By Greg Hunter’s USAWatchdog.com
I have been saying for months the path the country will ultimately take will be the inflation path. Yes, I know we have had some deflationary signs in the past. The financial meltdown of 2008 would have been a deflationary event if the government had not stepped in with cash. There was the $700 billion TARP fund, the $860 billion stimulus bill from Congress, and lots of money printing and toxic assets purchased by the Federal Reserve to the tune of around $1.7 trillion. Oh, and let’s not even talk about the ongoing black hole of liability that Fannie and Freddie represent to the country. It is more than $6 trillion. Not even a mention of this in the new financial regulation passed yesterday. Talk about denial!
What’s happening now is all this cash had been pretty much used up. The latest report from Shadowstats.com confirms the renewed downturn America is facing. It said, “The signs of a renewed or intensifying economic downturn continued to mount, with weaker than expected reporting of June retail sales and a worse than expected May trade deficit. June retail sales fell for a second straight month, and, dependent on Friday’s CPI reporting, the May and June numbers showed an annualized real (inflation-adjusted) contraction of about 7%. . .”
June retail sales are down “about 7%!” Yikes! What will the Fed do? For a clue, this story from My Way News, “With risks growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That’s a turnaround from earlier this year when they were moving to wind down crisis-era supports. . . . if the recovery were to deteriorate, Fed policymakers have options. They could revive programs to buy mortgage securities or government debt. They could lower the rates banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.” (Click here for the complete story.)
There are plenty of folks who think the U.S. economy is a Ponzi scheme. You know what happens to those things. They all eventually collapse because they can no longer grow fast enough to cover the cost. That’s the mindset of a recent article from The Market Ticker. It said, “When the scheme is early in its run everyone thinks that it will be no big deal, because at the time it isn’t. But when it gets later on everyone is terrified at the prospect of accepting the losses that must be taken, because they’ve gotten so large. . . In this case we’re now to the point where restoring fiscal balance across the credit system requires a roughly 60% contraction in both outstanding credit and the size of the Federal Government (in terms of dollars.) That in turn will contract GDP by 40%. I understand this sort of prescription is considered politically unacceptable.
But math doesn’t care about politics. It simply accumulates more damage, day by day, until we accept the math – and the truth. The gap has reached a size that is mathematically impossible to grow out of through expansion of GDP.” (Click here for the complete story.)
What we are doing now is making matters worse for most people. However, some are profiting greatly from all the debt and money printing. Back in October, I wrote, “Is The American Empire Being Looted?” I said, “I don’t know if all the trillions created and spent is just waste, incompetence or downright fraud. It is probably all of the above. It really does not matter because, in the end, the outcome will be the same. The dollar will be diminished, and the credit rating of the U.S. will be destroyed. In the Great Depression, the value of the dollar and the “Full Faith and Credit” of the country were never in question. I predict, before this financial crisis is over, both will be looted from the American Empire.”
In the end, we will have a currency crisis, and that means almost everything will cost more. (Housing will cost less as interest rates rise.) We are becoming an inflation nation. It’s a place where the vast middle class will become poorer as the dollar becomes devalued.
Excellent article, well presented. The financial reform bill you refer to is the final straw in our demise. There are two interesting things about it politically. First there is no financial reform just a redistribution of power from the legislative to the executive and from main street to wall street in a further concentration of resources. Second the American public has acquiesced to this sham from the same government that brought us to our current situation. The media, even the “hyperbolic” right wing radio did a lousy job of pointing out this disaster. The public is now almost completely at the mercy of bureaucrats whose only interest will be going to the office making rules and going back home. The consequences of their actions will be unknown at the outset; even Chris Dodd admits this.
The next phase of deflation is now unavoidable, along with food and fuel shortages. The average American deserves what they apathetically allow, the rest of us just have to hang on somehow. I feel confused when I try to think about why these legislators would want to do this. I understand Obama’s reasons quite well, but can not understand these people who are old and have been around during the period of economic and political freedom.
Greg, great read…How long before the powers that be start looking at 401K’s as a resource for their disposal???
I keep hearing that the Federal Reserve notes and Treasury bills are backed by the full faith and credit of the U.S. government. That translates to the US Tax payer. I see the US Government rolling the debt over by selling short term to cover long term debt. They just keep flipping them over and over. Isn’t that what businesses were doing before the credit crunch?
Thanks for bringing this into focus.
