Deflation, Hyperinflation & Vanishing Cheerleaders

For years, the “alternative media” (of which I consider myself a card-carrying member; I’ve even got the decoder ring) has warned of an approaching, dramatic, even catastrophic, economic decline.  In general, I believe our warnings have been technically correct but premature.  Despite our warnings, the “system” has demonstrated a power, momentum and tenacity to not simply survive, but to defy reality.  The “system’s” survivability has been impressive—even chilling.

Who is like unto the beast, hmm?

While the alternative-media posted its premature warnings, the Main-Stream Media (MSM) have persistently cheered the government, Federal Reserve, and monetary and economic systems.  According to the MSM cheerleaders, the “recovery” has arrived—and even if it hasn’t, it soon will—and besides, everything is under control so, “don’ worry, be hoppy.”

However, in the past month or so, I’ve been surprised to see a significant upswing in the number of MSM articles that have abandoned their cheerleading to warn of an impending economic shock.

How odd.  The MSM have begun to duplicate the “alternative media’s” warnings.

Where I’d typically found MSM articles that hollered “Rah, Rah, Rah!” for the economy and nascent “recovery,” I’m now finding a growing number of “run, you mutha’s run!” articles.  In just one day, I saw MSM articles with headlines like, “The IMF’s Prediction, the Federal Reserve and the $2.6 Trillion Time Bomb” (Huffington Post), “Schwarzman Warns of Next Financial Crisis” (Barrons.com), and Get ready for a 4,000-point Dow drop” (Market Watch).

The sudden increase in MSM “doom and gloom” headlines implies that the alternative media’s persistent warnings may finally (and soon) be shown to be right.  Perhaps, the economy has become so fragile that even the MSM is being forced to report the truth.  Next thing you know, even our politicians might try telling the truth.

It could happen.

•  David Stockman is a former U.S. Representative from The State of Michigan (1977–1981), Republican, and Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.  He writes as part of the alternative media and is critical of the MSM “cheerleaders”.

Stockman recently published an article entitled, “What is Around the Corner Is a Flaming Meltdown of the Fed’s Third Financial Bubble.”

Despite his hyperbolic title (“Flaming Meltdown”?), Stockman’s article clearly expresses his pessimism concerning America’s immediate future.  Stockman warns that another “Great Recession” (not a “Recovery”) is approaching and it’ll be at least as painful as that of A.D. 2008.

Stockman opened his article by complaining that when government recently admitted that the U.S. GDP suffered a 0.7% decline in the first Quarter of this year, some prominent MSM “cheerleaders” immediately declared that that loss was,

“. . . all a mistake due to winter, strikes and unseasonal seasonals.  So don’t sweat the small stuff, the US economy actually continues bounding along at a 2.5% growth rate, as it has for the entire recovery.”

“Unseasonal seasonals,” hmm?

Our economy is “bounding along”?  No kidding?

Stockman could barely contain his contempt,

“First and foremost there is no such trend as 2.5% growth. . . .  In fact, measured from peak to trough, [the Great Recession] was the worst downturn since 1950.  Real GDP shrank by 4.2% compared to an average of 1.7% during the previous nine recessions. . . .  The compound annual growth rate over the 29 quarters since the pre-crisis peak in Q4 2007 is just 1.0% . . . .  Cumulative growth in real final sales has been only 8%.  There is no 29-quarter period even remotely this bad since the early 1930s.”

Stockman went on to list: 1) more reasons why the US economy is headed for big trouble; and, 2) more evidence that the MSM is complicit in that trouble because it’s been previously unwilling to report the reasons for the coming collapse.

For example,

“After the Great Recession, the next weakest cycle on the chart is the subpar gain of 2.2% per annum for 2001-2008. During that period the Fed expanded its balance sheet in a then unprecedented manner from $500 billion to $900 billion—but only got a housing boom and bust, not an improvement in real growth.

“Throwing the rule-book of sound money to the winds, [since A.D. 2008] the Fed then ballooned its balance sheet by 5 times to $4.5 trillion . . . and got even less to show for it. That is, a 1% economy—and that’s on the generous side.”

In order to stimulate the economy, the Federal reserve almost doubled its debt in the seven years before the onset of the Great Recession in A.D. 2008 and then increased its debt by five times from in the six years after.  Result?  Virtually no stimulus.  The Fed failed.

•  Then, Stockman declared that it’s a “near certainty that [the Fed’s] Zero Interest Rate Policy (ZIRP) will eventually end and that the dollar will rise with it.”

I agree with Stockman’s prediction that the dollar’s value will “eventually” rise significantly.  But I disagree insofar as I think that rise will only be temporary.

A rise in the dollar’s value (purchasing-power) is deflation.

Deflation causes debtors to repay their debts with dollars that are more valuable than the ones they borrowed.

Deflation thereby enriches creditors while it impoverishes debtors and thereby drives debtors towards bankruptcy.

The US government is the world’s biggest debtor and is therefore the one entity most vulnerable to US dollar deflation.

Deflation is more than government’s adversary or even enemy.  In relation to an overly-indebted government, deflation is anathema.  Deflation and an overly-indebted government can’t coexist.  There can only be one.

The fiat monetary system depends in inflation.  If the dollar enters a period of serious and persistent deflation, either the government, or the deflating dollar, will be destroyed.

I’m betting that, in the event of persistent deflation, the government will survive.

If I’m right, a deflating dollar will have to be somehow killed.

If the fiat dollar dies, so will most of value of the paper debt-instruments (like stocks, bonds, pension funds, bank accounts, etc.) denominated in fiat dollars.

If I’m wrong, the deflating fiat dollar will live and the government will expire in overt insolvency, default and bankruptcy.

•  Hitler wasn’t the first politician to propose a “1,000 year Reich”. No government wants its people to believe it’s transitory.  Every government wants its people to believe that it’s both indispensable and immortal—but no earthly government is either.

The US government is no exception.  If the idea that the almighty US government might die in bankruptcy seems impossible—remember the A.D. 1991 disintegration of the former Soviet Union.  If the government of the USSR can die, so can the government of the US.  The average American may not believe that possibility, but I’ll bet that the movers and shakers in the Federal Reserve and federal government are very much aware of the government’s potential transience.

•  If the US government’s survival is threatened by deflation, and if a choice between a deflating dollar and a viable government could be made, the intentional destruction of a deflating, fiat dollar is far more likely than an overt bankruptcy by the federal government.

However, deflation doesn’t necessarily require the death of the deflating currency or of the overly-indebted government.  A deflating dollar could be tamed (not immediately destroyed) by simply restoring significant inflation.

We could keep both the overly-indebted government and our fiat dollar, if we could cause the dollar to be inflated rather than deflated.  Inflation favors debtors since they can repay their debts with cheaper dollars.  Inflation favors consumers and is essential to the “consumer economy”.  Inflation favors the US government because it’s the world’s greatest debtor.  Therefore, an overly-indebted government has a vested interest in causing inflation.

Government wants inflation.

Written by Alfred Adask
Adask’s Law

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