Timing the Deflationary Collapse

Posted by ltse 9 yrs ago

I written previously on the case for deflation under “The Case for a Global Deflationary Collapse”, I am going to add more background work here to support the deflation case before discussing the timing of this collapse. Good investors and trader anticipate the markets, bad ones just listen to the news, so one must scrape beyond the surface, ie news of QE3 , LTRO etc, crap we all know about, and ones that “inflationist” or “inflation simpletons” as I like to call them, point out to support the inflation case and hence gold and property. Right now there is a debt bomb exploding, and the inflation people are running towards the blast by holding gold, stocks (esp China stocks my goodness), real estate and commodities.

The markets is in a tug of war on both sides, credit inflation versus credit contraction, just like the tectonic plates below the earth surface colliding to cause an earthquake, the inflationary forces of the central banks battling against the deflationary forces of the markets, I call this the:

Clash of the Titans

Inflationary Force – ECB, BOE, BOJ, BOC and The Fed are all conducting QE, currency debasement to compete with one another for lower cost, higher exports, credit injection plus low interest rate to support the entire banking system from default.

Deflationary Force – Private Sector deleveraging, the enormous debt market or credit bubble, created by all of these central banks in their respectively economies during the boom phase especially the US and China or as Richard Duncan calls it “Creditism”, the debt bubble is now deflating.

Just focusing on the USA however, consider the following facts:

America’s total debt is $57 Trillion


Out of which, the government debt makes up only of $15 Trillion or 26% of total debt . The remaining debt is the private sector debt consisting of the financial sector, households, and the business sector, and it is this PRIVATE SECTOR DEBT DELEVERGING, ie $42 Trillion that is causing deflation.

The logic is this, most people know that the US dollar has lost roughly 96% of its value, how did it lose so much value? It lost value during the boom phase of the credit expansion since 1971 absent the gold standard, which has given us the prosperity we have today, when banks lend, and households, individuals and corporations borrow, they are creating money via the multiplier effect of fractional reserve banking. This credit boom is what has debased the dollar, it’s the private sector “printing money” during this boom phase by excessive credit creation via lending and borrowing. BUT now that the private sector is deleveraging meaning the credit bubble is unwinding, the USD is getting its value back, just as most people right now are abandoning the dollar, the US dollar is actually in the midst of a bull market.

Most people look at the Feds QE programs, QE1 and QE2 allowed the Fed to create only $2 Trillion in credit, THAT IS NOTHING compared to the $42 Trillion of private sector debt unwinding, so whilst the Fed is debasing the dollar with QE, the private sector debt deleveraging is bolstering the dollar. Deleveraging happens when the private sector :

-Decides not to take on more debt or cannot take on more debt

-Pays off existing debt

-Defaults on existing debt ($1 Trillion alone in students loans), banks or financial institutions collapsing, households walking away from their mortgages.

Reverse Psychology

As said earlier, people are running towards the deflationary explosion by holding hard assets and stocks, the masses always does the opposite of what they should do. For example, when interest rates are high, corporations bear a higher cost of borrowing, which means profit margins are lowered, resulting in lower share prices. In addition, higher rates encourage people to save, as people get a healthy return on their money, there is less incentive for them to speculate in the share market, hence lower demand for shares again meaning lower share prices. Therefore stocks offers the most value at reasonable prices when interest rates are high, people should therefore buy stocks when interest rates are high, but instead, they run into stocks when rates are low, just the same way they do with real estate.

Signs the Private Sector is Deleveraging

1) Private Sector debt bubble

“The Next Catastrophic Bubble to Pop Will Be Private Sector Debt”


2) Low savings rate or more accurately NO savings rate is an alarming indication of the inability to service debt, let alone pay off the principle.

“Total U.S. Savings Rate Lowest in Recorded History”


“The United States Personal Savings Rate Freaks Me Out.”


3) Cash hoarding

Corporations sitting on cash and not investing, a major deflationary sign, this is akin to consumers not spending.

