However, concern about the inflationary trend continuing into the future is misplaced. That is where we have come from, but it is not where we are going. Simply extrapolating past trends forward is tempting, but does not constitute meaningful analysis and has no genuine predictive value. It is far more important to be able to identify coming trend changes and to understand where these will lead.
Decades of inflation lie behind us. It is deflation – the contraction of the supply of money plus credit relative to available goods and services – that lies ahead. The threat we are facing is the rapid and chaotic extinguishing of the myriad excess claims to underlying real wealth created during our thirty years of credit hyper-expansion.
Here is another illustrative parable of financialization run amok, looking this time at the real world consequences that follow. Whereas credit expansion pushed up both demand and prices, creating the perception of great wealth in the process, the inevitable bust crashes prices and ruins businesses. The artificial demand boost disappears, but rather than return to its previous level, demand crashes and remains depressed for a long period of time.
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As we have said many times, rallies are kind to central authorities, because the supportive psychology of a rally, complete with suspension of disbelief, allows their actions to appear effective, temporarily. Stimulus packages seemed to achieve the desired ends, at least in terms of elevating the markets, suggesting that we were facing a relatively simple problem with a straightforward solution.
A dangerous perception has developed that central bankers are so much wiser and better informed than their predecessors in other times and places, that the lessons of the past have been learned and the pitfalls of the past avoided. This is of course the height of hubris. If a predicament such as this could be so easily resolved, then there would be no similar crises in the historical record. We cannot simply assume that previous central authorities were blind, ignorant, unimaginative or disinterested in self-preservation.
Now that the downtrend has reasserted itself with a vengeance, the supportive psychology of a rally no longer exists. Confidence is ebbing again, and fear is sharply in the ascendancy. We can already see how ineffectual the actions of central authorities are under such circumstances. Everything they do is too little, too late, and every failed attempt to stem staunch the financial hemorrhage only makes them look more desperate, which undermines confidence further in a vicious circle.Over the next year and beyond, we will discover what credit crunch really means. It is an economic seizure, and its effect is devastating. Credit in its myriad forms represents the vast majority of the money supply, and it is about to lose its money equivalency. This will leave only cash, and that cash will be extremely scarce.
Aggravating the effect of crashing the money supply will be a substantial fall in the velocity of money, meaning that money will largely cease to circulate in the economy as people hang on to every penny they can get their hands on.
Money is the lubricant in the engine of the economy in the way that motor oil is the lubricant in a vehicle engine. Attempting to run any kind of engine with insufficient lubricant will result in that engine seizing up.
Without the monetary exchange that we have built into our system at every level, it will not be possible to connect buyers and sellers, producers and consumers.
Nothing moves in an economic depression. This is the polar opposite of the frenetic activity of the inflationary boom years. Instead of the orgy of consumption to which we have become accustomed, we will experience austerity on a scale we cannot yet imagine.
Demand will evaporate, not because people do not have wants, but because they will lack the purchasing power to turn those wants and needs into consumption. Demand is not what we want, but what we can pay for.
We will be looking at falling prices as lack of demand undercuts price support, but because purchasing power will be falling much more quickly than prices, everything will become far less affordable, even as prices fall. As a much larger percentage of the much smaller money supply begins to chase essentials, those will receive relative price support, and will be the least affordable of all.
We must prepare right now for the onset of a long period of deflation and depression. Many people are reluctant to make preparations until they see the roof on fire, but by then it will be too late to take action.
To reiterate the advice TAE has been offering since its inception – hold no debt, hold liquidity in order to maintain freedom of action, gain some control over the essentials of your own existence, and build social capital in your own communities.
There is no time to waste in securing what you have, under your own control to the greatest extent you can manage. The future is at our doorstep, and it does not look like the past as we have known it.
