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Why a Ruinous Debt Deflation Is Coming

EST

I’ve been writing on deflation since the early 1990s, when I had the topic all to myself and was regarded as a voice on the lunatic fringe. Scary essays that I freelanced to Barron’s, the San Francisco Examiner and a number of other publications turned out to have been premature, but I’ve never doubted that the endgame for a global economy glutted by debt would be a deflationary collapse. Skeptics say the Government will make this impossible by simply revving up the printing presses, creating enough money to bail out ‘the system’ regardless of how many dollars it takes. Oh really? How would this work if, as is extremely likely, a state pension system goes bust?

Realize that 28 states have been growing their liabilities twice as fast as their economies, and that in the states that lead the pack — i.e., New Jersey, Illinois, Connecticut, New Hampshire and Kentucky  — accrued debts have been growing three to four times as fast as their economies. How long can that continue?  My guess is that Illinois, with a fiscally reckless Chicago to help bring it down, will be the first state to go belly-up.  Were the Federal government to come to the rescue, actual ‘helicopter money’ would be needed, since checks would have to go out every month to retirees so that they could meet recurring expenses.

The ‘Catch 22’ of a Bailout

Two dozen other states would be close behind, seeking the same treatment. If they got it, that would be tantamount to hyperinflation. Before you assume that such a thing is even remotely possible, substitute the word ‘taxpayer’ for  ‘Federal government,’ because that is who would pay for a bailout.  That’s right: All of us working stiffs would presumably be on the hook…forever, forking over a big piece of our paychecks to cover the bills of down-and-outers in more than two dozen states. Yeah, sure. And here’s the kicker: If printing-press money were used instead of transfer payments, the hyperinflation that would instantly result would make checks mailed out to the Illinois pensioner worthless. That’s the ‘Catch 22’ of a pension system bailout by ‘the government’.

Much bigger disasters loom, by the way, since the Social Security and Medicare/Medicaid systems also face certain bankruptcy. Anyone who doubts this should be required to answer this question:  Do you actually believe that millennials and gen-xers who are living with their parents till they’re 35, and who are $50,000 or more in hock for mostly worthless college degrees, will be able to foot the bills for baby boomers’ Social Security and Medicare? End of debate. (Note: Ten-thousand boomers are retiring each day.)  For more-detailed predictions concerning the impending debt deflation and ways you can prepare for it, click here for a recent interview I did with Howe Street’s Jim Goddard, and here for an interview with Greg Hunter of USA Watchdog.

Comments on this entry are closed.

shawn April 7, 2019, 7:36 pm

Hi RA,
I’m a deflationist and long time deflator. I can’t do anything like I used to, isn’t that the real definition of deflation? Is it possible that all the Central Banks are scrambling to add gold reserves to avoid this massive deflation we both agree is inevitable? Could the CB’s be planning to utilize new Basel 3 rules and exponentially increase the price of their balance sheet gold to underwrite the quadrillion in derivatives and $250 trillion of debt? Many believe there’s no gold in Ft Knox but if all the CB’s are already in on this coordinated con, why not just take gold up to $1 million an ounce and keep the party going? Krugman wanted to place a trillion dollar coin in the Treasury, what’s the difference? Sure would create a literal bazillion in new assets to lend against.

david b April 6, 2019, 5:37 pm

slow default equals inflation not deflation.I think the dollar will go through hyper inflation before its collapse.

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Slow defaults? Who said anything about slow defaults? And who said they ‘equal’ inflation, not deflation? If you bring an argument into this forum, David, 18 poorly supported words isn’t going to carry the day. RA

Kevin April 6, 2019, 5:43 am

Hi Rick,
Your observation that deflation is inevitable misses one very important fact, this time the Fed has digital money which can be credited instantly to the accounts of every citizen in unlimited amounts(i.e “helicopter money”), the Weimar government had the inconvenience and the obstacle of physically printing vast quantities of paper notes and distributing them. It also has the option via the government of Universal Basic Income(UBI). Both of these would be highly inflationary and would ensure inflation would soon turn to hyperinflation as more and more would be required at each iteration.
You suggest that because the new money would lose value as fast or even faster than it is created, they will not try it. As if you are dealing with intelligent, rational, responsible people! – NO! you are dealing with corrupt or naieve incompetent, financially illiterate politicians who will literally do anything to prevent the collapse we all know is coming, even if it means just postponing it for a few years and in the process create more destruction and suffering than if they had let the markets re-adjust themselves.
Everyone knew once the Fed started on the road to QE there was no way back, that it could never be reduced or stopped as the asset bubbles it helped reflate would collapse, and that is what was shown last December, Mnuchin pressed the panic button and told them to reflate. Why wouldn’t they do the same the next time???

