I'm calling 1 1/2 to 2 years
of deflation, followed by raging inflation.
Deflation Now
Richard Berner of Morgan Stanley, said:
“A global recession is now under way, and risks are still pointed
to the downside for commodity prices
and earnings.”
Nouriel Roubini writes:
"There is a glut and excess capacity of goods while aggregate demand
is falling soon enough we will start to worry about deflation,
debt deflation, liquidity traps . . . ."
And an oxford professor of economics and expert on U.S. inflation thinks
deflation is probably on the way.
So far, it looks like the deleveraging of the global financial
system is destroying wealth faster than central banks can create new
credit to replace it. [My comment: it wasn't
real money, only "cotton candy".]
***
[The trillions being spent on bailouts worldwide] small compared to
the amount of value already destroyed in the residential real estate
market and in the stock market. Twenty trillion has already been wiped
off global shares. Property markets in the UK and the US are imploding.
So what we may have underestimated is how quickly this deleveraging
and value destruction would spread to the commodity markets, which
we thought would provide relative safety with the backing of tangible
value. Resource stocks did not hold up for long at all. Why not?
On the one hand, it now looks like a lot of investors were buying
commodities – and staying "long" of the trend – with borrowed
money. Those investments have now been sold to raise cash and pay
back loans.
Secondly, when it's a bear market in stocks, there aren't too many
stocks that do well, full stop. Not even Gold Miners against the backdrop
of gold bullion holding up well...or at least, not collapsing alongside
everything else.
According to Bloomberg,
people are not buying even though things are being sold at "Armageddon"
prices.
Big investors are also hoarding cash. A report
by JP Morgan shows:
"Markets are reflecting extreme levels of caution among
investors. Institutional cash positions
are close to their all-time highs."
If governments borrow to finance these various programs,
they'll issue new bonds. Bonds soak up the available pool of global
savings. To that extent, this new borrowing crowds out other ventures,
which might otherwise have put the savings to a productive use.
But financing the scheme with bonds is not, at least, right away,
inflationary. Not in itself.
However, if governments can't find takers for the bonds they issue
to finance these schemes, they will have to either raise taxes (not
likely in a recession) or simply print the money.
And here's a hint. That's what they always do, from Argentina to
Zimbabwe.
That is why we maintain the preferred response to huge debt levels
is outright money-printing. Besides, simply making credit more available
by lowering interest rates stops working after awhile (like when
you can't lower rates any further...and become zero bound). How
do you get available credit out of bank computers and into consumer
wallets? It's not easy. Bankers are suddenly quite shy where they
were once promiscuous.
***
Right now, all this government cash is simply shoring up bank balance
sheets with more capital. But to really "get things going again"
and "fight the recession", the money will have to get back into
the real economy. And this is where we see the inflation coming.
Not in asset prices for houses or shares. But in real goods. Why?
If the government engages in massive public works projects as a
way of stimulating demand in the economy and keeping up growth,
it's going to be resource intensive. In a way, this is just another
kind of phony boom, but with the free-market varnish stripped off
to reveal it as an über-lending program by some kind of pan-governmental
agreement worldwide.
***
Western governments are already suggesting a system where the world's
top thirty banks will operate under the supervision of a government
panel of some sort. You'll see more "super banks" and greater control
of the levers of global banking too, plus a concerted program to
flood the world with new fiat currency.
