What Are The Causes Of Deflation In The Greater Depression?
By Delwyn Lounsbury - THE DEFLATION GURU
The causes of deflation are linked directly to fractional reserve banking causing fiat money inflation and the massive credit inflation of the past 70 years. The only cure for credit inflation like we have had is a big credit deflation (See page on Austrian economics). Thanks to government protection and encouragement banks were able to lend with first only small cash holdings in reserve. In the last decade our government and the Federal Reserve Bank required no reserves backing your deposits. None! We had a credit binge. Even the FDIC (Federal Deposit Insurance Corporation) and FNMA, Fannie Mae - the Federal National Mortgage Association both went bankrupt and had to be nationalized. You and I the taxpayers now own them. We are on the hook to pay for future failures.
The following is a long list I think shows why the argument for a deflation leading to hyperdeflation is valid. The GREATER DEPRESSION that started in 2000 and may not end until 2016. It's an end of a mania bubble and an 80 year long Kondratiev long wave cycle that all capitalist economies apparently go through. See the article on Kondratiev wave economic cycle. We are in a Kondratiev wave winter right now. Most asset values will drop by 90 percent into 2016 and unemployment may hit 30%. Even the price of gold may drop in half. All this according to Robert Prechter of Elliott Wave International - Join Club EWI free at links on this site.
When seeking the cause of deflation we need to remember that the real cause was credit inflation. Many items on this list are manifestations of the credit bubble popping. What is remarkable is the depth and number of related items on the list.
1. Growth of government at all levels federal, state, county and city due to the socialist neo-Keynesian belief that the economy can be micromanaged. Money is sucked away from the free market economy to fund inefficient and bloated programs. Eventually the largess grows to be one third of the economy and then causes it to get top heavy and crash. The big government parasite that is welfarism sucks all the life from the economy.
This Kondratiev long wave took some 80 years start to finish and the next on may take 100 years. The Obama administration has added 250,000 new federal positions and raised wages to government workers at a time when the private sector is hurting.
'As government expands - Liberty contracts' by Ronald Reagan
2. Military waste. Wars and much of the money spent by all the different divisions of our defense departments is poured down a hole in the ground-never to be seen again. Oil, food, time, materials, manpower, blood and lives wasted.
3. Governments support of favorite industries that would not make it in a free economy. Real estate bubble - unwise lending practices such as everyone should own a home nonsense. Government Oil depletion allowances meant there was no incentive to conserve or develop alternate energy sources. Solar best!
4. Real estate deflation - end of a mania - Prices down 33 per cent already leading to reduced wealth of individuals, reduced capital gains tax revenue and reduced real estate property tax revenue. Robert Prechter says there will be a 90% drop by 2016.
5. The coming stock market losses will make people feel poorer so they don't spend. Pension and retirement accounts lose money on stock and bond investments hurting ability to pay those retiring. 90% drop predicted. In a secular bear market with a bear market rally (B wave) rally topping in the first months of 2011. 13 year head and shoulders top formation. If you draw a line connecting the bottoms of the index moves you get a straight line pointing down to the right. This is a bearish technical chart pattern called a declining neckline.
6. Oil. High petroleum prices sucking money out of people's pockets that could have gone to purchasing goods and services in the market. We are all on an oil food chain using dead dinosaur and prehistoric plant deposits for our energy instead of whale blubber like we used to. Oil money is sent to foreign countries, which, in some cases is used to pay for attacks on America. Then there is the inefficient gas guzzling autos, appliances, lighting and phantom loads on TVs, computers, microwaves etc. Heat rises right. Why are all the working parts of refrigerators underneath the area meant to be cooled? Heat rises up through the whole refrigerator or freezer box. What a waste of trillions of dollars of oil all these years. Go solar.
7. Job losses - high unemployment meaning less money is around to buy goods and services. Thus, slow sales causes businesses to lay off more workers in a vicious circle cycle snowball effect. Here at the start of 2011 there are 14 million plus unemployed in the U.S. This is the multiplier effect in economics in reverse which will feed on itself creating hyperdeflation.
8. Collectable items, antiques, art and possessions in general loosing value. Lower prices when people try to sell. They feel less wealthy and cannot buy as many necessities. There will be many bargains in all kinds of property and possessions at the bottom as people sell assets to stay afloat. Antiques Roadshow on TV is seeing a 30 percent drop in some prices and their estimates of value range has widened greatly. I expect it to go off the air in the next several years. John Lennon's white suit recently sold at a 50% drop.
