Most of us understand that the audacious fraud that has sustained the U.S. economy and the global financial system can only end badly. But how? As far as I’m concerned, there are only two possibilities: deflation; or less likely, hyperinflation. In any event, it’s time for another go-round in the continuing debate. This issue seems to pop up in nearly every forum discussion no matter what the topic, so let’s use the holiday lull to focus on something that is almost certain to be more interesting than the markets. To get things rolling, here are some bullet points of my own:
Because of its quadrillion dollar size, the financial bubble cannot be inflated or deflated away via a gradual process; only a catastrophic implosion or explosion is possible.
The most deflationary event we can conceive of – i.e., the banks failing to open one weekday morning – is also the most likely.
The monetarists’ definition of inflation/deflation as an increase/decrease in the money supply is worthless in an economy that runs on credit. To understand deflation better than most economists seem to, you need only consider its most pernicious and destructive symptom: an increase in the real burden of debt.
This is the force that is suffocating Europe but which is being held at bay – barely – in the USA by the artificial and unsustainable suppression of mortgage rates.
Federal taxes are steeply on the rise, putting yet more deflationary pressure on households. Add in Obamacare, the largest new tax ever enacted, and it’s only going to get worse.
So are cutbacks in pension and healthcare benefits. Detroit’s bankruptcy has opened a legal avenue for states, counties and cities to significantly reduce benefits if the money to pay them doesn’t exist.
Price increases for groceries, tuition and health care do not represent inflation – as how could they if real wages are stagnant? Under the circumstances, an increase in the price of any or all three of those things leaves households with less money to consume other things.
He who says hyperinflation is coming must explain how homeowners will be let off the hook, presumably by an explosion in real estate prices.
No fudging that last item, please, since mortgage debt is such a big chunk of what we collectively owe.
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