Over time people have become confused between money and wealth. This is precisely what central bankers have had to do to convince consumers to borrow and spend recklessly. If any part of the US government/ Federal Reserve/ banking system is operating well, it's their public relations/ advertising/ media division.

At any period, there's a certain amount of wealth in the US economy, yet government has created much more "money" over very short periods to intermediate that wealth. Thus wealth per "dollar" has been diluted vastly.

How have they done this? By lowering the cost of debt both to the lender and the borrower and increasing leverage in the system through the fractional banking system. In our credit-based system, money equals debt: We've been spending credit, not wealth.

Recognizing the fact that economies more and more are influenced by central banks that attempt to stimulate economies (consumption) by creating debt many years ago, I began physically moving my assets around the world, shifting my wealth from time to time to the country I felt would devalue its currency the least: When a central bank creates debt, it essentially creates more of its currency, and thus devalues that currency.

Inflation is the creation of superfluous debt that chases unproductive assets (assets that produce little or no income for the risk undertaken). It devalues currency and drives up prices -- especially import prices. A central bank cannot create inflation by itself; through loose monetary policy and lower margin requirements, it can only encourage a fractional banking system to lend too much money in various ways.

Deflation is the destruction of superfluous debt. It is a corrective process that undoes artificial stimulus (inflation) driven by central banks that control fractional banking systems.

Deflation, which tends to lower overall prices, is good for the common man without debt. As long as he can keep his job (a big question), the lower prices make things more affordable. Lower price is the mechanism by which private capital is released from savings: Collateral prices are low enough to provide protection, and investment prices are low enough to provide an adequate return for risk. I find it ironic that the government is trying to get lending started again at the wrong price. It's futile.

Money is not wealth. We can create as much money as we want through an operating fractional banking system by creating associated debt -- that is, until there's so much debt that even at zero percent rates we can no longer service that debt.

People talk about all the “cash” on the sidelines fueling the next leg up in stocks. Those people aren't connecting the dots: That cash is there because of debt. Take the following example. Joe has $500,000 in stocks, a $750,000 house, and $20,000 in cash as assets. He has a $500,000 mortgage and $20,000 in credit card bills as liabilities. His net worth is $750,000. Over a 6-month period, his stocks and his house go down in price by 50%. He's forced to sell his stocks, because he took on too much risk. He now has $270,000 in cash and a house worth $375,000 as assets; his liabilities still amount to $520,000. His net worth is now only $125,000.

Does anyone think that $270,000 in cash is coming back into stocks anytime soon?

Those without debt and with assets have real wealth. As Joe found out above those that have used debt to purchase inflated assets have no real wealth. The government seems determined to reflate asset prices to make people feel wealthy again. This is either because they don’t understand what real wealth is (productivity) or they want to fool the populace. The reason they would want to fool the populace is to stay in power. Most voters have a lot of debt.

It is going to be very hard if even possible to reflate asset prices from these levels. It is very important to understand this: in a credit based system it is necessary for people to lend and borrow through the fractional banking system, which multiplies debt, in order to drive asset prices higher. So consumers must have the ability to borrow.

With consumer debt as a percentage of disposable income at a near high of 130% (normal is 50%), the consumer is clearly in no shape to borrow again. The Fed is powerless without a functioning fractional banking system. In fact, every time the Fed or the government has another bailout or stimulus package, that money is very low powered: there is no multiplier effect. All it does is replace debt that is being destroyed and perhaps slows the pace of deflation.

We have wasted vast resources bailing out the equity prices of large banks. Maybe one of our politicians can explain to us why. We could have protected peoples’ savings and deposits without this waste. Politicians fear deflation, but the average man should not. Deflation is merely a corrective process.

Capitalism did not fail us, government did. Capitalism is us, the market. Sure big players can hurt small players, but that is why we have rules (regulation). Government eliminated good regulation like Bretton Woods and Glass-Steagle (with a lot of help and money from bank lobbyists) and over time reduced margin requirements, letting big players run amok. But the big secret is that the big players and the little players alike could never have created this much debt without the Federal Reserve keeping interest rates negative and margin requirements at banks basically zero for years.

Some prices will rise (necessities); some will fall (discretionary assets) over the next several years. But deflation (debt reduction) will take its course -- whether government wants it to or not.

Risk is high.