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Well, the inflation-deflation debate has surfaced once again. Not in a big
way, but in a way that drives me to clarify my position a little. Perhaps you
will be surprised.
Divergence
Today's economy consists of an expanding divide driven by opposing forces.
Like the jaws of life, they are ripping open a gap between reality (real
economic goods) and fantasy (the US dollar). On one side we have the
collapsing real economy, and on the other we have unprecedented electronic
reproduction of the base unit of measure. On one side we have the exponential
expansion of social promises denominated in trillions of dollars, and on the
other we have a real economy incapable of delivering such value.
This divergence has been ongoing for some time. But in 2009, the angle of
opposition has finally reached 179 degrees. The graph of opposing parabolic
trends is almost complete. The only possible outcome at this point can be the
Waterfall Effect as described by Martin Armstrong.
The Waterfall Effect describes the "overnight" collapse of a
complex system, without even the forewarning of a run up (like gold in 1980
or the dot com run up). The following two graphs demonstrate this effect as
seen in the collapse of Roman money in the 3rd century AD. The similarities
to today are chilling.
The economy is such a complex organism with so many variables that it simply
cannot be controlled. It is the height of arrogance that our politicians and
so-called economists think they can control it. And it is the absolute height
of arrogance that they attempt to do so in such a way as to ALSO benefit
their selfish goals. With this level of stupidity, unintended consequences
become many orders of magnitude more probable than the intended consequences.
In fact, betting on the exact opposite of stated political goals is a sure
bet for the long run right now. And the payoff will be tremendous!
In "How ALL Systems Can Collapse Overnight",
Martin Armstrong uses the concept of entropy. Entropy is the amount of chaos,
disorder or unknowable elements in any system. A system has low entropy when it is
highly organized, ordered, controlled, contained, and all the elements are
known. A system has high
entropy when it is disordered, chaotic, out of control, and many elements
cannot be known. Science teaches us that everything in the universe
ultimately ends in absolute entropy (chaos) through the passage of time. In
other words, ashes to ashes and dust to dust.
One thing that can affect the natural progression of entropy along the way is
adding energy into a system. In certain closed systems with a high degree of
order and control, adding energy can actually reduce entropy, increasing
organization and order. This can be seen in the wonders of life and
reproduction. In the closed system of a baby, we add energy (food) and watch
it grow. Ultimately, though, entropy wins out and we return to dust.
But adding energy to a system usually has the opposite affect. It speeds up
the journey to absolute entropy. This can be seen in an explosion. A bomb can
take an entire building from low entropy to high entropy in a fraction of a
second. Another example is a forest fire. The fire is energy added to the
system (the forest) and it speeds up the journey from order to chaos. A
fireman can slow this process because he has the knowledge that adding water,
another form of energy, will affect the progression to entropy in a positive
way. But what if the fireman was acting without perfect information? What if
the fireman sprayed gasoline on the fire?
I will say it once again because it is worth repeating; the economy is such a
complex organism with so many variables that it simply cannot be
controlled... ESPECIALLY by politicians. The same fuel that ignited this fire
is being used to put it out!
The fact of the matter is that this entropic journey our economy is on must
be played out to its natural end. There is no amount of information or energy
the politicians or so-called economists could come up with that would be able
to turn back time. Nature must play out. And by adding imperfect, frantic
energy, by adding fuel to the fire, they are doing the equivalent of setting
off a time bomb. They are ensuring that we will all have to ride the
waterfall!
Deflation Talk
Deflation is the shrinking of the money supply relative to the economy. It
causes the purchasing power of money to rise and prices to fall. But
according to our modern deflationists, today's deflation comes at a time of
shrinking economy and rising money supply. According to them it is driven by
the lack of demand from the collapsing economy, and it is defined by the
falling price of assets like homes.
Robert Prechter is out and about today talking about the deflationary
depression, with stocks, commodities and real estate all falling together. He
says that we are just coming off a top the likes of which have not been seen
in 200 years. He says that the best way to ride this out is in the
"safest possible cash equivalents".
Basically, he sees this next major down-leg in the depression taking stocks,
commodities and real estate down another
85%. He says that oil will ultimately fall to between $4 and $10 per barrel! The
danger in making a prediction like this is while it may be fundamentally
sound, it is still denominated in the dollar, a piece of paper with shaky
credibility.
While I view Robert Prechter as extremely bearish, I must say that I agree
with him to a certain extent. The extent at which I do not agree with him is
the steady state of the dollar. Prechter views the world through his Elliot
Wave cycle theory, which is not unlike Martin Armstrong. But the problem is
that the waves he measures are against the backdrop of a steady state dollar.
Like Prechter, I expect all aspects of the economy will continue downward to
depths below that of the great depression. But during the great depression,
we did not have Ben Bernanke and we did not have a purely symbolic currency
as a measuring stick. We had a gold-backed dollar.
Think about this for a minute. The average retiree on Social Security
receives about $1,100 per month, or $13,000 per year. This is a dollar
denominated promise. If the crash from top to bottom is 90% or more as
Prechter predicts, this would give each and every Social Security recipient
the equivalent purchasing power of $130,000 per year when purchasing real
estate, the stock market or even commodities. Basically everything.
And this will be true not only for Social Security, but for anyone on the
receiving end of a dollar denominated promise, including all pensioners,
anyone with a tenured job, like teachers and government workers, and
including everyone in Congress. Virtually everyone with an income or cash
savings will see their purchasing power rise ten-fold!
The problem with this view is that the real economy right now cannot even
afford to deliver real economic goods at TODAY'S dollar purchasing power, let
alone another 800% rise in purchasing power, with Ben printing new ones the
whole way there.
So Bob and I both see a waterfall approaching, but how can we reconcile our
seemingly opposite views on deflation?
Currency is the key!
Take another look at the first chart at the top. Something has to give, and
soon! Think of those two diverging lines as fingers stretching a rubber band.
Then ask yourself, what IS that rubber band? I'll tell you. It is the dollar,
the unit of measure for everything economic.
There is a quote I like that comes from Le Metropole Cafe. It goes, "we
will have deflation in everything we own, and inflation in everything we
use". This is partly true. It is true during the run up to the rubber
band snapping. It is true until we hit the waterfall. At that point I have my
own version of the quote. "We will have hyperDEflation in everything
measured against real money, GOLD, and we will have hyperINflation in
everything measured against paper dollars."
So, just to clarify one more time, we will see hyperinflation in gold as the
dollar collapses on the world stage and loses its global reserve privilege.
This will be followed by nominal hyperinflation in all things priced in
dollars as the US frantically prints more and more to support its dying dream
of a socialist paradise. The distribution systems for these new dollars will
be wide and varied. But distribution will not be through wages tied to
economic increases in production (traditional inflation). It will be through
a variety of programs that will be called "stimulus". (See my
"New Stimulus Plan" and "Free Money" for clues).
The deflation that Prechter sees (as well as Mish, Denninger, Ackerman, Weiss
and many others) is very real. It is the collapsing economy and paper
financial structure. It is real
deflation in real
terms. But unfortunately for them, the dollar is not the true base of the
pyramid, and it will only benefit temporarily as a "pass through
level". (See "All Paper is STILL a short position on gold").
Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is
always concurrent with deflation (economic malaise) when measured in real
terms (gold). The dollar is only paper, and it is being printed like crazy.
So to measure things in dollars becomes very confusing when looking to the
future. The above-mentioned deflationists cannot imagine the hyperinflation
event that I describe because they are stuck on their cycles and technical
analysis that has always been measured in dollars. But in this crisis, the
currency itself is the key. All else is noise.
Sincerely,
FOFOA
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