“The $5 Trillion Stash: U.S. Corporations' Money Hoard Is Bigger Than the GDP of Germany


“Why U.S. Companies Are Not Spending Money”


4) Bank Failures

Most people have heard of Lehmans and Bear Sterns even MF Global, but how about the following? :

-First National Bank of Olathe

-LandMark Bank of Florida

-First Peoples Bank

Small and regional banks are failing all across America

“Bank Failures 2008 – 2012”



Lastly, I think Bill Gross sums it up well in this Zerohedge article:

“Delevering Threatens Global Monetary System”


The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures

I am going to continue with the 2nd part tomorrow, I have a lot of material to cover on timing this deflationary collapse.

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traineeinvestor 9 yrs ago
Thanks for taking the time to post a well thought out case for a deleveraging scenario.

I'm still working my way through the links but would like to point out a few things:

1. for 3) cash hoarding by corporates is primarily driven by a combination of (i) punitive double or tripple taxation if they repartriate overseas earnings back to the USA and then distribute it to shareholders and (ii) maintaining a warchest for acquisitions.

2. total lending by US banks rose in Q2 this year (the last quarter for which statistics are available): http://online.wsj.com/article/SB10000872396390444327204577617281388004676.html

3. even though private sector credit in the US has contracted during the current financial crisis (back to around 2006 levels last time I checked but this may not be the most up to date data), the US has still experienced inflation over that time period (and the rest of the world has caught a dose of exported US inflation) - this is inconsistent with the thesis that private sector credit contraction will lead to deflation. Presumably, there are other factors at work here such as non-private sector credit, FX rates, rising resource extraction costs and velocity of circulation of money (probably others as well)

Incidentially, one of the strongest cases for a short term deflationary contraction in the US is the "fiscal cliff" - I haven't gone through all your links yet, but I assume this is covered somewhere?

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Ed 9 yrs ago
Other observations include the monetary impact of global mercantilism, where every country is desperately trying to crush its currency, which to Hendry means the possibility of a massive FX short squeeze is increasing.

Hendry says that $3 trillion in Fed monetization has not unleashed inflation. Yet. What would? It would be “another trillion number” which would come when the central bankers no longer fear that their legacy would be of those ushering in Weimar 2, which means an opportunity cost of even greater catastrophe.

"Society is saying we need the most profound Lehman times X in order to allow the central banks to cross my Rubicon, to be revolutionary, and they can be only revolutionary when they have given up hope.” In other words things have to get so bad, deflation has to be such a threat, that everyone goes thermonuclear on their CTRL-P buttons.


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Ed 9 yrs ago
ltse - I am inclined to think there will at some point be a deflationary collapse... we can see that QE seems to be losing impact... the printed money has helped float corporate earnings over the past 3 years but that doesn't seem to be the case now as many companies are missing their targets...

If this continues of course the stock markets will eventually capitulate and drop precipitously...

But Bernanke absolutely does not want that - but can he do anything to stop it? His only option is to print more... so perhaps he will try to push the string with a bulldozer... but that won't matter... once the game is up the game is up... if earnings keep dropping there is nothing that can prop them up... i.e. deflation would be imminent and unstoppable

In a normal world I agree holding USD would be a good hedge - you could pick up assets for next to nothing in a deflationary environment...

However let's look at that big picture - if the above scenario plays out would the end result not be catastrophic? Surely Ben knows that - that's why he is desperately printing away... he knows that deflation means...

I have shifted some cash into USD but not significant amounts... I am not comfortable holding a lot of cash (USD) because:

1. I am not sure when the above happens and inflation is eating it up.

2. I cannot be sure that the USD will retain value or even exist in it's current form - perhaps the US govt will reissue a new currency?

3. I prefer to keep holding precious metals because I bought at a low price - PM have always held value - and in because I have no idea what the worst case 'catastrophic' situation might bring...

