Perpetual Deflation Causes Inflation

Global perpetual deflation relative to gold, causes price inflation

Thu, Sep 30, 2010 - 9:35pm

Eric Raymond wrote (note my pseudonym is "Jocelyn"):

"Decades? I severely doubt it. We passed the event horizon in March, when Social Security went cash-flow negative"

It does not amaze me that most people have not studied enough to have a very good understanding of the current macro economic environment.

That hyper-inflation theory only works when the rest of the world has a strong currency to run to. The world saves in US dollars (and Euros), e.g via the Yuan peg, so there is no danger of a run away from bonds any time soon. The entire globe dumping dollar reserves for non-monetary (i.e. low stocks-to-flows) commodities doesn't work either because it would implode the global economy-- that only worked when a small portion (e.g. Weimer Germany, Zimbabwe, Chile, Argentina, etc) of the world flighted to commodities. Instead, the world has no realistic alternative but to allow the central banks to monetize the debt via perpetual lowering of the sovereign bond interest rates in order to prevent an interest expense spiral[1]-- halving of the interest rate (e.g. 1%, 0.5%, 0.25%, 0.125%) also halves the interest expense and can go on mathematically forever.

Fundamentally the nature of a global debt trap is that no nation-state has enough free capital to write off the debt or standards-of-living deficit, thus all governments have to continue to be supportive of piling on more debt. The developing countries have an excess of idle human capital which counts as a liability greater than their accumulated production-- much of which is badly mis-appropriated to exports and speculation.

We will see inflation in commodities, because the declining interest rates and public sector debt crowding, is a deflation[1] that forces companies to lower labor costs to stay alive. With 7 - 10 developing world workers hired for every outsourced westerner, demand for basic commodities increases (but not 7 to 10 times more, because developing world people are more frugal, thus money multiplier and velocity-of-money is relatively lower).

We have deflation of the western hemisphere (any finance-able "asset" and demographics[2]) and inflation of the developing world ("things every human buys"). Mixed in with this is massive mis-allocation of capital due to centralized interference, e.g. Yuan peg is causing real estate speculation bubble and export infrastructure bubble (driving profit margins near 0, or actuarially negative) because individual Chinese capital can't escape to greener pastures (e.g. other less developed countries). The western countries are complicit in enforcing the Yuan peg (so they are either lying about wanting, or too compartmentalized to get, a free market for the Yuan to appreciate).

Private gold ownership is of no near-term threat to the Yuan peg and resultant mercantalism, so it provides a near-term release value for inflation. China is very wise to promote gold ownership, as it allows them to continue their Yuan peg longer. And at the end game, they can confiscate this gold, just as USA did in 1934.

The end game comes when the public sector has displaced so much of the private sector, that rationing of production becomes intolerable for voters, i.e. riots and war. The Obama health care bill is a rationing mechanism. Thus the end game is implosion of the western hemisphere which will drag the developing world mis-allocations into their Great Depression (as what happened to USA in 1930s as Europe imploded).

This is why gold & silver are the most preservative, i.e. gold has the highest marginal utility of any commodity due to its highest stocks-to-flows ratio (copper etc have only 6 months supply above ground). The world is in deflation as priced in gold and silver. However, it is likely at the end game, monetary metals investors will find their gains stolen via taxation.

Hyper-inflation is a shortage of cash, and the government must replenish the cash to masses, else hyper-inflation can not occur. The western masses have a negative net-worth, so any cash they receive will be used to pay down debt. The developing world has rising Gini coefficients with capital controls, so personal savings is mis-allocated instead of solving the mass standard-of-living deficit. This high global debt and standard-of-living-deficit load on the masses, is nothing like the situations that caused hyper-inflations, nor the Japan deflation. Japan internally financed much from their very high personal savings rates, which is opposite of the current situation. Also Japan's deflation did not involve the entire world, so it did not drive global mis-allocation and basic commodity inflation any where near the degree that is happening now. Japan's deflation was the first straw of the breaking of the global fiat camel's back.

[1], also it is crucial to understand that since the marginal-utility-of-debt went negative in 2008, all increases in public debt, force the GDP to decrease. You may read my more extensive comments.

[2] Demographics future of the world

About the Author

Shelby Moore III

antithesis [at] coolpage [dot] com ()