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The U.S. Is On The Edge Of A Growing Deflationary Sinkhole
Unemployment
The U.S. caused the 1930s deflationary depression and is again the cause of the current contraction. Although similarities exist between the two, the differences between them insure a far more consequential outcome today than in the 1930s. [Indeed, the world] now finds itself on the edge of a growing deflationary sinkhole created by the sequential collapse of two large U.S. bubbles, the dot.com and U.S. real estate bubbles.
Words: 1535
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Darryl Robert Schoon’s (www.drschoon.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Schoon goes on to say:
Global demand is again falling as credit contracts, a sign that debt-driven deflation is back but, today, there is an additional danger as well. Since 1971, because of the U.S. default on its gold obligations, money no longer possesses intrinsic value and the consequences will soon become apparent. Deflationary depressions and a collapse in the value of fiat money have happened before but never simultaneously. Soon, they will.
The Day of Reckoning Has Arrived
We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade.
The Problem
Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the U.S., the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more [in] what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.
The amount of outstanding U.S. debt, according to Martin D. Weiss, www.moneyandmarkets.com, has now reached levels that can never be paid off. The United States government and its agencies have, by far,
- the largest pile-up of interest-bearing debts ($15.6 trillion),
- the largest accumulation of unsecured obligations (over $60 trillion),
- the largest yearly deficit ($1.6 trillion), and
- the greatest indebtedness to the rest of the world ($4.8 trillion).
The unpayable levels of U.S. debt are not just the problem of the U.S. because the U.S. dollar is the lynchpin of today’s fiat money system, U.S. debt is everyone’s problem. The U.S. dollar is the world reserve currency and a default by the U.S. will have far-reaching consequences, especially in China, its largest creditor.
The Solution
Bill Gross, co-founder of PIMCO, the world’s largest bond fund and an expert in matters of debt, wrote in 2006 that the way a reserve currency nation [such as the US] gets out from under the burden of excessive liabilities is to inflate, devalue, and tax.
a) Inflate
Inflation destroys the value/cost of liabilities by eroding the value of money. Debts are paid back with inflated currencies, a process which benefits the debtor and injures the creditor. This is why reserve currency nations usually inflate their way out of debt by printing what they owe.
b) Devalue
Devaluation is another option afforded reserve currency nations. By devaluing the value of their currency, the value of what they owe falls relative to other currencies. Again, the benefit is to the debtor at the expense of the creditor.
c) Tax
Taxation is another option but is no longer available to the U.S., as its liabilities are now too high. It would be like forcing the elderly and morbidly obese to engage in strenuous exercise to regain youth. Of the three, inflating away debt is by far the preferred option but it is one the U.S. can no longer choose.
Why Inflation Won’t Work
It’s tempting to think that the U.S. can inflate its way out of its fiscal problems. A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would – other things equal – reduce the real resources needed to service and pay back the promises we are making today. However, inflating away U.S. debt won’t work because as Richard Berner points out nearly half of federal outlays are [now] linked to inflation, meaning that increments to debt would [also] rise with inflation.
Inducing monetary inflation would also raise aggregate U.S. debt resulting in a self-defeating cycle of higher prices and higher debt. However, there is also another more fundamental reason why inflating away U.S. debt won’t work, to wit: Inflation is almost impossible to induce during severe deflationary contractions. Fed Chairman Ben Bernanke understands this difficulty quite well. Bernanke’s late mentor, Milton Friedman, theorized the Great Depression could have been prevented by sufficient monetary stimulus and so in 2008, faced with the possibility of another deflationary depression, Bernanke put Friedman’s theory to the test. Unfortunately, when tested, Friedman’s theory didn’t work. Despite Bernanke’s massive monetary expansion, global credit is still contracting and lending is drying up.
Inflating away debt is virtually impossible in the presence of deflation, but if U.S. monetary expansion is sufficiently large, it could result in the hyperinflation of the U.S. money supply, which would destroy both U.S. debt and the U.S. economy as well.
Managing Director and Chief U.S. Economist at Morgan Stanley, Richard Berner, recently discussed the reasons in We Can’t Inflate Our Way Out, February 24, 2010. www.morganstanley.com/views/gef/index.html#anchor6647bf63-2073-11df-978b-bbc960980e46
Will Devaluing The U.S. Dollar Work?