9. Credit tightens up. Banks and other lenders fears lead to strict lending standards. Businesses can't expand. A low interest rate is sure sign money is on sale. It is a sign of weak demand and deflation. Transparency is code for more oversight & rules, by the way.
10. The Internet has lowered the cost of doing business online. This means it is easier to startup a business. Business and jobs also go offshore to cheapest providers. Prices drop each year due to this and quantity of scale price reductions. Think calculators.
11. Food. Farm commodities prices drop eventually due to weak demand. Small farms get hurt most. Reduced income means they cannot buy as many goods and services as well as new equipment. Now, in 2011 prices are up due to reflation by the government and high oil prices. Right now, the high cost of food sucks money out of people's pockets. They can't afford to buy stuff or go out to restaurants. Layoffs result. It's deflationary!
12. PIIGS - Portugal, Ireland, Italy and Greece. Inefficient government leads to high unemployment causing spreading malaise in Europe and a spreading banking and labor crisis.
13. Interest rate drops. Savers and retired people counting on a safe return on their money have less money to buy goods and services and to make rent or house payments. Then interest rates spiral up as businesses borrow at any rate to stay afloat. Bond prices tank meaning massive loses in value of debt instruments with junk bonds and corporate bonds hurt the most. Cities, States and Counties that cannot print money (like the federal government can) can have the most trouble.
14. The saving rate has climbed from 0 to 5% already in 2010. Means there is less money for purchases. This hurts business.
15. Increases in debt and credit card repayment means there is less money for purchases. This hurts business and the trend will continue.
16. People travel, eat out and vacation less. Companies are cutting way back on first class airfare. People are cutting back on their vacation plans. 106 motels are in foreclosure in the summer of 2010 here in the San Francisco Bay area.
17. Auto sales & leasing down. Since the bailout of GM and Chrysler, people are keeping their cars longer and fixing them. Stock price of Auto Zone parts store (AZO) at a high point.
18. Clothes and retail stores hurting as people cut back and do with less. Japan is in a long term 20 year long deflation. Property values just hit a 36 year low - summer of 2010. Japanese wear their clothes longer sometimes until they are threadbare. We are catching their disease.
19. Bank bailouts and lending freeze up. Trillions of derivative dollars disappear despite government intervention to try and fix the problem. Roaring 20's inflation of up to 10% a year had bankers back then fearing the money they had lent out would be close to worthless in just 10 years. They clamped down and stopped lending causing the economy to go into a tailspin. The same thing is happening right now only world wide. The Greater Depression will be 2 times as long and 2 times the size of the 1930's depression due to its Grand Supercycle scale.
20. Spending on entertainment and sports event attendance declining. Robert Prechter sees sports star salaries slumping from here on due to reduced attendance.
21. State, county and city cutbacks and layoffs due to both lower sales tax and real estate property tax revenue. 46 states are in the red already. California has a deficit of 17.3 billion dollars. Illinois has a 13.5 billion dollar deficit and 5 states are technically bankrupt and many are laying off police officers and firemen.
22. CPI drops. Consumer Price Index chart on a down trend. Index does not include energy and food. Crazy! CPI hit 62% upward retracement level in 2011 and then reversed down.
23. socialized medicine means 16% of a once vibrant American free market economy will be controlled and micro managed by an inefficient government bureaucracy. ObamaCare (rationing, euthanasia and tax) is unconstitutional! This is a job and an incentive killer. Socialism is inefficient. Most health care insurance companies will go out of business. The Health Care Affordability Act of 2009 is outright euthanasia and rationing!
24. Cap and Trade means more costly restrictions on business. So business people get cautious and pull back from expansion plans. Cap and Trade is a job, incentive and profit killer and will lead to a one-world-government program which means loss of our freedoms.
25. Baby boomers retire. They draw out their savings quit buying stuff including bigger homes. They live longer and start sucking social security, Medicare and Medicaid monies out rather than contributing.
26. Bankruptcies grow. People give up and default. Business and lenders are weak - they write off losses and retrench.
27. Volatility increases. Flash crash of 998 points in the Dow. Fear increases. People pull money out of the markets and park it in safe 90 day government T Bills at almost zero interest rates. You should do the same by-the-way. Cash will be King!
28. Gold to silver ratio bottoms April of 2006 hits new high 4/1/2011 in a mania blow off. Silver is an industrial commodity. A weaker economy means weaker demand as evidenced by top in prices May 2011. The price of copper is already dropping here in the first quarter of 2011. Economic booms are said to have a copper top. This is due to all the copper used in industry, autos, appliances and housing.
29. Margin debt on stocks tops out at $384.1 Million-Sept. 2008.
Higher margin requirements recently on some ETF's (exchange traded funds) and gold and silver. Deflationary!
