Sooner or Later the Deflationary Depression and Purging Will Come

by | Jun 17, 2010 | Bob Chapman, Forecasting, Karl Denninger, Marc Faber | 15 comments

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 business’ 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 won’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 “recovery,” 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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    1. 20smoney

      I tend to think that gold will ultimately skyrocket not because of inflation but because of a loss of confidence in government and the functioning of the economy.

    2. sanityjones

      Three years into this crisis and economists are still arguing about how it will end, deflation or inflation……………

      It will end in a societal collapse long before the bankers and politicians give up on throwing money at the problem IMO. Also we’ve spent 2.3 trillion to achieve 2.38% growth, (using fuzzy math and accounting gimmicks) which in actuality is DEBT which will have to be paid back at some point in the future.  We seem to be trapped in an economic Hell of applied circular reasoning.  Am I missing something?

    3. wheedle

      I suspect there are many individuals who don’t consider themselves government employees because they pay taxes ,and therefore don’t consider themselves part of the problem.Policeman ,soldiers, teachers,city bus drivers,,,,, these are the kind of jobs created and sustained by Billions of Dollars every year. Tax Dollars.
      Entitlement programs such as Medicare, Social Security,Welfare,Unemployment Benefits,Government Pension Funds,,,,,,,,these also require vast amounts of Tax Dollar Funding.
      Our elected officials and the budgets they create to fund National Defense, Government Infrastructure,,,,,,all require more and more Tax Dollars.
      Combine all of these and you have fiscal year deficits that require funding far beyond what the Taxpayer can cover.And we all know that borrowing to pay debt is unsustainable.

      The United States Government may soon face the reality of cutting spending and entitlement funding.And those who put food on the table at the expense of a taxpayer funded system may soon realize how unprepared they are when that funding disappears.The rioting and civil unrest may be just around the corner.Gear up folks. The preps you have now may have to sustain you for a very long time.

    4. Patriot One

      Does it matter at this point? Inflation, Deflation or Bi-flation, Inflation will make the currency worthless, deflation will make everything you own worthless and bi-flation will rip saw the country between both extremes. So it really doesn’t matter up, down or back and forth, the result is collapse.

      Everything is a double edge sword now, even metals. Since there won’t be markets to trade on the government can just repeg the price of gold at $22 per once issue new currency and inflate it to $35 per once. Its history, they did it before.

      If we had remained on the gold standard I don’t think we would be talking about this today. As I quote Ronald Reagan, “Government isn’t the solution to our problems, Government is the problem”

      What ever happens I’m sure it will not be pleasent. The main targets will be the Boomers and the young. Good luck ladies and gents. Stack it deep!!!

    5. lostinmissouri

      Deflationary depressions are the reason governments hyper-inflate.
      Gold and silver will do well in either.

      I agree,  the world governments have hit debt  saturation or approaching it quickly….everyone hang on for an ugly ride.   It is not if the SHTF,  it’s just a matter of when.

    6. scott_free

      Inflation,  Deflation does it matter it all leads to the same place,
      and why can’t you have both @ the same time? deflation in the
      housing market and Inflation in the food/energy market.
      We are not living in “normal times” we could see chaotic markets
      from now on. That’s what happens when a system comes to an end. Perpare you selfs cash and gold are king, I got out of all marketes, stock, Ira, 401k, banks. I refuse to play the game anymore, 10 years from 200-2010 of no imcome growth, house
      50% loss, I have a plan to leave the country if needed.

    7. Cyborg

      They can string this out for mamny years folks. They can continue bailouts and Stimulus every  year for at least the next 5 five years before it gets to taht critical point. but then WHAMMY-We find ourselves in a real War this time and not a military action as we have now in Afganistan .Were going to hear the crap for a good long time about this and that . Just make sure you got your guns and ammo and know how to use them and brace yourself for the coming events .

    8. Paul Revere

      Obama is purging the middle class as we speak. 

    9. Think Time

      scott_free, you nailed it with the price push up in “living” costs. Groceries, Insurance, gas etc.. (don’t be fooled by temporary dip in gas prices) and the downward spiral of housing values/401k’s/pensions/ investments. (PM’s not included) Think about it. There is no better way to do what PR noted. The purgin of the middle class. That’s the Game! Elite & non-elite. There will be no middle anything. It’ll be the have-alots and the have-nothings. 

    10. Dave

      Even if they try to confiscate everyone’s gold (I say “try to” because only around 5% complied with Roosevelt’s order in 1933),it won’t matter since we are no longer on a gold standard as we were in ’33.
      Moreover,all the gold above ground in all vaults,government and private is only around 400 billion dollars in value…
      That’s not enough to fund a broke America for more than a couple months.
      I don’t worry about confiscations,devaluations or “reptilian’s”,I’m keeping my gold,guns,ammo,food.
      Those who hold all their wealth in dollars/stocks/401K’s,pensions too will be very sorry indeed.

    11. BleakoEcobamics

      Yes, deflation and inflation matter.  They are probably the most important investment decision you need to make, as they form the basis for your actions to try to preserve any wealth you may have.  If you have nothing and owe nothing, it probably isn’t so important.   So here’s an example.  I expect deflation to continue for a while, with another leg down in the housing market.  I sold my house a couple of years ago, it’s primarily in cash now.  If I get the sense we’re headed toward significant inflation, I’d want to buy land and a house at a low-ish interest rate and buy gold with remaining cash.  Let inflation eat away at the mortgage.   That, to me, is a reasonable scenario.  Yes, there is a probability of worse, but if it’s so bad that there is simply no way to plan or prepare for it, then I’d rather focus on what I can do. 

    12. GoneWithTheWind

      They can string it out for awhile but I’m not sure they can string it out for years.  Right now I think their goal is to get past the next election without it falling apart.  True they can print money until they run out of paper.  True they can borrow from themselves.  But it cannot go on forever.  And when they print/borrow money and send it off to their cronies and special interest groups they are not solving the underlying problem.  This all began as a recession; just another cyclical recession.  But they choose to pump dollars into the system instead of cutting taxes.  The result is every business owner knows big tax increases are coming (in fact is the major goal of the radical left) and they cannot expand their business in that kind of environment.  It cannot last much longer and once it begins to spiral downwards it will accelerate.  This could turn bad very fast.  It is 1930-31 all over again but is being disguised by massive amounts of printing press money.

    13. John

      During a deflation, cash is king. It increases in value relative to the things it buys. Which means that only those who bought gold, wheat, MRE’s, etc. are going to be screwed.

      No surprise there: when was the last time you paid gold for anything? Last time I looked, people were using cash or cards.

      If you’re “off the grid,” hiding out while waiting for the apocalypse so you can feel yourself rising to the top by watching everyone else take a fall, you have no one to blame but yourself when society rerights itself and leaves you stranded in your bunker. You did abandon us, after all. You did take off and leave us to solve the problem without your input.

      So, we’re not going to with bother you, either. You can eat your MRE’s and wait for the next apocalypse.

    14. Dale

      Comments…..Nations in the past that have tried to inflate thier way to prosperity fail every time.

    15. james moylan

      I have a web site where I give advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks . If their is anyone that is interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about double digit inflation. I am very disturbed by the lack of progress on cutting the budget deficit. It will require large tax increases and budget cuts to bring the deficit under control. When nobody will buy the debt obligations of the united states than the buyer of last resort will emerge and who might be that buyer of last resort’ the government itself. in other words the massive money printing will have begun welcome weimar republic two thousand ?

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