So far, this is playing out as deflation. Sovereigns don't have the money to pay their obligations. Pension funds and hedge funds don't have the money to meet their obligations. These are all signs of deflation.
Mike, would it be fair to interpret it as "debt repudiation"?
What went on previously was debt expansion. I'm not willing to say that we have debt contraction at the moment, because I am not convinced we do except maybe on the margins. EVEN PERSONAL DEBT IS NOT SHRINKING. Average people are about as indebted as they ever were.
Their ability to borrow MORE money has diminished--though even that not entirely cut off.
A great deal of debt that SHOULD be defaulted on is being rolled over, one way or another. "Credit" is still being "created" "out of thin air". Bank of America, Chase Manhattan, the top 20 French banks, Deutschebank--notice that their doors are still open. They haven't shut them down. Where is the "deflation"?! Where is the "deleveraging" that everybody's talking about.
I don't even see it in the housing market. Housing prices have "corrected" but hardly collapsed. Houses are still very expensive where I live!!!
Apartment buildings even more so. I would like to buy a bigger one than I own, in order to collect rent to support my large extended family, but prices are too high compared to rents.
Think of it this way Bud: imagine the economy being like a balloon. Imagine that the balloon is being blown up, and that the air pressure represents so-called "credit creation", and the size of the balloon represents the size of the economy.
You can blow up the balloon without much resistance UNTIL YOU HIT THE NATURAL LIMITS OF THE ECONOMY. You can't expand the economy past the constraints of inputs such as natural resources such as oil, or for that matter the amount of fertile farmland in the world.
WE HAVE HIT THOSE CONSTRAINTS.
This time "it really is different", and it's NOT "just" a "purely monetary phenomenon", and it's not different in a good way.
Back in the 1930s, the economy went into reverse because credit stopped expanding. That's what you would expect to happen. HOWEVER, I absolutely don't believe that it's a bottomless pit.
I do believe that the fundamental nature of an economy like ours, based on credit creation, has to expand or contract; it can not maintain a steady state, because of cycles of buildup of debt that build up faster than the economy could possibly grow, followed by phases of debt repudiation. That's what happened during the Great Depression, and also ALL OTHER SIMILAR DEPRESSIONS of the 19th century. The GREAT Depression was great because they continued expanding credit after credit expansion not only outraced the economy, but also, they continued expanding credit even after the economy began shrinking!
THEY SIMPLY SHIFTED THE FLOW OF MONEY FROM COMMERCIAL BANKS TOWARDS THE MEANS OF PRODUCTION, TO THE CENTRAL BANK TOWARDS CANCEROUS GOVERNMENT.
Just like now, the real economy was impoverished, while the government grew cancerously.
NOW WE COULD NOT EXPAND THE REAL ECONOMY EVEN IF WE WANTED TO; we've hit constraints that are other than purely organizational. We've hit natural limits.
The economy is SHRINKING. Even housing is shrinking: you've seen the videos of abandoned housing being bulldozed. You've seen the pix of suburban houses taken over by bobcats. You've seen the pix of empty neighborhoods around Denver (and, for other reasons, Detroit and New Orleans).
The economy is SHRINKING, but the money supply continues GROWING.
Show me "deflation" on this chart:
This is where my balloon analogy fails, because the shrinking balloon does not cause money creation to reverse--unless maybe you think of the shrinking balloon squeezing the air into higher pressure levels. It causes debt to be repudiated, but there's no way to stop the presses that someone else controls! (that's a metaphor; we all know that most of the money is created electronically, not by literal printing).
The problem with the word "deflation" is that it confuses the SHRINKING economy with a fall in the money supply. The money supply is rising, not falling. Another problem with it is that it's a case of "reductionism". It reduces the model of what's going on down to a binary choice between monetary growth, and monetary contraction. BUT THERE ARE OTHER VARIABLES. The real economy could be growing, or shrinking.
Housing prices are coming down because availability of loans has shifted AWAY FROM the private consumer. It's not that the money supply is shrinking, it's that borrowing patterns have changed.
Rising prices could be an indication of inflation (a rise in the supply of money and credit.) But I believe the price rises we have seen have been more the result of shortages, i.e. wheat, oil, rice shortages; not inflation.
The supply of money IS rising. "Credit" is shifting, not shrinking; it is shifting from average consumers to the cancerous government and parasitic financials. The "shortages" are caused by a real economy that is SHRINKING.
Every phenomenon that you perceive is consistent with my model, but there are more variables involved than just the money supply, which is RISING not falling.
So what is one to do?
The answer becomes obvious as soon as you accept: "expanding money, shrinking economy".
Jim Puplava keeps talking about investing in dividend paying stocks.
I understand what he is thinking, but bad idea. THE ECONOMY IS SHRINKING. Phantom "capital gains" from INFLATION will not keep up with rising prices because the shrinking of the economy implies shrinking profit margins.
You don't get rich buying sinking ships.
The dividends will stagnate, OR EVEN SHRINK IN NOMINAL TERMS, relative to rising prices.
I would be leary of all stocks.
I would too, because aside from stagnating (or even outright contracting) relative to inflation, generally speaking now would be a good time to "get more real", out of paper assets and into real assets.
The trend from real assets to paper assets has gone on too long. It's time for a reversion to the mean.
With interest rates on safe loans or stocks so low, it might be justifiable to spend ones money only on things that save money. Paying off debt is the obvious first and best savings. Next? Maybe selling ones house and moving to a cheaper location?
Generally you want to gravitate from paper assets to real assets.
Generally you want to sell excessive consumptive assets (eg vacation homes, more home than you need, excessive cars) and buy productive assets (farms). As production falls, you want to own some of the remaining production (yet reserve enough cash for cash flow problems, which will continue to be severe due to the shift in credit allocation preferences).
Then what? Growing your own... everything..... Of course, everyone here is doing that far better than me.
How about : "Integrating yourself into a real, local economy" versus a global system that is breaking down.
You already know you can't do everything yourself. Those of us who are trying are already dealing with reality.
I have land. I'm lacking labor, storage, and equipment. I can't afford all of that. It's too much overhead for a single person to bear the brunt of.
I can rent equipment from local farmers; otherwise it would be sitting idle much of the time.
Problem is payment. If they accepted wheat, we'd be in business. The same lifeblood flows through our local economies--$US currency--as flows through the greater system, but rather a lot of it is flowing through connected circles and rather little of it is flowing in our direction. The flow of money is extremely imbalanced. Money is flowing in the direction of financial speculation, not production. (the day the flow reverses--the money will be worthless.)
I've found you can reduce your reliance on money flowing through the local economy by sharing profits of a larger system with a higher level of integration than just the single farmer.
In other words, instead of me paying you for labor and expertise, you work as a partner for a share of the profits of a system that includes my land, Tom's seeds, and your ingenuity. The "diversified" profits would include both cash and food.
Think in terms of local production but a higher level of integration of processes that lead to a salable product. Instead of aggregating cash we don't have, we're aggregating resources we DO have.
Does this make sense to everyone?