30. OTC, over the counter stock prices and share volume peaked back in 2000 with lower peaks in 2004 and 2006. Lesser total dollar amount traded shows trend of disappearance of market froth at the same time as what has turned out to be a 13 year head and shoulders topping formation with a downward neckline if you connect the lows. This is a secular bear market people!
31. Tea Party. The Libertarian party is actually the third largest political party. Libertarians are for free enterprise, small government, small armies for defense only and a do no harm attitude. People are cranky these days. Mood change to pessimism (waning) about government and elected officials. There is a surge in conservative talk radio (Rush Limbaugh, Mark Levin) and conservative TV shows (Glenn Beck). Join them and support upholding our Constitution before our freedom and liberty is completely gone!
32. Crime, Gangs and Mexican Boarder drug cartel problems - fear, higher cost of law enforcement and boarder patrol. Xenophobia (fear of strangers) as evidenced by the uproar over the Manhattan Muslim mosque planned near the site of 9/11 attack and Arizona's new immigration law.
33. Video gaming is non-productive and results in reduced exercise leading to obesity, diabetes & other health problems. Some are addicted to the point of flunking out of school. World wide problem
34. Fishing license sales soar in Michigan. People are trying to catch a source of protein to supplement their diets.
35. Private pay colleges. People out of work try and retrain in a different industry. Some end up with a big pile of debt and no real job opportunity.
36. Medical tourism increases. Healthcare in other countries is as much as one third cheaper cost for medical and dental procedures. Money leaves the U.S. for other countries.
37. End of throw away society. People search the net and publications like Consumer Reports to find the best and longest lasting products. Companies build better products.
38. Sales of Kubota and other small tractor company sales are up - a back to the country - back to the farm trend. Worry about crime and food availability. People seek 'elbow Room & off-grid.
39. Xenophobia - Gated communities. Fear of others. Fear of strangers. People that can afford it seek sanctuary in upscale living. There are immigration issues. Fight over mosque near World Trade Tower 9/11 site. There is uproar over our Mexican boarder and fear of a drug and crime wave.
40. Solar & efficient home systems purchases - safety & savings.
41. Disintermediation. Borrowing short-term money to turn around and lend it long term. If interest rates go up faster on the short-term money than the loans they have made with the money, they are caught again like what happened during the savings and loan crisis back in the mid 1990's. Likewise, lower prices mean lower real estate commissions. Commissions drop to 5% & now 4%.
42. Socialism is a wasteful inefficient growth of government and allocating scarce resources instead of the free markets. Dangerous! 'Killing the goose that laid the golden egg,' ObamaCare is pure socialism which kills free enterprise - economy implodes.
43. Barack Hussein Obama - socialist president turning fascist - was a Marxist in college. He appoints all leftist people (Czars) in his administration, grows the size of government by 250,000 jobs, balloons our debt and then rams unconstitutional ObamaCare heath care rationing system down the U.S. citizen's throat. He raises taxes and gets business worried, uncertain and cautious as he turns fascist & tramples all over the U.S. Constitution. Wrong war on entrepreneurs - soak the rich economic model = freeze up!
44. People mood wanes. TV news talk of 'these troubled times,' 'Flash Crash' and now 'these bad times.' A negative social mood started 2000. Realism and skepticism morph into realization and outrage. A waning society develops. Secular bear market stock rally ends in the middle of 2011 and the World economy crashes past 2016.
45. New Tariffs and trade sanctions. The Smoot-Hawley bill passed in June of 1930 was a bone-headed move which raised tariffs on 20,000 imported goods. The 'New Deal' socialism delayed the U.S. economic rebound and made unemployment worse back then. Same socialist/isolationist trend is going on today.
46. China, India, South Korea & other growth economies are providing cheaper goods and services thereby taking jobs and greater market share.
47. Terrorism. Three billion dollars extra money spent - a drain as evidenced by the Patriot Act and the hiring of more military & government employees. All of it borrowed money!
48. Regulations. Uncertainty is a business and job killer. Every minute congress (and every other government group) is in session we lose more freedoms.
49. Threats of new taxes and the canceling the Bush tax cuts - a business killer. Bailouts mean taxpayers take on trillions of risk. Taxes, fines, fees rise to pay for government borrowing and deficit spending. Big government is a big parasite sucking the lifeblood out of economy.
50. Problems in Persian Gulf. Egypt. Libya, a nuclear Iran. Hezbollah and Hamas join in Hatred of Israel. Oil is lifeblood of the west. Obama throws Israel under the bus. Why?
