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2. printing fiat with a debt offset : result, deflationary depression / debt deflation U know, reading about the inflation and deflation debate, I have come to realize that there is not a lot of understanding prevalent of the difference between debt offset inflation and pure inflation of fiat. When people say, "the Fed is printing money out of thin air" they are frequently alluding to pure inflationary practices, i.e., just printing money into the system with out any offset mechanism whatsoever. This kind of thing happened in Germany, which had hyperinflation in the 1920s, and it took off and went from some nominal inflation rate to worthless fiat Marks in only 6 months. Then u had the typical stories like using a wheelbarrow to buy a loaf of bread, the guy leaves it in front of the store for a second to check, the wheel barrow is stolen and the money dumped into the gutter.... But in the US presently, we have a highly effective debt offset mechanism, where yes, fiat is produced by the Fed in huge quantity, but it is offset by debts that the masses take onto themselves. In this case, when the Fed prints (issues bonds) and or when they increase the money supply to the banking system, it is translated directly into securitized debts in the form of mortgages, or asset backed securities in various ways. The mechanisms of debt offset money issuance are very numerous, and the US has become an innovator in the creation of financial instruments and debt offset money..... Now, most of the inflation has translated directly into real goods and real estate.... a highly effective debt offset mechanism, with what appears to be a virtually unlimited machine that can take all the money thrown at it, translate it into housing, bid up other existing housing and real estate, and for a long time, gives the illusion of prosperity, all the while increasing indebtedness as its final result. But this method of issuing money is not purely inflationary in the sense that printing money without debt offsets is, and the kind that took down Germany into hyperinflation in the 1920s. But this is inflationary and it is the kind that will unwind itself in debt deflation when the real estate market, lets go.... Now what happens when the real estate market lets go is the following: First the market cools off. Then people cannot sell in a timely manner. Then they default and those defaulted loans are a drag on the market, and swiftly bring about the ultimate crash of the real estate market as the properties are liquidated in fire sales. Then all the debt offset money on the books of the banks is either written off or written down. Bank failures result or the Fed just prints up new trillions to replace all the destroyed debt offsetted money... The mechanism of debt offset inflation is a longer process than the pure inflation without any debt offset, but takes years and decades to unwind the mess, whereas a pure hyperinflationary event, such as Germany in the 1920s, or recently Argentina, can be swiftly unwound, of course with mass poverty.....initially until a new fiat regime is created.... Now the reason why debt offset inflation and deflation takes so long to unwind is precisely because the debts take a long time to be written off....and accepted as finally worthless paper (worthless noncollectable debts). In a pure hyper inflationary event, debtors are wiped out, yes but so are the debtees, the difference is that that process happens swiftly if there is not a debt offset inflationary mechanism. Now in the case of the US, we don't have the pure inflation/hyperinflation case. We have debt offset inflation, which is much more insidious, and will take a long time to be unwound, but just as severe in the depression it creates as a hyperinflationary one, but will take ten times as long to be unwound. Japan's long bout with deflation, and it was really a mild case, was precisely because the YEN was never destroyed, and all the debts accumulated had to be rationalized some how, and not directly written off. In our case, our massive debt overhang that has resulted from debt offset inflation will take so long to unwind that, in the end the government will have to make the hard decision to abandon the US dollar, and replace it with a new currency. The trouble here lies with the fact that this particular currency, the US dollar, has become the world reserve currency, and ultimately to abandon it, will have just incalculable consequences when it is finally abandoned... in other words, those debts that you have in dollars will persist a very long time, not be written off until there is no alternative. How perfect is the timing of the new bankruptcy laws. From what I understand of them, they will just serve to keep the people who unwisely went into debt buried for a long, long time, with no real way to get back on their feet, and essentially impoverished for the rest of their working lives....and after too??? -- which is a perfect recipe for a very prolonged deflationary depression.......... It makes me wonder if there are some very clever behind the scenes organizations that have come upon the perfect mechanism to destroy the US.... a masterfully instigated debt offset inflation, that results in bankruptcy of the US...and perhaps a world electronic currency to take the place of the US dollar....... In any case, the future of the US dollar is not good to say the least, and there will be a coming depression that is so deep you will not believe it, and you also wont believe how long it takes the government to realize they have to abandon the US dollar or there will be a permanent deflationary depression......
The Prudent Squirrel newsletter is Chris Laird’s weekly macroeconomic gold newsletter. A month or so ago, I predicted the short term gold bear market is over based on the weak USD and the continuing concern in the Mid East. That has proven to be true – holding up gold in spite of weakness in the base metals…. Stop by and have a look. CONTACT
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