As we have been writing for the last 3 years, debt deleveraging equals deflation. While people have been screaming for imminent hyperinflation, we have stood by the idea that we would have to stop in deflationary territory before central banks around the world would react, flooding the globe with fiat currency. Check this little piece out from our local LA Times:
The whole story is worth reading, but what it does show us is that deflationary forces are pulling hard, and that central banks will have no option but to panic—unleashing infinite quantities of currency on an unsuspecting public.
Deflation is a contraction of the currency supply, which causes prices to fall and the value of currency to rise. When prices fall, a boom becomes a bust, and suddenly a recession becomes a depression. Fed Chairman Ben Bernanke, a scholar of the Great Depression, knows the dangers that deflation poses to a debt-based economy.
Hyperinflation is when extreme inflation spirals out of control and confidence in a fiat currency falls. Usually, hyperinflation is characterized by a negative feedback loop, in which people, fearing the falling value of their currency, buy hard goods in order to preserve their purchasing power. This drives the prices of goods up, which creates price inflation, and drives the purchasing power of currencies down—creating a feedback loop.
A fiat currency is created by a government decree. The Latin word fiat means “let it be done.” And with the stroke of a pen, or the crank of a printing press, “money” is created. Fiat currency has no inherent value—the paper that a $100 dollar bill is printed on is surely not worth $100. It might have been worth a few cents before the government ruined its utility as scrap paper by printing green words and numbers all over it! Compare this with gold, which is a precious, rare metal that is, in many cases, the only substance on earth that can be used for certain human purposes, including science, medicine, and of course—adornment.
How Does Fiat Currency End — Part I: Deflation
Universal Bailout—Coming Soon!
The Road Ahead
So we are betting on what a few people will choose to do? Sounds like a good bet because very few people are making such a bet.
However we must keep one thing in mind we are betting on the actions of others.
What does that mean?
Well if you bet $10,000 that I will buy gold and silver in the next year you will win. If you bet $100,000,000 that I will buy gold and silver in the next year you will lose even if you did not place the bet with me.
So I have 2 points...
1) This is a bad bet if the ONLY basis is what central banks MAY do.
2) Gold and silver are good bets based on the reality of the fraud, usage, money, credit, and circulation.
Davincij15
Stories such as this often confuse deflation (contraction of the money supply) and 'price inflation', which is dropping prices. Given the trillions of US dollars pumped into Wall Street to artificially prop up the DOW, we are already experiencing price inflation on the most important commodities-- food and energy.
Meanwhile, thanks to stagnant or declining wages, little obtainable credit, and negative savings rates, (all of which are exacerbated by loss of purchasing power), luxury goods are all falling in cost. For all intents and purposes, real estate is currently a "luxury" beyond the reach of most Americans.
Worse, the tens of trillions created in QE-to-infinity are coming home to roost, leading to further price increases in core, life-sustaining goods and services. In other words, deflation and inflation are not mutually exclusive. I suggest we will see both operate as the world economy continues its inevitable death spiral.
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