Devaluation is the U.S.’ only remaining option but, as pointed out in Comstock Partners’ special report of February 25th, “The Cycle of Deflation, Impediments to Debt Relief”, the major impediment to a U.S. devaluation to reduce debt is China saying:
“There is a stumbling block to the normal competitive devaluations that typically take place. In the past, a country that incurred too much debt just did what they could to devalue their currency in order to export their way out of the dilemma by exporting their goods and services to their trading partners…[but] the Chinese have linked their currency to ours, so as we debase our currency, one of our major trading partner’s currency is also declining and China becomes the major beneficiary of the debasement of our dollar.”
The China peg to the U.S. dollar thus prevents the U.S. from altering its trade deficit by currency devaluation, but it does not prevent the U.S. from devaluing the dollar for other reasons. If the U.S. does devalue the dollar, it will not be to reduce debt—it will be to maintain its advantage over the world in general and China in particular.
The Influence of China On U.S. Actions
U.S. dominance is being challenged by China. While it is not possible to know what the U.S. will do, it is naïve to believe the U.S. will do nothing; but whatever happens, U.S. debt and the U.S. dollar will be affected.
China has now significantly reduced its buying of U.S. debt leaving the U.S. with growing deficits and a virtual boycott by China of new U.S. IOUs. This will impact future U.S./China relations. The tentative but mutual benefits of the past are being replaced by self-interest as U.S. spending and consequent debt is increasingly perceived as being out of control by China. That perception is correct. Since the 1980s, America’s focus has been on borrowing more, not spending less and the implications are clear.
With China moving away from increasingly risky U.S. debt, the U.S. is now far more likely to treat China as a challenger than as a needed creditor and, while devaluing the U.S. dollar would have minimal impact on overall U.S. debt, it would have a significant impact on China. In December 2009, total foreign holdings of U.S. government debt equaled $3.29 trillion. With total U.S. obligations now close to $100 trillion, a 30 % devaluation of the U.S. dollar would impact only that debt held by foreigners. China currently owns at least $1.7 billion in U.S. dollar denominated securities and, if the U.S. devalued the dollar by 30 %, China’s losses on its investments would be in excess of $500 million.
As stated earlier, it is not possible to know what the U.S. will do but since WWII geopolitical considerations have always outweighed economic factors in U.S. policy decisions and there is little reason to expect this to change—even as the end-game approaches.
The End Game and Sovereign Default
The U.S. is trapped. Caught between rising expenditures and the need to borrow more, outstanding U.S. debt is incapable of ever being repaid and should the credit rating of the U.S. ever reflect its actual state, sovereign default, not devaluation would be the result.
In 2008, Kenneth Rogoff and Carmen Reinhart, in their book “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crisis,” reviewed the history of sovereign defaults concluding that the then dearth of defaults was in actuality a warning of more to come. They were right.
As the end-game progresses it is impossible to know what the U.S. will do. It is likely the U.S. doesn’t know itself. What the U.S. does know is that it is now trapped by increasing levels of mounting debt from which there is no easy exit.
*http://beforeitsnews.com/story/21/656/Will_the_US_Devalue_the_Dollar.html
Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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Posted by Lorimer Wilson on Jul 16 2010, With 0 Reads, Filed under Economy. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.
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No. Deflation is when the money supply contracts. You cannot have a contracting money supply when you’ve just flooded the system with bankster bailouts in order to satisfy the Chinese on all the phony derivitive contracts. What you end up with, once that bailout money trickles into the banks and then reaches the little people is hyperinflation, the exact opposite of deflation. The fiat hits the banks and the banks use usury to turn that into assets on their account and loans flow out creating more and more paper. A flood of worthless paper is not deflation, it is INFLATION, you have increased the amount of paper in circulation. The only reason we do not have hyperinflation now is that the banks cannot do anything with their bailout freebie cash. As I said, it’s tied up propping up phony housing contracts. But once the dam breaks open…
The money is not trickling down to the little people, it is being held in reserve, hence no inflation.
Money doesn’t trickle down; it trickles up. Money flows uphill. The only way to create demand is demand-side stimulus which is money in the hands of consumers, who will spend it.
Unregulated greed has killed the goose that laid the golden eggs for the old world financial order. As the article clearly explains, it is over for them. First in America, then all of western civilization. Done.
It’s past the tipping point. In a couple of years the smell of the rotting corpse of the old world order will have become intolerable to everyone. The actual NWO ain’t gonna be what the fossilized old power brokers had in mind.