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Ed 9 yrs ago
TI: off topic but re: repatriating overseas corporate profits... much of the offshore income is not subjected to taxes as companies maintain complex webs that allow them to avoid all taxes... so the double/triple taxation claim is bogus.

e.g. http://www.usuncut.org/targets/apple/offshore http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html

Any that is for another thread...

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Ed 9 yrs ago
Bill Gross PIMCO: The Global Monetary System Is Reaching Its Breaking Point

Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors.

Both the lower quality and lower yields of such previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.

Bond investors should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years.

Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets.?

More http://www.zerohedge.com/news/bill-gross-global-monetary-system-reaching-its-breaking-point

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traineeinvestor 9 yrs ago
Ed - We'll have to disagree about the tax issue:


From the WSJ:

"If companies choose to repatriate earnings from overseas, they would have to pay taxes on foreign earnings they repatriate. The foreign earnings balances, however, should not be assumed to be the full amount that companies might bring back if there was another U.S. tax repatriation holiday, Mott said in the study.

Under the last repatriation tax break in 2004, Mott noted that U.S. companies repatriated about 39% of their foreign earnings balances. If another repatriation tax break was enacted and companies repatriated at the same rate, he said about $663 billion might come back to U.S. shores"

Sounds pretty clear to me (especially since the report was issued by a major multinational bank).

I've also had this discussion with two senior executives of very large US companies - they are keeping their cash off shore to avoid the double tax issue.

Further proof - look at the cash balances of companies in countries that have global consolidated tax regimes - all much lower cash balances than US companies. Why? Because they do not face the double tax issue.

And this is not about the amount of tax paid (which is a completely separate issue) but about a really really dumb tax code that penalises companies for bringing money into the US and again for distributing it to their shareholders (the biggest of which are pension funds and retail investments funds). It's just dumb. If they had another repatriation holiday it would be interesting to see how much of that cash flowed back into the US (last time it was estimated at around 39% - quite a big stimulus jolt and one that costs the US tax payer nothing in the short term and actually benefts them once that money gets put to use in the US).

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Ed 9 yrs ago
TI: but many companies are paying little or no taxes on their overseas earnings... so how are they being double taxed?

And for those that are taxed slightly overseas I am not a tax accountant but I can bet a million dollars that when they are taxed in the US that overseas tax is taken into account.

If you are an American working in HK you get double taxed (with some exemptions) even if you don't bring the cash back to the US.

Taxes are the price of civilization....

Now if you want to discuss how America wastes it's tax money on bombs, rip off health care costs, bad education, huge subsidies for anyone with a a lobbyist, etc.... In Canada where I come from most people don't get too upset about paying taxes - because we get something back...

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traineeinvestor 9 yrs ago
Ed - I'm obviously expressing myself poorly on this issue. I am not quibbling about the amount of tax - America needs to both raise its tax revenue and cut spending - it's that America has an incredibly dumb and hugely over complex tax system that produces all sorts of ridiculous distortions. As an aside, I pay taxes in America and it takes a firm of accountants to prepare my tax returns each year and the combined federal and state tax returns for one year of US filings are thicker than the combined salary taxes I completed myself for the first 16 years I was in Hong Kong. FWIW, my US income is slightly down this year but the US taxes will be higher.

You'll get no arguement from me on how America wastes its current and future tax revenue (borrowing today is effectively spendig tomorrow's tax revenues). Even thinking about it has me reaching for a nice bottle of Cloudy Bay ... I left work a bit early today.

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Ed 9 yrs ago
Right but the issue was double taxation...

I posted articles that indicate many multinationals pay little or no taxation on their overseas earnings... so there is generally no double taxation when they repatriate.

You wanna bring cash back to America whether you are a corporation or an individual... you get taxed... that's life.

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ltse 9 yrs ago
@ Angelique Bouchard

We haven't had capitalism since the days of Henry Ford in the 1930s. Capitalism was when we had sound money (gold backed) and businessmen would invest and accumulate capital (hence capitalism), and those savings would be the basis of economic growth, so we had very slow to moderate growth, but the growth was very healthy and steady.