From time immemorial, the “Golden Rule” never changes; “One who has the Gold makes the rules”. Gold is more than a commodity; more than a ornament; more than a reserve; it has, is and will be true currency. Unfortunately, the “Golden Rule” was broken in June 1933 with US Dollar de-linking with the Gold Standard and now paper or fiat currency(s) must face the music. It is inevitable; Hard Physical Assets vs. Paper Assets. Thanks you for world class reporting which the mass-media is deliberatly avoiding.
Nixon decoupled the Dollar from Gold in 1971; in 1933, they just confiscated it from the public and moved the value of the dollar from 20 per ounce of gold to 35 per ounce of gold.
When one takes a short peek into the history how the Federal Reserve was secretively created and the list of shysters who were involved, it becomes painfully clear very quickly that that organization was never designed with the benefit of the general public in mind.
It worked to a fair degree for seventy-some years simply because it appears we were lucky enough to have people running it who seemed to have a set of morals and a sense of duty to the public even though it is in fact a private bank. No more. Our federal government has become nothing but a cesspool of corrupt, money-grubbing bastards who are owned and operated by the self-serving money-grubbing bastards of Wall Street. The Federal Reserve has become nothing more than a counterfeiting operation for Wall Street. None of the stock market and real estate bubbles of the last twenty-five years were accidents. They were all designed and executed with the destruction of the middle class in mind.
In three and a half years the Federal Reserve will be 100 years old. If this country is still in one piece at that time, I suggest we celebrate that milestone with another rip-roaring, guns-and-bullets revolution.
Inflation??? you go to lengths quoting Karl Denninger (Market Ticker) who will tell you its is massive default, delevering, etc that will lead to DEFLATION….Your thesis is lacking on how we get an inflated currency from or situation, and certainly you can’t quote Karl to support that theory
Another great article. Although inflation is inevitable, deflation will come first. Krugman will stand at his figurative podium telling Congress that the stimulus was not enough and more QE would be necessary to fend off the markets total collapse. Congress will authorize a new stimulus creatively titled something like “Americans For Fiscal Responsibility Act” which will be quite the opposite of anything remotely considered fiscally responsible. Of course it will conveniently occur during the next election cycle so both sides can pander to their constituent. Dems throwing out their normal monikers like, “hate, racist, fascist” and the Republicans will fire back with, “socialist, communist, marxist” and the bill will pass anyway. While we bicker amongst ourselves about ridiculous social issues, politicians from both parties will continue to reward their investors (campaign contributors/Wallstreet) with more money to prop up this perpetual Ponzi Scheme. You are robbed on the front through your income tax while your politicians reach around your back pocket and steal your savings through inflation. And all this to reward the very same people whose judgement helped cut the baby boomer generation’s portfolios in half just before their retirement. All in the name of “protecting” the citizens from themselves.
Through our ignorance we have subjugated ourselves to the rule of politicians who are spooning the bankers who fund their campaigns. While the diligent, informed author and readers of this site take their time to research the actual news that is going unreported we have to listen to the same Right/Left ignoramous at the water cooler spout off about something they heard Rachel Maddow or Glen Beck say and consider themselves “informed”. The inherent trust of federal government in a country that was founded upon inherent distrust of government is truly disconcerting.
Sorry for the rant but I needed to vent. Heard some macaroon at the water cooler talking about how he “feels things are getting better”. Based on what? Where is this wonderful information coming from is what I asked. He told me he was watching CNBC and they said so. I chuckled and walked off.
P.S. He drinks from an “I Heart PETA” mug.
I saw a news cast last night where the reporter dissected many unemployment,and new job created statistics with the inevitable outcome that things, indeed, were looking up. Unbelievable..
Many of these corrupt politicians believe that,if they can make enough cash selling their votes and souls to the puppet masters that pull their strings,they can avoid the future challeges American citizens face.On the contrary, should their blood stained fiat currencies lose most or all of their value they will suffer a greater wrath than most.I suspect the pilots they hire to fly them out of the country, when the ball drops, will have some scores to settle when their investments turn to dust.As we saw in Argentina,many of the individuals responsible for that country’s economic crisis fled with suitcases filled with money in 2001.
And since this economic debacle is global, who would welcome these snakes with open arms ? Their puppet masters ?
“Fasten your seatbelts, it’s going to be a bumpy night!”