Hang on to your hats!
“Unregulated greed”?
Fannie Mae & Freddie Mac are government entities that had all of the “regulations” built into any bureaucracy but they lent $300K to waitresses for homes.
In real life,private banks would never have done so since they are regulated by reality of losing their asses if they screw up!
Moreover,banks were ordered by bureaucrats like Barney Frank to loan money to unworthy borrowers,then surprise!,they defaulted.
Government entities don’t have such concerns,in fact,they can’t go broke because we can be compelled to bail them out (like we did).
The real esteate mess,like the war on drugs,the Iraq war,Afghanistan,Israeli atrocities,public schools,the DMV,the post office & AMTRAK is the result of inept government meddling,not “corporate greed”.
And just wait til they get their grubby mitts on Healthcare.
Just look at the post office. It goes broke yearly and get a bail out every year. They are regulated by congress, and their business model is bankruptcy yearly.
Actually “stimulating” the demand side is THE problem.
In a natural, organic system, supply and demand find a moving but relatively stable equation.
In our current world, the supply side has overbuilt and the demand side is dying.
I’m afraid we are in a lose-lose situation. Much pain to come.
Hang on to your hats indeed.
Anadianant
http://aadivaahan.wordpress.com
What has created the mess is the USA abandonment of its Constitutional requirement of having gold as money. It is hard to steal everyone’s wealth when you have to take their physical gold. Make the money fiat and you can rob everyone of their money with a few mouse clicks or emails from the Fed.
Honest money produces honest people, corrupt money produces corrupt people.
Hyperinflation is a currency event not an economic inflation event your use to. In hyperinflation it is a distrust in the management of the currency itself. Hence Still inflation by default yet with poor business conditions. We don’t have all the reosources. China has bought them all along with major economic alliances with Canada, AU, Africa and now Europe. We are busy running up trillion dollar bills with the Pentagon. Real inflation already exist if you own a car, home and have children. Check you wallet latley on taxes, insurance food energy etc? Those prices have gone up not down in USD’s.
Ken, thanks for the short, detailed explanation. You summed it all up better than economist I have read or heard. Thank you.
Ken, Ooops!! Forgot to ask when you think hyper-inflation will hit Americans. I’ll like to buy more canned food before it happens.
Ken, you are right and wrong. Deflation, as you pointed out, is when money supply is contracting. But ‘money supply’ in its broadest measure includes credit, not just currency printed or created. The $2 trillion handed out to the banksters is a drop in the ocean of worldwide debt. Credit supply is shrinking faster than Ben can print, so money supply is contracting.
Indeed, US M3 money supply is currently shrinking at 1930′s pace. http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html.
Also, note that the Fed has not significantly increased primary money supply, its base of physical currency has stayed quite stable. Instead, it has ‘credited’ the bankster’s accounts with virtual money in return for collateral.
I agree with Ken.
As the Most Wise God said: The borrower is (truly) servant to the lender. Proverbs 22:7
And this passage in Ecclesiastes 9:17 eerily seems to apply to America with the bankers and the government tightening their noose around our throats:
For man also does not know his time: Like fish taken in a cruel net, Like birds caught in a snare, So the sons of men are snared in an evil time, When it falls suddenly upon them.
#1. Pay off the debt with debt free U.S notes. Not FED reserve notes.
#2. Abolish fractional reserve banking. As the debt is payed off the reserve requirements of all banks and financial institutions would be raised proportionally
at the same time to absorb the new US notes. Full reserve banking would be the result.
#3. Repeal the FED act of 1913 and the 1864 national banking act.
#4. Withdraw from the IMF, The BIS, and The World Bank. Arrest and trials commence.
‘Some people think the Federal Reserve Banks are US government institutions.
They are not… they are private credit monopolies which prey upon the people of the US for the benefit of themselves and their foreign and domestic swindlers, and rich and predatory money lenders.
The sack of the United States by the Fed, is the greatest crime in history. Every effort has been made by the Fed to conceal its powers, but the truth is the Fed has usurped the government. It controls everything here and it controls all our foreign relations. It makes and breaks governments at will.
- Congressman Louis McFadden
Bill, right on! Keep spreading the word and someday someone will blow up their tv and actually start thinking. Then maybe we can elect some real leaders, not the ones the mainstream media tell us to.
