Tuesday, October 28, 2008

Say Yes to Deflation, No to Tyranny

I responded to a post on a message board that cited this article by Eric Janszen. I was asked for my response and will reprint it here for my readers:

I have been a "deflationist" for a few years. I was previously a "inflationist". I am also a student of Austrian Economics. Generally, we believe the Dollar is unworkable in it's present form and from an ideological perspective, we despise the confiscatory nature of inflation that a fiat currency naturally perpetuates. We want a gold standard, and as a result we want the dollar to implode so our goal can be realized. Therefore, any notion of the dollar rising is typically rejected as nonsense to most of my colleagues - Mr. Janszen included.

Unfortunately, most Austrians (not all) share the myopic view that because the Fed and Treasury are growing certain areas of the supply of money and credit that it will have the same effect it did every other time they did the same thing. i.e. - the creation of another asset bubble, and a rise in general prices.

John Xenakis at Generational Dynamics, Kevin Depew at Minyanville, Mike Shedlock at Global Economic Analysis, myself and a few others all understand that the conditions in existence now are different from those in the past 80 years. For one, we have an aging boomer population that need to liquidate their assets for retirement. Second, we have a heavily indebted Gen-X and Gen-Y population that desperately need to save money, eliminate debt and spend less money overall. Third, we have banking institutions worldwide, whose balance sheets are so impaired, that they are not ABLE to lend money, even if they wanted to.

It takes two people to make a transaction. And just because there is someone (central banks) providing a nice cozy environment to make one, doesn't mean it will happen. Banks cannot lend. Consumers and businesses see no reason to borrow. That is, in essence, the argument for deflation. "You can lead a horse to water..."

If businesses and consumers rapidly started saving, slashing expenses and re-educated themselves in new lines of work. And if banks allowed for a far higher level of transparency into their balance sheets, marked all assets to market and reduced their leverage ratios - we could potentially see a mid-cycle hyperinflationary boom, that if allowed to grow out of control, would lead to the destruction of the dollar. But that is a lot of "ifs". And the destruction we would see along the way would be breathtaking.

It "should" have been done by now. Balance sheets of westerners "should" have been repaired after the dot-com bubble. Banks "should" have reduced leverage and improved their balance sheets in 2002. And responsible government officials "should" have told us to reduce consumption and debt. Society in general "should" have, at that point, retrenched and to put it bluntly - started making more babies. But we were told to do the opposite. And like good little sheeple, we obeyed. Now we are being forced to do all of the above from a far tougher starting point. It should be noted that there was a recession in 1927 also, and the easy money policy of the Fed at that time greatly extended the boom which undoubtedly made matters worse in the depression.

Essentially, we are making the same mistakes that were made in the 20's and 30's. We're trying to prevent asset prices from falling to where savers are willing to buy them (i.e. much lower). And we are depleting the pool of available savings now, by going further in debt to prop up these prices. This means that when the opportunity arises for a new technology or infrastructure project to be advanced - we won't be able to. We'll lose the opportunity to some other, more frugal nation. And the jobs that would 'normally' be created will cease to exist.

From 1932 to 1937 the Dow Jones rose nearly 500%. Yet very few people managed to participate in one of the greatest bull moves of all time because there were no savings. The employment rate barely budged during this time first because there were few legitimate business opportunities, and later because the skills of most workers became obsolete after years of underemployment. As a result, the economy died again in '37 and eventually led to America's reluctant participation in WWII.

There is simply no way to make this crisis go away as our central bankers have promised us they can do. And we certainly cannot simply 'go back' to the way it was. To me, it is very clear that what they are doing now will be to our severe detriment 5, 10 and potentially 80 years down the line. Whether they are doing this maliciously with some ulterior motives (aspirations of the banking elite for a one-world government, justification for another war) or out of ideological ignorance is not a question anyone knows the answer to.

The outcome is already pre-determined. Asset prices will go far lower, many people will lose their jobs and there will be widespread civil strife. What is not pre-determined is the path we take to get there, and our relative position to emerge from the crisis stronger than other nations. Will we give our liberties away in favour of comforting reassurances from authoritarian leaders (like the Germans did for Hitler) or will we return to our roots? Will we have the courage to jump at new opportunities in efficiency technology and health care or will we retreat to the comfort of old and tired industries? Will we embrace diversity, new ideas and trade, or will we persecute, attack and protect?

Those are the real questions. Arguing about why the stock market went down yesterday and what it will do tomorrow are such minuscule issues in comparison, yet nobody is willing to address any issues more than a few days out. That unwillingness leads me to believe our society is so blinded by their own waning narcissistic materialism that they will be willing to sacrifice anything to get it back.

It's not coming back. And unless we come to realize that soon, the only question remaining will be, "what form of tyranny will we accept under the guise of it's promised return?"

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