Deflation – When Will It End?
QUESTION:
Dear Martin,
It is CRYSTAL clear that your call for a deflationary cycle has been right on the mark. No one else saw it coming. The changes that are part of this were not as visible even a few years ago like they are now. (Of course they were to you!) I can see the economy starting to decline now, yet prices are rising due to business regulation and business focusing away from capital investment. It costs companies more to do business so those costs are passed along to the consumer.
I see the rise in taxes on everything for the consumer creating the decline in disposable income. Cash is afraid and being hoarded, supporting the commensurate shrinking of the money supply, liquidity is drying up in parts of the stock markets, and inflationary government expansion never seems to quit, sucking the life out of the productive aspects of our society.
If the economy turns down as you believe this fall, tax revenues are going to collapse. Then what? Taxes to the moon? With all of these trends firmly entrenched, when and how will the deflationary cycle end, if ever? If we are to get an inflationary cycle before the crash and burn, what could possibly cause that? Or do we just go straight to crash and burn starting in the fall? Thanks for all you do.
Best, T
ANSWER: The deflation comes from the rise in the cost of government, in addition to the collapse in leverage. As governments with power turn to extracting more from the people, rather than from the weak government, you get massive deflation and never hyperinflation. As was the case with the revolutionary new government in Germany during the 1920s. Their own power leads them down the path of suicide. Of course, that can migrate to full economic totalitarianism akin to communism. Whether you technically own your home and are taxed twice its value, or if the state owns it and allows you to live there, is just a technical point. The bottom-line is both are deflationary – not inflationary.
However, while this is typically the first wave, the second wave of inflation comes when CONFIDENCE in government collapses. This can take place with a full-length cycle of 72 years, as was the case with Russia (1917 – 1989). You will recall that the volatility portion of the Economic Confidence travels in waves of 6, whereas that frequency builds into groups of 12, forming the major volatility wave of 72 years. In finance, this is known as the Rule of 72. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. It is interesting that this appears in volatility.
Therefore, at the worst we face a 72-year cycle of Economic Totalitarianism. However, the admixture of the fact that about half the world has already collapsed in 1989, we have a 26-year cycle from 1989, bringing us to Big Bang in 2015. We can see this materializing before our eyes and this is what the crash in government in the West is all about – the collapse in Socialism. We have a change for a reversal of this trend in 2016 with the U.S. Presidential election. Yet clearly, the USA has peaked economically and Obama has produced perhaps the worst presidency in American history, even after winning the Nobel Peace Prize. He has trashed the entire world no less, advocating bombing many regions.
Consequently, we have a rare opportunity to prevent a 72-year wave of Economic Totalitarianism, but the price will still be the economic decline of the West as the financial and economic power of being the Financial Capital of the World migrates to China. That is inevitable.
So the deflation comes to an end when people run for the hills and begin buying anything tangible. In the old Soviet Union, people did not expect social benefits from their government, and were better prepared to be self-reliant. The same is true in China. In the United States, Europe, and Japan, the people are not self-sufficient as a whole. They will suffer from the withdrawal symptoms of socialism, which arguably has been far more damaging than communism, where people expected nothing. Socialism replaced the family structure entirely; children do not save to support their parents in their old age, as they have been lead to believe that it is the government’s job. Parents are having to support their children into their 30s, as they cannot find jobs in their field of study, or any job at all as is the case in Canada and Europe.
Keep in mind that deflation has nothing to do with the supply of money. That is the problem with most analyses. When you correlate everything, you see that government increases the supply of money in response to the collapse in CONFIDENCE, not the other way around. With that collapse, we in the West will have to learn not to rely upon government and reemerge as self-sufficient to save the day, at least on a personal level.
The abolishment of cash is extremely dangerous. For years, I have warned that we will NEVER return to a gold standard and are heading straight into electronic money. That is where government becomes the Economic Dictator as they try to retain power over their imploding system hallmarked with corruption. They will seek to shut down the underground economy, and that includes the drug trade. They are deliberately trying to prevent anyone from buying or selling without government’s approval, and this is one of the very arguments to eliminate cash along with 100% tax collection. Yet this is how the West is committing suicide by extinguishing the global economy.
The Graying of Society & Why the US Economy is doing better than Most
Why is the USA better off in some respects to Europe and Asia? They are calling it the “Graying of Society”. The problem is rather stark: the socialistic system never counted on the collapse in birth rates and a greater life expectancy increase. This is wreaking havoc on the fiscal budgets of governments everywhere, yet strangely enough, is a major advantage for the U.S. economy in comparison to both Europe and Asia – something the dollar haters never look at no less even want to talk about.