Good job.
Mark
[...] Continued: [...]
The dominant people in our politics and economics are Israel firsters and war profiteers – usually both, probably always both. So every situation has to be analyzed from the perspective of Israel, if you wish to know what our “leaders” are thinking. Of course this perspective isn’t best for America, but they really aren’t too concerned as long as Israel is advanced. The financial ruin of America and its working class citizens are of no great importance to them, unless it may hurt Israel, the Zionist elite, or the war profiteers. Then action will be taken.
So to change things in America, pressure must be brought upon Israel and the Zionists, which is difficult considering that they own the media and consequently the majority opinion, as well as most politicians, banks and the intellectual climate at the universities.
Well in the first American revolution, the British held most of the good cards too, but it is aid that 5% of the population was able to win through armed resistance and a willingness to sacrifice their lives and well being.
It is now time to begin the second American Revolution and restore our government to ourselves by all means necessary. Fight for your lives and your children’s future!
Restore America – Remember the USS Liberty -Remember Rachel Corrie.
WAYNE ALLEN SCOTT
2nd American Revolution!! Glad someone mentioned this.
I strongly recommend everyone to read that new book out about a small, American town of citizens that do stand up to federal tyranny & ends up starting the 2nd American Revoution.
Man!! It’s great cause it could be our hometown & families. I strongly recommend it.
http://www.booksbyoliver.com
You are right. It is the duty of the citizens to throw off a tyrannical government and constitute a new one suitable to the people.
You’re right about the rest of it, too. Including the USS Liberty, deliberately attacked by Israeli forces in a failed false-flag operation.
Let us not forget Rachel Corrie. Let us hope a thousand ships named Rachel Corrie ply the eastern Mediterranean in full view of Gaza.
Grow your own garden, draw your own water, be self suffcient, and tell the Federal Government “no I will not participate in your games”.
THE MANIPULATIONS OF THE INFLATION NUMBERS BY NOT COUNTING HOUSE PRICE INFLATIONB AS INFLATION WILL JUST BE ANOTHER TRICK UP THE SLEEVES OF THE MONEY MASTERS (MANIPULATERS) THAT WAS A DEFLATION OF SAVERS DOLLARS…..
PARDON THE LOSS OF THE DOLLARS EARNING CApabilities by the lousy returns and interest
The root of the problems:
IT’S THE JEWS,STUPID!
IT’S THE JEWS,STUPID!
I thought smokers were responsible for everything that went wrong.
As long as AIPAC rules our nation and its political leaders, we will slowly degrade to third world nation status.
Take back power from the dual citizen Israelis in the USA and we have a chance.
If not, it’s game over.
Phooey. Anyone with a brain can see it’s a classic case of deinflation. The dollar’s worth less and less, but that’s okay, no one has any money.
Well…to tell you the truth, we blew it in the 60s when the powers that be gave in on Vietnam, and the huge peace movement didn’t keep on going to abolish the illegitimate so-called “federal government”–but instead went home shaved their beards, cut their hair and said, “yippie”.
It is said that “In a democracy you get the government you deserve”.
“The money is not trickling down to the little people, it is being held in reserve, hence no inflation”
Mark Savatar is nearly right! although how you can hold heavily created and therefore borrowed money in Reserve is only a trick the big boys can do.
The money being created (printed) is being “spent” by the large corporations that were mostly bankrupt and was used to shore up a plethora of financial instruments and deals , not real “spending” as you and I know it.
This spending was not inflationary! But if the inevitable happened and this money filtered through and started appearing on main street , that would be inflationary.
To negate the effect of this happening , which it eventually would , the banking system for a number of years now has gently restricted the Growth of M0 and M1 , so called “Main Street Money” the only money maybe 70-80% of the population have access to or interest in!
Meanwhile M2 and M3 have been heading for the Stratosphere , and in the case of M3 (includes Big Corp money etc) its increase was so embarrassing that the Fed stopped reporting the figure in 2006 although it still reports on M0 , M1 and M2.
