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VIDEOWhy Deflation Never Had a Chance
What the deflationists fail to acknowledge is that in a purely fiat monetary system, deflation is a choice, not an inevitability.
Lately we've been hearing a lot of talk about Kondratieff cycles, Elliot Wave super cycle, end of the world, deflation, deflation, deflation.
What the deflationists fail to acknowledge is that in a purely fiat monetary system, deflation is a choice, not an inevitability. To put it in simple terms, if a government is willing to sacrifice its currency, there's absolutely no way deflation can take hold in a modern monetary system.It doesn't matter how large the debt contraction is -- 10 trillion, 100 trillion, or 1,000 trillion -- any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt. Granted they'll destroy the currency by doing so, but at some point we're going to be faced with the choice of print or deflate. I have little doubt Ben Bernanke will choose to throw the dollar on the sacrificial altar.
Consumer credit isn't growing you say. Consumers are deleveraging. Not possible to have inflation unless consumers are borrowing and wages are rising. Pure nonsense!
Let me point out one indisputable fact and then I'll delve deeper into the deflation/inflation argument and where investors need to put their capital to protect themselves from the coming inflationary storm. In a purely fiat monetary system, a government that's willing to sacrifice its currency can, if it so desires, print enough money to mail every man, woman, and child a check for 1,000, 100,000 or 1 million dollars. To do so would halt any deflationary force right in its tracks. It would, for most practical purposes, wipe out all consumer debt. Impossible you say? Well the US has already done it twice. (It was called a tax rebate, in case you forgot.)
Here's the thing: Where the inflationary forces show up is determined by who gets first use of the money. So far that's been the banking system. Through the myriad bailout programs the Fed has created money out of thin air and forced it into the insolvent financial system. That has resulted in selective inflationary forces being unleashed. Instead of loaning credit to consumers or businesses who don't really want it, the financial system has plowed the money back into financial markets. It's the reason the stock market rallied 80% despite flawed fundamentals. It's why oil rallied from $35 to over $80 despite impaired fundamentals. It's why gold is threatening to break out again to new historic highs.
If instead of forcing the liquidity into the financial system it had been mailed to the average consumer, we'd now be seeing real estate prices rising rapidly again; food prices and gasoline would be going through the roof; wages would be rising out of control.Where inflation shows up is a direct result of who gets first use of the freshly minted dollars. I can assure you we don't have an impending deflation problem; we have a rapidly approaching inflation problem and currency crisis.
I've said for a long time now that eventually the market is going to make Bernanke pay a terrible price for his insane monetary policy. That price is going to be a currency crisis in the dollar and I think it's already begun.
While everyone was busy watching the euro crack during the first part of this year, what no one foresaw was that eventually the cancer that began in Europe would at some point spread into the dollar. It began three months ago although no one has noticed yet.
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