Is not it a wonderful sign that retail investors who bailed out of the stock market when it hit a multi-year low in March of 2009 and who kept selling all the way to Dow 12200 just reached in February, are now are now ready to buy stocks again hoping they will continue to go […]
The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.
This is an excellent real life example of how deflation works. As reported by Reuters JP Morgan was holding Lehman Brothers’ collateral back in 2008 as a way to protect itself against possible investment losses. Well, deflationary bust that was caused by rampant FED sponsored inflation prior to the Fall of 2008 crisis, has hit not only the investments but the collaterals as well.
When you have a 93% evaporation on the collateral which is supposedly only a fraction of the actual assets that it guarantees, you can safely say we are in the thick of it – the deflation.
In yet another clear set up by the so called “US Government”, the US Treasury and Labor departments, as if it is their own idea, are looking to give Americans more “options” of how to invest their pension money. These “options” have a funny way of becoming the only choices when it comes to government […]
At last, the news reports are now fully brimming with optimism and proclaiming victory after victory on the economic front. Despite the fact that the private (and total) credit in the US economy has been and is still contracting at unprecedented multitrillion dollar annual rate, which is deflation by definition in credit based monetary system, the Bloomberg news declares nevertheless that the honorable manager of the privately owned Federal Reserve, Ben Bernanke, has already defeated deflation. Oh say, can you see …
The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors. While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden.
When you have US Treasury yields sitting at historic lows at prolonged periods of time and across the entire yield curve, it only means one thing – delfation is here and anywhere you look on the horizon. But when you have yields turn negative, which really means investors paying privately owned Federal Reserve to hold their money as it has become the only safe place to keep it, this is a sign of a crash or some impending credit event which is also deflationary. Someone somewhere knows something. Only indication we, the common folks get of an impending crisis, is the sharp jump in excess reserves held with the Federal Reserve banks by other financial institutions. The excess reserves rose by almost $250 Billion between July of 2009 and November 2009, while the stock market has been setting yearly highs and “recovery” has been gathering pace, or so the powers that be would want us to beleive. Add to this the November 19th, 2009 delay in release of “Reserve Bank credit H.4.1 weekly report” and you get a shiver down your spine that something is about to hit the proverbial fan.
“The recovery is very weak and the U.S. is running the risk of deflation…” say the Japanese investors as they are piling into US Treasuries while expecting the yields to drop sharply. They may be the only ones in current economic environment that have extensive experience investing in deflationary times and so it may be worth wile heeding their advice:
“Demand for Treasuries is very good because of the idle money in the banking system…”
“The medium term risk toward inflation is being caused by potential policy missteps by policy makers in regards to monetary and fiscal policy and the weakening dollar…”
“Any economics textbook would tell you that the massive stimulus from the central government will eventually cause inflation, but the Japanese know it doesn’t have to turn out that way…”
“The U.S. economy has faced a double whammy: the recession and credit contraction. The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.”
Even though the signs of deflation are everywhere as expressed in contracting credit, money supply, and prices, the privately owned Federal Reserve’s executives continue to beat about the deflationary bush by referring to it as “disinflation” and talking about it in future tense. It has been happenning already for the past year and a half and it will continue as evidenced by record low long term Treasury yields this week. The below article provides a detailed discussion and solid evidence of deflation and how it works.
When one of the world’s largest fixed income investment funds goes long US Treasuries this only means one thing – they are betting on sustained deflation. After spiking in the early spring the Treasury yields are slowly grinding down again. The 30-year Treasury is now yielding a little above 4% which is a long term low.
National Deflation Association 