Goodbye Inflation – Hello Deflation
I have been warning that the analysis portraying we were headed into hyperinflation was really nonsense. That entire idea was constructed only on the hyperinflation of Germany with old-school ideas of money. Much of those theories were antiquated in 1971 when we moved to the floating exchange rate system, yet the overwhelming majority failed to comprehend what truly took place.
The idea of debasement of a currency resulted in inflation was the lynch-pin of Gresham’s Law – bad money drives our good. Yet there was another aspect. It was not just that debased money caused people to hoard the old money, it alsoSHRUNK the money supply. The more you debased, the more you had to issue to fight against DEFLATION caused by the shortage of money.
Gresham was the economic adviser to Queen Elizabeth and he worked for Britain in the then financial center of the West held by the Dutch in Amsterdam. There was the first exchange. This is where people and nations gathered to sell their bonds and to buy insurance. Gresham represented Britain in that marketplace.
However, Henry VIII was a major debaser of the currency. He confiscated the property of the Catholic Church and cleverly played that up for religion, but in fact, he was desperate for money. The more he debased, the more the money supply shrunk. It became like a dog chasing its own tail. Consequently, Henry’s debasement was observed by Gresham for Britain would borrow coins at good silver and then repay with debased coinage. This resulted in the collapse of British credit in Amsterdam.
Nevertheless, such theories were predicated upon the simple fact that money was coinage. It was the difference in metal content that could be compared from one nation to another. The greater the debasement, the greater the hoarding, which simply contracted the money supply. Hence, the value of a currency issue was based upon CONFIDENCE. Since the debasement of Henry VIII brought out the collapse in credit (DEFLATION), what was overlooked here was actually theCONFIDENCE – not the mere metal content.
Bank Money became popular for once you deposited the coinage, it was preferable to pay by bank transfer. The coins did not have to be checked for debasement or clipping. Bank paper money actually rose as a premium.
Today, just follow the CONFIDENCE. That is the common-denominator. It is not whether or not money is gold, conch shells or slave girls as St Patrick reported to his shock upon arriving in Ireland. It is the oldest factor behind everything – do you trust the person you are dealing with.
JP Morgan’s famous reply before Congress is precisely on point. He would never lend money to anyone regardless of the collateral if he did not trust him. Simple stated, ” a man I do not trust could not get money from me on all the bonds in Chrisendom.” To this very day, that remains the cornerstone of the world economy.Some people would never buy a bond of Mexico or Argentina, or wherever based solely upon trust.
It is the collapse in trust in the Euro that is the undoing of Europe. This Brussels does not comprehend what it has done. All the suppression of elections, threats, and shenanigans will not save the day. Europe will collapse under the Euro because there is no trust left in Brussels. The dollar will rise going to a premium as bank money rose compared to coinage. It was simply more trustworthy. Of course, eventually banks began to lend out the money without the knowledge of the depositor who assumed they were paying for storage.
Commodity Contagion
Equity markets around the globe have tumbled on Monday, led by commodity-linked shares as oil prices fell to 5-1/2-year lows and investors fled to the safety of government bonds. The so-called “smart money” is running into bonds and this is what we need to complete the bubble in bonds that will burst for BIG BANG.
Brent and U.S. crude oil prices dropped to their lowest levels since spring 2009. The global supply expansion is the cause combined with the recession that is underway everywhere outside of North America. As taxes rise, people have less disposable income and this sets in motion the economic decline. Even the virtual French Communist President Francois Hollande has been proven dead wrong. His 75% “super-tax” on the rich in 2012 only led to the rich fleeing and destroyed the French economy. After 2 years, the damage to France’s appeal as a home for top earners who create jobs may have collapse to level not seen since Cuba. The tax pickings from the levy were paltry to put it in the best light. Personal, I would just retire and stop working for the government and it appears many French did just that. Hollande severely damaged France’s competitiveness and has driven a nail into the heart of Euroland.
The global supply in oil has resulted in a major glut and lackluster demand as the economy declines. Strength in the U.S. dollar has contributed the collapse in oil prices and will continue to do so. The dollar has reached a near nine-year high against the euro and this is right on target for what out model has been forecasting.
Russia’s oil output hit a post-Soviet high in 2014 as Putin intended to use the income to rebuild Riussia into a major world power again. At the peak, Putin even assumed he had a new weapon – energy to beat the Europeans into submission. Iraq’s oil exports in December were the highest since 1980 demonstrating this was not a CIA plot, but a massive peak in crude oil output.
Crude close 2014 BELOW $57 and now we should eventually see a collapse to the $31-$35 area as time unfolds. Oil producing nations expanded their budgets assuming money would continue to fall from above. However, this is theDEFLATION we have been warning is coming – not inflation. The inflation is the rising cost of government and the economy shrinks and whatever could go wrong is going wrong precisely as our computer has been forecasting.
Political uncertainty in Greece, has renewed fears of a Greek exit from the Euroland rattling European stock markets ahead of the country’s elections later this month. The dollar keeps rising and we achieve a YEARLY BEARISH REVERSALin the Euro for the closing of 2014. You cannot get any more BEARISH that electing a yearly. The same is true in the Swiss.
The concerns about Greece and Europe’s economy helped push long-dated U.S. Treasury yields to their lowest levels since August 2012. The yield on the 30-year U.S. Treasury bond was last at 2.604 percent after touching a low of 2.592 percent. German 10-year Bund yields hit a record low of 0.492 percent. This is confirming our warning that the BUBBLE is not in equities – it is in bonds.
The Dow Jones industrial average (.DJI) closed down 1.86 percent at 17,501.65. The S&P 500 (.SPX) closed down 1.83 percent at 2,020.58. The Nasdaq Composite (.IXIC) closed down 1.57 percent at 4,652.57.