51. Federal Reserve Bank - a fraudulent immoral monopoly and cartel. Stupidity and bad timing now means its portfolio is now 50% mortgage securities and other types of riskier bank debt. Its bag of tricks is empty with short-term interest rates near zero. Helicopter Bernanke (He said - we can take helicopter loads of money and dump it on any problem) is a gradualist. In truth, he inherited this whole problem from Alan Greenspan and past fed heads and their bankster Anglo financial power elite friends that we all owe money. The Fed cannot stop the deflation and the Greater Depression. The power elite don't want to see the value of the dollar going down further. They will have sold their real estate back in 2006 and will now be selling and shorting stocks, bonds and gold. The U.S. dollar is still the reserve currency of the world. It will be strong.
The Federal Reserve Bank is a nefarious power elite one-world-government/new-world-order 1913 plan to take all our freedom.
52. Interest rates rise. Next everyone that ran to the safety of bonds gets caught. As interest rates rise, the price of the bond drops causing capital losses. Robert Prechter says many corporate and state and municipal bonds will be worthless at the depths of the Greater Depression. States, counties and cities which are experiencing reduced revenue due to drops in people's income along with drops in property taxes are already seeing their bonds reduced to junk status by the ratings agencies.
Even the Federal debt has been put on the watch list by Moody's.
53. M-3 down. The government does not publish total money supply figures anymore. Why? Deflation shows up there first. M-3 is estimated to be down 9.7% a big deflationary drop and can lead to hyperdeflation.
54. Bank Failures. We are having bank failures at rates not seen since the 1930's. Up to 1,000 banks a year have gone under. So far, the government regulators have swooped down and either taken over or arranged a merger of troubled banks. This will change as the numbers of bank bankruptcies increase. They will be out of money and forced to just let them fail.
55. FDIC and Fannie Mae now taken over by our government. The Federal Deposit Insurance Corporation idea has a fatal flaw. Propping up troubled financial institutions makes them take chances an engage in unsafe banking practices because they think the government will always be there to bail them out. Now, you and I the taxpayer will be saddled with trillions in debt in the aftermath of the wash-out coming to the FDIC and Fannie Mae.
56. Peak oil. The year 2005 is being called the year when petroleum production peaked. High oil and energy costs suck money right out of people's pockets. They forgo purchases of other products and services causing those industries to contract. Deflationary! No money left to buy stuff.
57. Debt stress. 46% in a recent poll are debt stressed out. Health and productivity suffer.
58. Credit card pay downs. For families making $50,000 or more, a record 50% are paying down their card debt.
59. Unemployment close to 10%. Don't forget this does not count those that stopped looking for a job, went back to school, retired or on unemployment. Rate is really 17% . Proof the Obama socialist model does not work.
60. Commodities prices dropping. Consumer Price Index is in a long term downtrend. It reversed a 2011 bounce to the 62% (golden number) retracement level. Weak housing and automobile manufacturing that use a lot of copper. Topping price trends!
61. Real estate deflation. 50% drop in prices in some areas. Builder's confidence index is at new low. There are many layoffs in related industries. Many housing and commercial loans written on adjustable interest terms back in 2005 to 2007 are coming up for their rate reset or coming due. Many may not qualify for a whole new loan or be able to make the new higher payment. It's a real drag on the whole economy.
62. Hedonic Pricing. The Apple computer of 2005 was $999 - the $999 Apple today is way better, faster, more memory, bigger screen etc. Free enterprise (along with Moore's Law or the power of computers doubles every two years or so) means companies produce better and cheaper products do to innovation along with price reductions to quantity of scale. The more units produced the cheaper each unit is. Think calculators.
Even the government uses hedonics in their statistics.
63. Socionomics (Read Robert Prechter's books) A marriage of sociology and economics about societies mood swings from positive (waxing) to negative (waning). Man is a herd animal and follows the herd or he would have been thrown out of the cave and frozen to death. Not the way to invest, by the way, everyone piling into real estate, stocks or whatever at price peaks like a bunch of lemmings rushing over a cliff and into the sea to die. Robert Prechter says 9/ll type of events only happen in a negative mood period. Plus, he says 9/11 was the start of world war three.
64. Anglo financial power elite. Next is hyperdeflation with a strong dollar. The Anglo financial power elite have most of their money in America and won't stand for it losing any more value. There are 1,500 or so family dynasties - who we all owe money to - the banksters (George Soros, the Morgans, Rothchilds, Warburgs, Goldmans and Rockefellers etc. They have already sold most of their real estate and now will be dumping and shorting stocks, bonds and commodities. Everything is going to deflate in price by 90%. Gold may drop more than half. In 10 or 15 years from now (after the Greater Depression) we get runaway inflation again if the dollar is not private money backed by gold. Lobby for and support it or else we will get a one-world-government (or a Hitler) and lose all our freedom and liberty.
