Saturday, March 17, 2012

Probably culminating in a hyperinflationary depression

Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.

In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.

If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.

It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.

Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at

In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.

Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?

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