Capital was a function of real savings back then (unlike today it is a function of credit), so back then businesses were very prudent with capital as any losses is absorbed by themselves, and government played a very small role in the economy. So no communism or socialism will not "work" in America, it will fail just as it has everywhere else.

Margaret Thatcher - "The problem with socialism is that you eventually run out of other people's money. "

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ltse 9 yrs ago
@ TI,

Thanks. Will try to go over those points, but regarding inflation, that is all due to the Fed's "reflationary" efforts. Will cover that when I discuss the timeline.

@ Ed

Let me start of saying gold is real money, it is the ultimate insurance, it is an asset that is not somebody else's liability, so everyone should have some. My point is, I wouldn't go rush in to buy it at these prices, and when deflation hits, I am going to able to buy alot of more it with dollars, because like it on not, we are stuck on this dollar standard, what they decide to do in the future I am not sure, but when the crisis hits, we will still be on the dollar standard for a while because the government is always late with any solutions.

"if the above scenario plays out would the end result not be catastrophic? Surely Ben knows that - that's why he is desperately printing away."

Yes, this deflationary collapse would be catastrophic, and your right he's been doing exactly that, he has done more than any other chairman has done already, and his actions has only bought us more time to prepare for a collapse that is now going to be much worst as a result of his action.

So far he's held off deflation, but the Fed is losing ground, because unlike the inflation simpleton's think, we are at 180 degree opposite to what happened to Weimar Germany or Zimbabwe. In both these cases, central banks printed and circulated boatloads of actual bank notes, interest rates were double digits, people hated those paper currencies so much, they got rid of it in exchange for goods as soon as it reached their hands, food prices and everything elses soared.

Today in the US, its on the other end of the spectrum:

- Interest rate are at historical lows

- Banks do not want to lend dollars, their assets are mostly mortgages that are losing money, so they can't get rid of those assets for dollars.

- Households cannot borrow dollars either, they are either not credit worthy or are unemployed

- Workers cannot get a job, because its very diffcult to find an employer willing to part with a salary (dollars)

- Commodities are all way off their highs, crude oil today is trading @ $88, a far cry from the $140 high

- Treasury yields are at record lows, because people want to hoard dollars, so much so they are doing it at the expense of inflation

So this should be extremely obvious already, we are heading toward deflation as the next juncture and not inflation.

However, I do agree the Fed and/or the government will try very hard to fight this off, not that they haven't done so already, right now 1 in every 4 dollars is spent by the government, so if the private sector accelerates with deleveraging, you can make a case that the government will step into high gear as well by getting further into debt, which is why a major war is an ominous sign. Charles Nenner's cycles work is predicting exactly that, but even so, given the excessive boom, I think at least a 50% retractment from $42 Trillion to $21 Trillion of private sector debt, is probably unavoidable.

Debt is like a drug, it gives an artificial high but ultimately it wears off, the economy, like the human body, has to purge itself of excessive consumption and clear itself of toxins to get better, but purging it must, the Fed is going to have to stand out of the way of this delveraging or be taken down with it.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises (Austrian Economist)

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Ed 9 yrs ago
TI: Right but the issue was double taxation...

I posted articles that indicate many multinationals pay little or no taxation on their overseas earnings... so there is generally no double taxation when they repatriate.

You wanna bring cash back to America whether you are a corporation or an individual... you get taxed... that's life.

LTSE: fairly big gamble that there will be time to maneuver amongst assets when all this unravels... I jumped into PM early so have a big buffer... would I still buy at 1700+... I suppose if had no PM I would still consider... I am in line with TI re having a 'just in case' stash of PM...

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Ed 9 yrs ago
AB: like the quote... agree banks create products for the purpose of generating commissions - same same as casinos run as many different games as possible... one difference - when the house loses in the finance world they get bailed out...

ltse - I don't agree with Thatcher's comment as a universal rule of thumb... some of the strongest economies in the world would qualify as socialist: Germany, Finland, Norway, Sweden, Australia, Canada... but then again I guess it depends on the definition of socialism...

