A Message to the Deflationistas

Whatever is needed to paper over the excesses of the banking industry will be provided. 

.... the U.S. is running Japan’s playbook straight down the line, except that they are doing so at a point in time where they have consumed their pool of savings and will have to rebuild it while simultaneously bailing out a banking system infinitely more over-levered through the magic of rehypothecation and risk-price fixing, as in JPMorgan finally admitting that they have been mis-reporting CDS quotes. So, while the U.S. is in year four of the Japanese recipe for losing a generation, Japan is likely exiting theirs, albeit it at a glacial pace.

.... In the end we have exactly what we inflationistas have been saying for four years: commodity inflation and credit deflation. Hyperinflation will only arrive as a mistake or a blunder by the central banks, but not out of stupidity but rather out of faith in models which are wrong and when those models fail, they fail spectacularly causing massive interventions. The more likely scenario now that we have lived through four years of it is a grinding stagflation a la the 1970’s with rising energy, food and precious metals prices and a sideways stock market



The Federal Reserve is still fully in control of the situation, at least for now, and at this point if they get the timing wrong will result in hyperinflation because they are so woefully behind the curve that they will have to over-print to the point of confidence collapse or we will muddle through with a grinding 8-15% inflation for the next 10-15 years which will wipe out an entire generation of value investors just like in Japan after their bust in the 1990’s until now.

Central to the deflationist argument is that because we live in an age of fiduciary media, or credit money, and credit is trying to contract as loans are defaulted on wiping out creditors’ claims to money that this is the same as all forms of credit are contracting and will create something akin to the liquidity trap of Keynes’ nightmares. But to make this argument one has to believe that the central banks will not perform the one function they were created for in the first place: to provide the banks with all the credit they needed to keep functioning if they over lent to people who couldn’t pay. Yes, the system is structured similarly to a Ponzi scheme but the difference is that Ponzi didn’t have a printing press.

For this reason being long gold in a mix of physical metal and claims for it is an excellent long term hedge against the self-preservation instincts of the banking class.

....................... Peter Pham