestrading.wordpress.com/
Shouldn't China and Russia be shown on the diagram showing who the US owes money to? Or did I miss something?
A long article teat says the same thing as an old cowboy said "I am more concerned with the return OF my money than I am with the return ON my money".
Another old cowboy told me once out on the plain of eastern Colorado, "In the later fall of the year, if you see dark blue black clouds to the north, fuck those cows, run your horse to death if you have too, just get to cover anyway you can, you will be enveloped in a wall of snow that could last for days. They call them "Blue Northerns".
We have a Blue Northern on the way, the clouds are rolling in fast!
1. "How much longer can that delusion last?"
--Forever. Anyone that thinks mankind outgrows his delusions should examine the history of religion or the organization of political systems anywhere on Earth, at any time in history.
The story is always the same. The delusions will not change until human nature changes; and even then, they will only be replaced by new, updated delusions.
-----
2. "Once people lose faith in their currency all bets are off."
--Not really. As history shows, the old currency is simply replaced by a new currency. Maybe a few 1%ers change places, but other than that, everything stays the same.