Aging populations have been a phenomenon, occurring when the median age of a country or region rises due to increase in life expectancy and/or declining birth rates. We now are seeing both factors come into play and a third factor that is not even considered it seems by anyone. Additionally, people traditionally even gear their advertising to what is called the demographic sweet-spot only focusing on the traditional 25-54 age demographic which actually misses about 58 percent of the total U.S. population amounting to 180 million people. Yes this is the aging of the baby boomers but it is also those under 25 who wield increasing influence over household spending.
They call this decline in the birth rate the celibacy syndrome in Japan where the youth are not even dating. I have written that socialism and Hollywood have altered society dramatically, to the point that society seems to have lost its way in even grasping what LOVE is. I have written about Prima Noctum (the right of the king to take a bride on her wedding night) which was featured in the classic film “Braveheart”. This threat typically resulted in paying the king a fee to relieve him of such a right, which was done 99% of the time. This threat became the marriage license fee of modern times. I suppose today the bride would have to sleep with Obama, and in Germany it might be the groom who would have to sleep with Merkel. Those visions are certainly worth the whatever fee to avoid a real nightmare. Young girls in their 20s and now competing for men over 40 just to have a stable life and be able to raise children. With the youth unemployment in Europe over 60% in parts and 65% of college graduates cannot find a job in their field yet are saddled with student loans they cannot escape, raising a family is taking the backseat to everything.
Simultaneously, there has been this trend toward the graying of populations, even appearing to some extent in the less economically developed countries due to more of an increase in life expectancy. This is the case for every country in the world, except for the 18 countries designated as “demographic outliers” by the UN. There have been periods of aging populations, as there was in Rome during the time of Augustus (27BC–14AD) when he enacted Family Laws to compel men to get married.
Ovid (43 BC – 17 AD) wrote his famous work “Metamorphoses” comprising 15 books and over 250 myths. The poem chronicles the history of the world from its creation to the deification of Julius Caesar, within a loose mythical-historical framework. The recurring theme, as with nearly all of Ovid’s work, is love—be it personal love or love personified in the figure of Cupid or Amor.
The popularity of his carefree attitude to sex and adultery challenged the moral conservatism of the Emperor Augustus. Shortly after Augustus exiled his own daughter Julia for her string of affairs, Ovid published “Ars Amatoria”, a poem offering guidance for adulterers. This ended his life in Rome, as Augustus then exiled him to the Black Sea. Nevertheless, this reflects conservatism clashing with the liberal free love era of the 1960s, which also took place in Rome. The common denominator is actually economic prosperity, for as it expands the birth rate has typically declined.
For the most part, the decline in the birth rate may have never coincided with the graying of the population, previously driven by a sharp increase in life expectancy. There is little doubt that the rate of population ageing in the 21st century will exceed that of the previous century. This will vary considerably among countries in terms of the degree, and the pace at which these changes will unfold.
Now we introduce migration. Immigration saved Rome, but this the people do not grasp with the migration crisis unfolding in the U.S., which is starkly different from that of Europe. The U.S. sees an inflow of Mexicans who are hard workers, Christian, and family oriented. Europe is faced with immigrates from mostly the Arab regions, introducing different cultures and religions that do not mix well with the indigenous population of Europe. Everyone wanted to go to the big city to be a part of it, if we are talking about Rome, London in the Victorian Age, or New York City today. This led to mixed marriages, and many say the Latin race is being watered down, as in Roman times. This is true also in modern times.
Yet, the influx of the youth kept Rome alive. This is a stark difference from the migration into the USA, in contrast to Europe. The pension crisis is actually far worse in Europe than in the United States. Believe it or not, the median age of the U.S. population stands at 36.9-years-old compared to the worst on the list, being Monaco at 51.1-years-old. This means that this is the center point; 50% of the population is older and 50% is younger. On this score, the USA needs the immigrants to keep the population young and productive, and from an economic perspective, they should make them legal citizens to pay for social security or the economic system will fail. If legal, they will contribute to the tax base. Illegal citizens will live off the tax base. Of course, moving to a cashless society will have the effect of always wiping out the immigration trend for employment and could irrevocably ruin the economy long-term.
Second on the list of aging populations is Japan, followed by Italy, Germany, Jersey, Hong Kong, Guernsey, Austria, Finland, and Greece. Even Switzerland is number 20 on the list with a median age of 42-years-old. The ageing of the developed countries is seriously at odds with the economics of socialism, as this has been a demographic phenomenon characterized by a decrease in fertility, a decrease in mortality rate, and a higher life expectancy among populations intermixed with the migration patterns and changes in the population culture.