65. The US is a huge international debtor, it's borrowed nearly $3 trillion from foreign governments. If interest rates should ever go up back to what one might consider normal, the interest costs are going to eat us alive. This is especially true if the US keeps on running this deficit spending insanity. Robert Prechter says interest rates will soar as people & businesses borrow at any price to stay afloat. 15% to 20% on 90 day T-bills may be in the cards according to Prechter. They are close to 0% currently. Money is on sale. Low interest rates are a sign of slow business activity - disinflation. High interest rates suck money out of people's pockets just like high oil and food prices. Deflationary! Nothing left over to buy stuff or go out to a restaurant etc.
66. The Austrian school of economic thought says each and every time there is a mania with credit inflation at the root there will be a big crash. Every darn time! Credit inflation, fractional reserve banking and fiat/paper money) are the cause of deflation. Deflation is the bitter cure for government and the populace living beyond their means by borrowing. Credit deflation happening now!
67. Banking 'Transparency' UK banks, HBC and Lloyds, are joining a worldwide trend toward more transparency or increased regulation and oversight. Every country's currency supply is created through loans, fractional reserve banking or government bonds. So, the more regulations, the harder it is to get a loan, and the more scrutiny on banks - the more deflation grows as lending slows.
68. End of deficit spending plus budget reductions-trend grows.
69. Kondratiev wave theory-80 year Spring/summer/fall now winter.
70. Financial repression. The gist of financial repression is that government waters down its currency fraudulently figuring to pay for excess borrowing with inflated worth - less money. This is a rip off of savers, the elderly and others on a fixed income. Just like a drug dealer who cuts his dope in order to sell more. It is actually government bankruptcy! Game over! The U.S. dollar will be in a bull market until 2016. Cash Is King!
71. Fiat money. Fiat money is money with no gold backing. Fiat means 'let it be made' in French. History has shown that fiat currencies always go bust. Lobby for private gold backed money or else we get runaway inflation again in 10 years! It's the only way to keep government honest. Do not let government or a central bank control the money! They always inflate it to the moon.
72. One World Government - The Anglo financial power elite (The 1500 mega rich families that control all the world's central banks - the BANKSTERS) want a one world government is the biggest story in the universe. The elite have been orchestrating a directed history - a weakening of free market capitalism (using all 71 above causes of deflation) for the last 300 years to grind the middle class into submission and global governance. They have now engineered the Greater Depression that started with the dot com mania 2000 peak and will offer one-worldism as the solution. The greater depression will last into 2016-2018 and result in a 90 percent drop in most asset prices. Gold may drop in half. Unemployment will probably exceed 35 percent.
This global deflationary depression will be twice as big and twice as long as their 1930's depression that brought socialist fascist Franklin Roosevelt into power. Welcome to an Orwellian 'Big Brother' society with the leftists like Barack Hussein Obama doing their wet work. Why do you think Obama, the socialist communist Marxist fascist Nazi, got the Nobel Peace Prize and the $1 million dollars (front money) that goes with it in the first months of his presidency? His tax the rich wealth redistribution is covert communist code - textbook Communism 101.
The Rothschilds, Rockefellers, Warburgs, Morgans, Goldmans, Oppenheimers, Schiffs etc. will be giving you one option - global governance and a one world currency. A brave (Ha!) newer world in which you are told where to work, where to live, what to do and what to think cradle to grave. Central banking using fiat money, wars, global warming and now a cruel crushing deflationary depression have been their smokescreen for taking your freedom and liberty. The likes of the UN, IMF, World Bank or Bank for International Settlements (BIS) will rule the new world order. Only the truth broadcasted by the internet reformation and a return to a privately run gold backed money can save us. Only gold is not someone's debt. Only gold is honest.
PS COLLECTIVISM IS COMMUNISM. I HANG MY HEAD & CRY ABOUT THE NEFARIOUS GLOBALIST CONSPIRACY. Read 'The Creature from Jekyll Island - A Second Look at the Federal Reserve' by G. Edward Griffin -
Robert Prechter says the bottom of the GREATER DEPRESSION will not be until 2016. He thinks prices will be down 90% on most assets and that unemployment will reach 30 percent. Cash will be King. If you have cash at that time, your money will buy things at a big discount. As you can see, there are a whole lot of causes of deflation.
By Delwyn Lounsbury - THE DEFLATION GURU
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