I think the bigger enemy is corporate socialism - or crony capitalism - because this prevents efficient markets from functioning... prevents creative destruction...

Here's a rather long but interesting article related to this http://www.zerohedge.com/news/2012-10-25/guest-post-dark-age-money

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ltse 9 yrs ago
@ Ed

Probably not intended for this thread. But the USA right now along with the PIGS nations

are in the sorry state they are now all because of socialism, just the same way the former Soviet Union got ruined. Same goes with Australia, Canada, China and to a large extent nowa days Hong Kong. Pls make your case for socialism and why you think it "works"? Pls define socialism as well for arguments sake just so that we are on the same page.

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Ed 9 yrs ago
Disagree ltse... Sweden, Canada, Australia, Germany, Norway are socialist... they are some of the strongest countries in the world at the moment.

If you want to know what is causing the sorry state we are in I suggest you read this superb article... it addresses the US primarily but this is a global phenomenon:


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ltse 9 yrs ago
"Haha. (comment removed - please don't insult others)"

So wheres the arguments for socialism? can't think of any? just insults and the recycled lines

of Germany, Australia, blah blah.

Its not suprising people with socialist mindsets are also the most ignorant.

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Ed 9 yrs ago
Over the last several decades, the United States has undergone one of the most radical social and economic transformations in its history, leaving the masses ripe for “religious and political extremism,” Ferguson writes.

The system is unstable, and driven deeper and deeper into the pockets of Corporate America, especially its financial sector where, Ferguson writes, “there is now abundant evidence of widespread, unpunished criminal behavior.”

“The rise of predatory finance,” he says, “is both a cause and a symptom of an even broader, and even more disturbing, change in America’s economy and political system.”

Ferguson’s film, “Inside Job,” explains how the ongoing financial collapse that began in 2008 was caused by “the criminal greed of the global financial elite that ordinary citizens had (unwisely) trusted, empowered by government deregulation and by the viral spread of rapacious free-market ideology.”

The financial sector is the core of a “new amoral financial oligarchy,” he says, “that has profoundly changed American life.”


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Ed 9 yrs ago
Sweden vs USA

A comparison of the US and Sweden is therefore revealing. Using comparable data and definitions provided by the Organization for Economic Cooperation and Development, the US has a poverty rate of 17.3%, roughly twice Sweden’s poverty rate of 8.4%. And America’s incarceration rate is 10 times Sweden’s rate of 70 people per 100,000. The US is richer on average than Sweden, but the income gap between America’s richest and poorest is vastly wider than it is in Sweden, and the US treats its poor punitively, rather than supportively.


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OffThePeak 9 yrs ago
CAMPAIGN FINANCING LAWS are is desperate need of change

- I hope every thinking person will get behind this cause !

(The US has been "rented" by corporate interests)


Who invests in an election is as important as the amount invested. In the 2010 midterm elections, the average contribution of the One Percent of the One Percent group was $28,913, more than the national median individual income of $26,364.

The latest estimate for the minimum amount spent by both sides in the Gov. Scott Walker “recall election” in Wisconsin: $63.5 million.Most of that investment came from billionaires and corporations and the vast majority went to support Walker.

Walker received $500,000 from the U.S. Chamber of Commerce alone. The Republican Governors Association Right Direction Wisconsin PAC received $1 million from billionaire David Koch in February.

Karl Rove’s “American Crossroads” Super PAC, the Koch brothers, and the U.S. Chamber of Commerce plan to funnel $1 billion of corporate money into buying the White House and Congress this November.

How serious are the stakes of the 2012 election? In the 2012 election cycle, outside groups are expected to invest more than triple what was spent in 2008. Journalist Joe Hagan sees the 2012 campaign as an ugly “coming tsunami of slime.”

/more: http://consortiumnews.com/2012/06/20/strangling-the-republic/


Best way to fight in now : support Third Parties

Choose one: Gary Johnson, or Jill Stein

Vote for one of them instead of Rom-Bama !

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