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VIDEOCentral Banks: Heads They Win, Tails We Lose
Deflation is the cleansing of the speculative excesses and a return of general population profits back to their rightful owners -- the central banks and those behind them.
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Since that time we've seen a mini-replay of the 2008-2009 crash. Stocks and commodities have taken one on the chin while the US dollar and US bonds have rallied. Yet instead of taking heed of these signals and revisiting their inflation thesis -- as we did in the summer of 2009 -- the inflationist side, much like the man holding on to the memory of a lost love, continues to hold out for something they had in abundance for decades.
Several generations experienced generalized inflation as this historic US dollar credit bubble expanded, and for the most part savers and many others have seen their purchasing power eroded during that time. This was unnatural and destructive and perhaps wouldn't have gone on as long as it did if it weren’t for Congress and the policies of government.
As that bubble expanded, the cheap money contributed to rising input costs across the spectrum. That credit growth over many decades created the inflation that drove up prices, forced companies to outsource production and labor, lowered the quality of our food, and diminished the value of our parents’ savings. No part of the economy was spared. If maintaining profits meant more unemployed Americans or the use of cheaper, less nutritious ingredients in the food our children eat, then so be it.
Instead of dealing with the problem of a sharply rising supply of cheap credit that was at the root of the problem, officials like former Federal Reserve Chairman Alan Greenspan, well aware of government policies as well as being one of the leading proponents of unbridled capitalism and unregulated markets, did nothing to slow the trend.
Until a wall was hit, head on, that is, in 2007 with the popping of the housing-mortgage-credit bubble. Might I suggest that you can only mock nature and sensibilities for so long before a violent backlash in the other direction.
And that’s where deflation comes into the picture. Deflation is to inflation as exhaling is to inhaling, as restful sleep is to neurotic waking hours, and as a healthy clutter-free mind is to depression and anxiety. As human progress is forever upward, it's the balancing that nature demands and ultimately ensures and brings about, one way or another.
The crash of 2008 was the beginning of a process that, in my opinion, will last many years and bring back balance. That process is deflation; a rare phenomenon we'd concede but because something is rare or happens once per century doesn’t mean it can’t strike. Just ask the people of Haiti about that.
In late 2009 I warned about the un-payable levels of US dollar debt outstanding in the world, a condition I coined the "Hin-DEBT-burg."
What's critical and important to take away from that piece is that not all US dollar-denominated debts are liabilities of the US government. So when readers write in and ask how in the world the US dollar can rally when there are potentially tens of trillions of derivatives and other credit instruments that will never be repaid, the answer is that they aren't the US government’s problem, but rather the concern of the private party that issued them.
When the US money and credit supply is viewed through that lens, then the growth by one or two trillion in the US monetary base that the Fed has allowed in order to assist its closest friends is but a hiccup in the big picture of a US dollar-denominated money and credit collapse. Since the sum of all US dollar money and credit purchasing power during the boom pushed up asset values -- all assets, including gold -- then the evaporation of that purchasing power should bring down nominal prices across the board.
Deflation also restores to central banks the profits that those outside their inner circle earned by way of the money and credit that central banks control. In other words, central banks never intend nor desire that the general population ride their coat tails for free. Deflation, then, is the cleansing of the speculative excesses and a return of those general population profits back to their rightful owners -- the central banks and those behind them.
(In dollar trading, PowerShares DB US Dollar Index Bullish (UUP) is lower -0.04 to 24.14 while PowerShares DB US Dollar Index Bearish (UDN) is higher +0.06 to 25.70.)
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