Courtesy of Bette Davis in ‘All About Eve’ c1950
inflation for somethings, deflation for other things. Maybe it will be harder on some and not so bad for others. I was talking to this guy heading to LA , I ask him were he was going to stay. He said that was easy, just get a bag of food,an walk down the street, some gal will take you home.He grew up dirt poor and figures it’s OK to be that way. I would say a big group of people could care less about money and what it’s value going to be in the future. It’s all about who the money is being give to, big government contracts nobody talks about inflation when that happens but food stamps watch out inflation around the corner. It’s all to funny that capitalism ends with ism, which makes it one kind of a system and systems fail sooner are later. PEACE
Great article! My question: I am aware of how higher interest rates effect the Real Estate market however, the higher cost of labor and virtually every single component that goes into home construction will be higher….with this being the case, how can prices go down?
Stephen has many good points; especially about the public and our Congress. There is truly no difference of any substance between the current crop of Democrats and Republicans. I disagree with the deflation coming first before inflation because of the below. Billhopen on the other hand doesn’t understand where the inflation will come from. Fiat currencies are bought and sold on the open market. Only the demand for a currency sets its value. If you don’t understand this point then you don’t understand the coming storm. Billhopen, do you think the demand for Whale oil increased or declined with better alternatives?
Most are treating Economics like it is real science and that economies can truly be controlled. The politicians are wrong on both accounts. Inflation in the Weimar Republic was not preceded by deflation; they had a debt to service that far exceeded their gold and foreign currency reserves. Look at our history. Nowhere in the 1970’s did the US experience deflation and we had recession and runaway inflation. We left the gold standard in 1971 because of gold and dollar arbitrage. Our ponzi scheme, the Bretton Wood system collapsed.
Here is the definition of deflation:
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.
1) Feds will pour more money into the economy like the speakeasy’s of Prohibition pour liquor. Instead of allowing a lot of pain to bring equilibrium to the system, they spent over a trillion dollars and got NOTHING! What we need is a reset. We can try to control the fall or we can push it to the point that the backward movement is totally uncontrollable.
2) Spending has contracted in the investment and consumer segments
3) Unemployment is off the chart [real unemployment, not the US Government numbers]
4) Fall in real earnings [ this has been happening for a while if you look at Real inflation and your check book]
The last and only real deflation we experienced was during the great depression. The US dollar was pegged to Gold then. Don’t confuse the fluctuations in commodity prices as deflation; they rise and fall with the supply and demand. Our dollars WILL devalue, that is inflation. There is no Gold standard. All fiat currencies float and are basically a ponzi scheme. Keynesians say that inflation is the result of a growing economy. John Maynard Keynes did all his modeling and theorizing on the Gold backed currencies not fiat currencies. The “Great” economist of our day, that the main stream media trot out to cheerlead the so called recovery, are basing all of their comments on a flawed model.
At the start of the Great Depression, in 1929, the US Government was running a budget SURPLUS and the US had a trade SURPLUS of $400 Billion (nominal). We produced most of what we consumed and we had countries willing to pay us Gold for our goods that they NEEDED. We had a dollar backed 100% by Gold that other countries would take for payment for anything at anytime. They couldn’t run the printing presses like we do now.
Today, you have a fiat currency backed by the taxpayer [and a thousand nukes or so]. What are you going to deflate against? 2010 first quarter GDP is 14.592 Trillion dollars (nominal), our debt is nearly 100% GDP and our total obligations of 63 Trillion dollars are nearly 100% WORLD GDP. Our deficit this year alone is over a Trillion dollars and we have a trade deficit of half a trillion dollars. Most of what you buy is imported. The more our financial situation deteriorates, the more the dollar devalues and the higher prices go. What is going to cause deflation now? Even the impending collapse of the Euro only raised the value of the dollar of a few months.
And none of the current economic models being used by Bush or Obama seem to take into account national debt. I think that you, Greg and I agree that we have only a few ways out and all of them are ugly: Hyper inflation, default on US Debt (my favorite) or revaluing the dollar downward by a factor of 1000. What do we have today that the world needs? Big Macs, Starbucks, our deceptive investment vehicles?
And Don’t disregard everything Glenn Beck says. He’s right in a lot of areas. He’s jsut a little theatrical.
Perhaps you will find it “interesting” that China’s leading credit rating agency, Dagong, recently downgraded the U.S. and U.K. sovereign debt. Please check this article: http://www.globaleconomiccrisis.com/blog/archives/1116