Sooner or Later the Deflationary Depression and Purging Will Come
International Forecaster Bob Chapman has a different view of the near term effects on our economy than what you may have gotten from the hyperinflation forecast by the NIA in their documentary Meltup.
Chapman, who has long suggested that we will eventually end up with hyperinflation akin to Weimar, Zimbabwe or Argentina, and that a total collapse of the system as we know it will occur some time between mid 2011 and 2012, seems to have changed his outlook for the near term.
Chapman, among others like Mike Shedlock and Karl Denninger, suggests that a Deflationary Depression and Purging is Coming.
We believe an inflationary depression began in February of 2009, and little has changed. Since then factory output has increased, as have inventories and other outward signs, such as retail sales. We believe that one-year spurt is ending, unless a new stimulus program is put in place. This past week we saw a $78 billion addition to unemployment benefits and Larry Summers has said they need an additional $200 billion. In order to keep the economy going sideways a total of another $800 billion will be needed. The Fed may have cut back the creation of money and credit to zero, but it is still dishing out trillions to domestic and foreign banks, which can only affect the domestic economy in a residual way. The key is real personal income. Including government programs it has fallen $500 billion over the past 16 months. In addition real unemployment remains at a high of 22-3/8%. That is U-6 less the birth/death ratio. This terrible dilemma is a first and is surprising in as much as government addition to income has gone past 18% for the first time ever. We expect that part of the reason for both situations is the perpetual drag of free trade, globalization, offshoring and outsourcing, which has continued unabated.
There is no question that the $800 billion stimulus has come to an end. During the past 16 months $200 billion of that $800 billion has shown up in consumer spending. The rest has raced through the economy and the result is a budget deficit in the vicinity of $1.8 trillion.
Small businessâ€™ contribution has been zero. Many of these businesses are failing and most cannot get loans. We expect that condition to persist indefinitely, which means job stability is nowhere to be seen in the immediate future. In spite of bogus government figures the economy is not growing and wonâ€™t grow. Unless the system is totally purged in a classic way there will never be any recovery.
Sooner or later the deflationary depression and purging will come. The economy is stagnant and that is with an $800 billion stimulus program and $2.3 trillion in spending by the Fed, some of which had to have entered the economy. Just think of where we would be without both additions. With stimulus, over the past year, we have only seen an average of 2.38% growth. This is certainly a very weak â€œrecovery,â€ especially in view of the tremendous amount of money and credit injected into the economy.
Even Marc Faber has suggested that a deflationary near-term impact is possible, though his long-term outlook remains inflationary, leaning towards the hyper flavor.
Like other deflationists, Chapman suggests that the collapse of credit and leverage in the system will not be offset by increased monetary expansion. There is just too much bad money in the system as it is for the government to print enough money to get out us of deflationary asset price collapse.
It seems that the reflation promoted by billionaire investor George Soros has failed and the system will simply collapse if governments around the world choose not to aggressively seek intervention through the expansion of money and credit. A recent speech by Mr. Soros, however, indicates that he believes reflation has actually worked as he had originally planned. “The first phase of the maneuver has been successfully accomplished,” said Soros in regards to the injection of billions of dollars in government stimulus to offset the 2007 – 2009 deflationary spiral.
Three years into this crisis and economists are still arguing about how it will end, deflation or inflation.
For now, it seems deflation is taking hold (though it never really let go), but there remains a very powerful variable within the debate, and that is the government and how they will act going forward. If stimulus is not renewed, we can expect an asset price collapse pretty much across the board, except maybe gold. If, on the other hand, government continues to pump money into the system, we may end up with stagnating prices, or perhaps hyperinflation if the stimulus injections are large enough, but such an effect could be many years away.
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Date: June 17th, 2010
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