It is said the market can sniff out prospective problems and price itself
accordingly. If so, then someone needs to get this dog some nasal spray,
lickedy-split!
The deflation scare currently hovering over the entire market, particularly
in the metals and commodities sectors, has been brutal. But the key
question today is whether this “scare” will evolve into a genuine
deflation threat to the US and the world?
Inflation and deflation are monetary phenomenons. Monetary inflation occurs
when the supply of money increases faster than the supply of goods and
services. This is different from the concept of price inflation, which,
depending on several variables that may impact inputs along a given
production chain, can cause an increase in the price level for certain
goods and services at any given time. Otherwise said, monetary inflation
causes price inflation, but a price rise isn’t always a result of
monetary inflation.
With monetary deflation you have the opposite effect, in that it relates to
a contraction in the money supply. If the supply of money contracts, while
the supply of goods and services either remains constant, increases, or
contracts at a slower rate, then that can lead to price deflation.
Otherwise said, a contraction in the supply of money will in most cases
cause asset prices to fall, but falling asset prices are not always the
result of a monetary deflation (the oil price can rise if the supply of oil
is falling at a faster rate than a money supply contraction, for
instance).
What we have today is falling asset prices in, specifically, real estate
and stocks, and a rise in the value of the US dollar. This has led many to
wrongfully conclude that we are not only experiencing a deflation scare,
but that a depression brought on by a deflationary collapse is
imminent.
I don’t see it that way. Stocks and real estate are collapsing because
the US was on a debt binge for many years. Given that real estate purchases
are mainly financed by debt, and that many have used margin in stock
portfolios, as well as, in the cases of hedge funds and others, dangerously
high levels of leverage, the deleveraging that was forced upon the market
following the collapse of debt instruments tied to bad loans is what is
causing the dramatic declines in these asset prices today.
In a fiat money world with governments controlling the money printing
presses you can be sure those governments will do everything in their power
to fight off depressions. Anyone who continues to doubt this must have been
living under a rock the past couple of months.
With much of the world holding the same toxic instruments and in similar,
but not as horrific shape as the US, the ability of the US Treasury to tap
its foreign creditors and borrow its way, to the tune of trillions, out of
this mess has been severely impacted. On the domestic front, the savings
rate is approximately zero, and increasing levels of unemployment will
cause tax receipts to collapse. The only alternative will be the printing
of money.
The US is the world’s greatest debtor. Money printing will bring on
monetary inflation, which will wipe out those debts, savings, as well as
the US dollar. That is the real scare that markets today, as well as
foreign creditors, should be pricing in. It is only a matter of time. To
borrow a line from the classic film ‘The Usual Suspects’: The greatest
trick the Devil ever pulled was convincing the world he didn't exist.
Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA
www.murkymarkets.com
****
Christopher G Galakoutis is an independent investor and commentator. A
student of finance and economics, he has in the last few years directed his
attention to studying the macroeconomic issues that he believes will impact
the United States, and the world, for many years to come. While working
diligently to cater investments for his own portfolio to the changing
economic landscape, he also decided to start writing about these issues in
an effort to reach as many people as possible. In that respect Chris also
highly recommends tuning in weekly to the Financial Sense Newshour with Jim
Puplava, and Peter Schiff's book “Crash Proof: How to Profit From the
Coming Economic Collapse.”
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
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