This is one of the methods being used to restrict and control inflation , the real enemy of the working class. Unfortunately it has horrible side effects, unemployment from the decrease in spending and vice-versa , and the inability of Companies to grow or improve through scarcity (through increased collateral requirements) of Capital (except the Motor Industry of course) , let alone the drop of spending in the Working Economy which negates any reason for a Company to grow or increase production in the short to medium term (I believe it will be a Long Medium term 5-8 years)unless an unforseen factor arises to increase demand (WAR)!.Low wage increases ,lower wages overall and a continuing collapse in Housing Values (Myth:House prices are real Money!) will carry on unabated as the people that really produce wealth in this country pay off the debts that the Wealthy Financial class have created on behalf of them.
The sinking in the economy will continue and unlike some people who predict Armageddon, I say America will carry on with one change, everybody will be poorer, except the Wealthy Financial class of course .
And while the Federal Reserve and the 12 Banks remain in Financial Power , as they assuredly are , there is no way out.
And there is the main problem, money always flows towards where the greatest accumulation of money is (because of interest), a bit like mass and gravity , from the poor to the rich. Maybe there is nothing wrong with this ,maybe this adds excitement to our lives? What if we all had the same amount of money and started anew what would happen?
Of course, left out of the analysis is the possibility of direct governmental injection of new currency into the economy by the emission and spending of “Greenbacks” (of the form first emitted in 1862) by the U.S. Treasury. Such emissions will not need any lending by the banks to make their effect felt. This is not a constitutional solution to the problem, nor a viable economic one. But, politically, it is probably the route that will be taken, inasmuch as a deflationary depression will create intense social dislocations the ultimate consequences of which cannot be predicted.
WE;ALL OF US;NEED TO INVEST IN SAUGAGE;IT’S OUR ONLY HOPE.
[...] The U.S. Is On The Edge Of A Growing Deflationary Sinkhole [...]
You have to tank the jewish devil for the mess America is in.We know that in Revelation 2:9,,3:9 Bible call those converted KHAZARS(THE SYNAGOGUE OF SATAN).
America is on way to hell brought to you by the chosen people of satan,enjoy the ride you pay with your money.
http://www.realzionistnews.com
[...] Wilson beschreibt in seinem jüngsten Artikel mit dem Titel „Die USA am Rande eines wachsenden Deflationsschlundes“ auf sehr gute Art und Weise, wie die ganzen Schulden zu dem Fiasko führten, in dem wir uns nun [...]
[...] *Lorimer Wilson: “The U.S. Is On The Edge Of A Growing Deflationary Sinkhole” [...]
Time to get a 2nd passport and hunker down, get off the grid,…In a nice south american country
Very pertinent article.
Deflation is already here.
In light of the latest published GDP growth rate (2Q) of 1.6%, a further discussion of the 3 solution options to induce growth is needed:
a) Inflate
[...Bernanke’s late mentor, Milton Friedman, theorized the Great Depression could have been prevented by sufficient monetary stimulus and so in 2008, faced with the possibility of another deflationary depression, Bernanke put Friedman’s theory to the test. Unfortunately, when tested, Friedman’s theory didn’t work. Despite Bernanke’s massive monetary expansion, global credit is still contracting and lending is drying up.
Inflating away debt is virtually impossible in the presence of deflation, but if U.S. monetary expansion is sufficiently large, it could result in the hyperinflation of the U.S. money supply, which would destroy both U.S. debt and the U.S. economy as well...]. 100% on the mark. Inflate wont work (technically e.g. from economic science).
c) Tax
[...Taxation is another option but is no longer available to the U.S., as its liabilities are now too high. It would be like forcing the elderly and morbidly obese to engage in strenuous exercise to regain youth...]. Also true. Tax wont work either(also technically e.g. from economic science).
b) Devalue
This is the only technically feasible solution (e.g based on economic science). However a big question: Is it politically feasible? Discussion:
Who stand to loose from it?
The very rich because their financial assets will be worth less and less. They will not even propose it.
The working class (but only in the short time) because with the massive import of everyday ‘cheap’ goods from China, prices of these goods will increase, making the poor feel a little bit poorer. The current demagogues (e.g. populists) in Washington will not propose it.
Who stand to gain from it?
The thrifty middle class because, with already depleted savings, devaluation will not hurt their pockets anyway, and the ensuing real growth will then necessarily lead to more jobs and reduced unemployment, which will ultimately benefit everyone!
Points to make:
Point 1: It can be done. America is a democracy: Enlightened people and bold leaders should push for such a move, although initially painful for some.
Point 2: If not done, deflation will reign in. Americans will attach themselves to what they have now, but alas, will not have more than what they have now. This will not be America!