Deflation When Will It End?
QUESTION:
Dear Martin,
It is CRYSTAL clear that your call for a deflationary cycle has been right on the mark. No one else saw it coming. The changes that are part of this were not as visible even a few years ago like they are now. (Of course they were to you!) I can see the economy starting to decline now, yet prices are rising due to business regulation and business focusing away from capital investment. It costs companies more to do business so those costs are passed along to the consumer.
I see the rise in taxes on everything for the consumer creating the decline in disposable income. Cash is afraid and being hoarded, supporting the commensurate shrinking of the money supply, liquidity is drying up in parts of the stock markets, and inflationary government expansion never seems to quit, sucking the life out of the productive aspects of our society.
If the economy turns down as you believe this fall, tax revenues are going to collapse. Then what? Taxes to the moon? With all of these trends firmly entrenched, when and how will the deflationary cycle end, if ever? If we are to get an inflationary cycle before the crash and burn, what could possibly cause that? Or do we just go straight to crash and burn starting in the fall? Thanks for all you do.
Best, T
ANSWER: The deflation comes from the rise in the cost of government in addition to the collapse in leverage. As governments with power turn to extracting more from the people rather than weak government, as was the case with the new revolutionary government in Germany during the 1920s, you never get hyperinflation but massive deflation. Their own power leads them down the path of suicide. Of course that can migrate to the full economic totalitarianism akin to Communism. Whether you technically own your home and are taxed twice its value or the state owns it and allows you to live there, is just a technical point. The bottom-line is both are deflationary – not inflationary.
However, while this is typically the first wave, the second wave of inflation comes when CONFIDENCE in government collapses. This can take place with a full length cycle of 72 years as was the case with Russia (1917 – 1989). You will recall that the volatility portion of the Economic Confidence travels in waves of 6 whereas that frequency builds into groups of 12 forming the major volatility wave of 72 years. This in finance is known as the Rule of 72. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. It is interesting that this appears in volatility.
Therefore, at the worst we face a 72 year cycle of Economic Totalitarianism. However, the admixture of the fact that about half the world has already collapsed in 1989, we have a 26 year cycle which from 1989 brings us to Big Bang in 2015. We can see this materializing before our eyes and this is what the crash in government in the West is all about – the collapse in Socialism. We have a change for a reversal of this trend in 2016 with the US Presidential election. Yet clearly, the USA has peaked economically and Obama has produced perhaps the worst presidency in American history since after winning the Nobel Peace Prize, he has trashed the entire world no less advocating bombing many region.
Consequently, we have a rare opportunity to prevent a 72 year wave of Economic Totalitarianism, but the price will still be the economic decline of the West as the financial and economic power being the Financial Capitol of the World migrates to China. That is inevitable.
So the deflation comes to an end when people run for the hills and begin to buy anything tangible. In the old Soviet Union, people do not expect social benefits from government and are better prepared to be self-reliant. The same is true in China. In Europe, Japan, and the USA, the people are not self-sufficient as a whole and will suffer the withdrawal symptoms of socialism, which arguably has been far more damaging than communism where people expected nothing. Socialism replaced the family structure entirely so children do not save to support their parents in their old age – that’s government job they have been told. Parents are having to support their children into their 30s since they cannot find jobs in their field of study or any job at all as in Canada and Europe.
Keep in mind that deflation has nothing to do with the supply of money. That is the problem with most analysis. When you correlate everything, you see that government increases the supply of money in response to the collapse in CONFIDENCE not the other way around. With that collapse, we in the West will have to learn not to rely upon government and reemerge as self-sufficient to save the day at least on a personal level.
The abolishment of cash is extremely dangerous. I have been warning for years that we would NEVER return to a gold standard – we were headed straight into electronic money. That is where government becomes the Economic Dictator as they try to retain power over their imploding system hallmarked with corruption. They will seek to shut down the underground economy and that includes the drug trade. They are trying deliberately to prevent anyone from buying or selling without government approval and this is one of the very arguments to eliminate cash along with 100% tax collection. Yet this is how the West is committing suicide – extinguishing the global economy.
