Deflation and Central Bank Delusions
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Tuesday, January 13th
Contradictions exist in our less than sane financial world.
Is it sensible to pay insolvent banks to hold your currency? Negative interest rates are now common.
Is it sensible to lend your savings to insolvent governments for 10 years at 2% interest or less when history shows us that the purchasing power of the currency will decrease far more than 2% per year?
Is it sensible that the time value of currency is effectively zero? Zero or negative interest rates are not a sign of economic health.
Graham Summers has written about the $100 Trillion Trigger That Terrifies Central Banks. From his article:
“The world is turning Japanese.
“For over 20 years, Japan has been ground zero for the great Keynesian nightmare of central planning. Japan’s financial bubbles burst in 1989 – 1990. Since that time, Japan has seen little to no growth for 30 years.
“In the simplest of renderings, Japan has proven point-blank that you cannot fight an epic debt bubble by making debt cheaper…However, this has not stopped Central Banks from around the world from implementingthe exact same failed policies to fight their own bouts of deflation.
“When stocks crash, investors go broke. When bonds CRASH, entire countries go bust… When this bubble bursts, 2008 will look like a picnic.”
From Paul Craig Roberts:
“At any time the Western house of cards could collapse.”
“The good times are over… there will be minus signs in front of returns for many asset classes.”
Andy Hoffman points out that the Baltic Dry Index fell to its lowest ever level in early January. He also notes that Japanese corporate bankruptcies exploded to an all-time high and that the number of Japanese households receiving welfare hit an all-time high for the sixth straight month. He goes on to say:
“…when deflation truly kicks in, everything will decline in value – except money itself, i.e. physical gold and silver. The fact that nominal values will eventually explode when hyper-inflation arrives is immaterial, as real values will continue to plummet irrespective – just as they did in Weimar Germany and 1990s Zimbabwe, to name a few examples. Yes, everything that can’t maintain its purchasing power will plunge; and what ‘asset’ will lose more purchasing power than U.S. Treasury bonds?
“After all, who on earth would voluntarily lend money to the most heavily indebted, insolvent entity in history?”
“Under the gold standard, gold was money. So you had to pay for things with gold… But during World War I, European governments went off the gold standard… printed a lot of paper money… and used it to finance the government debt.
“Today the global economy is like a big rubber raft. Instead of being inflated with air, it’s inflated with credit. On top of the raft you have all asset classes – stocks, bonds and commodities, including gold – and 7 billion people.
“The problem is the raft has now become fundamentally defective. So much credit has been created that the income of the 7 billion people is insufficient to service the interest on the debt… and they keep defaulting.
“The natural tendency of the raft is to sink. And when it sinks – as it did in 2008… and when QE1 and QE2 ended – all asset classes go down together.
“There’s only one possible policy response – and that’s to pump in more credit.
“That’s what the QE is about. Central banks pump in more credit.”
From Alasdair Macleod:
“There is compelling evidence that 2015 will see a global slump in economic activity. This being the case, financial and systemic risks will increase as evidence of the slump accumulates. It can be expected to undermine global equities, property and finally bond markets, which are currently all priced for economic stability. Even though these markets are increasingly controlled by central bank intervention, it is dangerous to assume this will continue to be the case as financial and systemic risks accumulate.
“Precious metals are ultimately free from price management by the state. Furthermore, they are the only asset class notably underpriced today, given the enormous increase in the quantity of fiat money since the Lehman crisis.
“In short, 2015 is shaping up to be very bad for fiat currencies and very good for gold and silver.”
MY CONCLUSIONS:
- Watch Japan for further indications of a bond and currency implosion resulting from Abenomics and Keynesian money printing nonsense.
- The good times are over. A major crash or collapse could occur at any time, this year or even as late as the end of 2016.
- Deflation in many sectors has arrived. Excessive global debt can no longer be serviced, employment is weak, far too much collateral is impaired, commodity prices are declining, and too much wealth is being sucked out of our economies by the financial industry, the military-industrial complex, big pharmacy, big government and entitlements.
- Central banks will fight the economic downturn, outright deflation, and a bond market implosion with the same failed policies. Volatility will increase, and QE, regardless of what they call it, in Japan, Europe, and the U.S. will accelerate. That extra bond monetization and “money printing” may not help as much as central banks and insolvent government hope, as it will eventually dawn on savers and investors that QE to infinity is required merely to keep western economic systems afloat. Then real money – gold and silver – will be bid much higher.
- Under any scenario, gold and silver will remain the ONLY real money. They will maintain lasting value in a world of imploding stocks, bonds, and unbacked fiat currencies.
- I expect that central banks will not voluntarily self-destruct by allowing a deflationary depression, that politicians will demand more QE to keep the system afloat, and that central banks will decide that rapidly rising gold and silver prices are a small price to pay in exchange for the continuance of the system that keeps the political and financial elite both wealthy and powerful.
Gary Christenson
The Deviant Investor
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