&&&&&&

Kevin, I long to hear a good argument against deflation or for hyperinflation, but this is not it. I’ve stopped debating people who don’t address the points I’ve made, many of which pivot on a VERY specific — and highly likely — sequence of events. Everybody seems to have some theory about why hyperinflation is likely, but I haven’t heard a good one yet.
RA

John Jay April 5, 2019, 10:00 am

Rick,

Well, as I have argued before, the Dollar can’t “Collapse” until a replacement appears.
It won’t be gold or silver because the average American does not have even $500 in spare FRN cash on hand, let alone stacks of gold and silver coins.
Yuan ,Rubles,Yen, Rupees, Sterling?
Bitcoin?
I doubt it.

There are one billion people from the Rio Grande to Tierra del Fuego that just love the USD, and every person that crosses our border means more demand for USDs.

Every buccaneer from China that flies into LAX needs to convert his loot into USDs to buy his mansion in Arcadia, San Marino, or Irvine.
Been going on for decades in California, and it has priced young Legacy Americans out of both the Hispanic and Asian barrios.

Many ways to nullify all the debt America has piled up.
If the nascent Bolsheviks win, it will be cancelled, via my Proscription List scenario.
If the Fed types stay in power, NIRP/ZIRP makes it affordable a la the Japanese CB policy.
SS, Medicare, etc?
Easy, just inflate prices and let the Legacy Americans starve in the gutter and die off as their SS will be hard put to pay for a six pack of Maalox!

The only way massive deflation will be allowed by the Fed types is an orchestrated “Crash” that allows them to buy up everything for pennies on the Dollar.
But why gamble on a revolution when their slow but sure plan has them on the path to own it all anyway?
If there has not been a decades long Oligarch conspiracy to destroy Legacy America,
there might just as well have been!

If you have any doubts about that, just pay a little visit to a few DMV offices in Los Angeles County
Then you tell me what you think!
LOL!

John Jay April 4, 2019, 11:14 pm

Rick,
I believe you will see Trump deport 20 million vagrants that have no legal right to be in this country before you will see any deflation allowed, especially in housing.
TARP proved to what lengths the owners of the Federal Reserve will go to keep house prices in the stratosphere. Remember “Cash for Clunkers?”

Open Borders does much more than provide cheap labor and cheaper votes to the Oligarchs!
It has been keeping upward pressure on rents and house prices since the Immigration Reform Act of 1965.
Which just happened to both depress wages and add nitro-methane to home prices and rents, just as the first of the Boomers started entering the labor market and housing market.
At exactly the wrong time when the last thing Boomers needed was more competition for both!

Which is exactly why you can count on Trump to eventually sign off on Amnesty, it is what the big banks will demand to ensure an ever increasing tidal wave of tenants to keep rents and mortgages in the stratosphere. If that requires the “Twelve in a room in America” of W S Story, so much the better!

State pensions will be paid no matter what damage is done to the remnants of the private sector. Reparations, taxes on unrealized capital gains, wealth tax, etc are already being proffered by the Bolsheviks at all levels of government. And you can bet that the laws and new tax forms to implement those measures are already in PDF as I write this. Just like the Patriot Act magically appeared when needed!

In my opinion America is toast on so many levels, that what is going to happen to her can best be described by a term from Physics:
Phase Transition.
Using a movie from the popular culture to best express what will happen…………………
Just watch Dr. Zhivago.

Regardless of my sentiments to the contrary, I have to accept that traitors in DC have won Civil War 2.0.
The Bolsheviks are already warming up in DC.
Trump will prove to have been just a speed bump on the way to Dr Zhivago.

Rick Ackerman April 5, 2019, 9:14 am

We’ll just have to agree to disagree, JJ. I don’t see even a slight possibility that deflation can be averted — or ‘not allowed’, as you’ve put it. The dollar force set to implode is a hundred times as large as the balance sheets of all of the central banks put together. The problem is much, much, much bigger than whatever political hubris can be inveighed against it. RA



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