Coping With Deflation.
Nine out of ten commentators predict monetary hyperinflation because the Federal Reserve and the U.S. Treasury Department are pumping such vast amounts of money into the system in desperate attempts to un-stick the availability of credit and "get the economy moving again."
Trillions of dollars of value have vanished from the stock , real estate, and financial markets. The government and the central bank have been pouring mere billions into the system in the vain hope they can re-inflate consumer enthusiasm for spending money they don't have. The consumer, however, is a deer frozen in the headlights of an onrushing car. He doesn't know which way to jump.
The consumer is kicking himself for getting so far in debt and he has begun hoarding a few dollars in the hope his savings will pile up fast enough to help him out of his financial troubles. If the principal on his mortgage is greater than the declining value of his house he prays the government will bail him out. Forget that the U.S. Constitution ties the hands of government in such matters. In a time of serious trouble, though, who wants to be bothered with an old-fashioned constitution? Certainly not Congress, the Administration, or the courts.
Right now the signals are flashing "deflation." That's always the eventual payoff after a long economic boom fueled mainly by debt. Consumers are forced to cut down on their demands. Businesses cut back on their operations. Some go out of business entirely for lack of consumer support. This shrinkage leads to an increase in bankruptcies, and the bankruptcies trigger more dominoes to fall as the economy spirals down into a deflationary depression. But all this pain is necessary to clear away the trash accumulated during the years of false prosperity created by debt, both private and public.
The federal government is trying to halt the natural correction by doing exactly what caused it in the first place - - by borrowing massive amounts of money. In other words, taking on stupendous debt to "cure" a problem that was caused by taking on stupendous debt!
What can we "little people" do in this whirlwind downdraft? First of all, adjust personal affairs immediately according to the winds of change. If you see deflation is overpowering the monetary scene cut your debt to the bone immediately and double your efforts to become indispensable on the job. Don't ask for a raise. If the business is wobbly, offer to take a cut in compensation. Deflation is clearly recognized by a scarcity of money and a leveling or even a decline in average prices.
If, on the other hand, you believe the Fed will succeed in igniting hyperinflation before the eventual deflationary correction has done its cleanup work, you should borrow heavily to buy hard assets and pay back your debt in cheaper dollars. Recall the German doctor in the early 1920s who borrowed to buy a herd of cattle for his dairy farm. Within a few months he sold one cow and paid off his note. The lender loses in stiff inflation...the borrower wins! Also, you'll recognize the outbreak of price inflation when there's a general rush to gold and silver, historical safe havens in inflationary times. At the moment the prices of precious metals are waffling, indicating neither monetary deflation nor inflation.
Many people predicting hyperinflation fail to act on their own prediction. They tend to act prudently. They are living well within their means, which is the best way to deal with a deflationary depression.
Bottom line: Even if the banking system is able to launch a burst of money inflation it will only momentarily delay the onset of the correction we must face. At the moment the banks show no sign of opening their doors to the level of lending required to get heavy inflation going again.
And what of the bank failures? There have been sixteen in the first two months of 2009. The FDIC is already feeling a pinch and is increasing the premiums member banks must pay to replenish the fund.. Depositors' accounts are insured up to $250,000.00 each. However, the FDIC only has the funds to cover a fraction of the total demand deposits in American banks, although in the case of a run on the banks it can tap directly into the U.S. Treasury. Also, it is not unlikely a surge in demand for cash would result in cash rationing. There is not nearly enough paper currency or coin to meet demand if depositors suddenly decide they prefer their mattress to the bank vault.
The most worrisome thing about this major economic correction, in my view, is the damage it can do to the social order. The U.S. population in 1932, when FDR was elected, was 125 million people. In 2008, when Barack Obama got the nod, it was 143 percent greater, 304 million. Should the masses become angered in their scramble for their share of the pie we can expect to see ourselves put the Constitution on the shelf and install a dictator. This is the usual way a democracy that stumbles badly ends its days.
March 1, 2009
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From Riches to Rags
Fiddler's Broken Wrist
Chances of Gold Confiscation
Look Out Below!
Voting for Maggie
Poobahs of Positivism
A Wistful Vista
An Unknown Road
Blood In the Streets
How To Buy Gold
Just Plain Stealing?
A thing to fear
Unstuffing a Lifetime
FDR & History
The Chicken Little Convention Mr. Bolton's Predators
And Lead us not into temptation
The Legislature and Embryos
Ac-cent-tchu-ate the Positive
What Fools, We Mortals
My Immigrant Relative
The Eloquent Pogo
Unionize School Children
Hucksterism Gone Wild
Unmanageable Religious Violence