The only thing ‘wrong’ with deflation is that it makes sovereign and derivative debt unrepayable. The smart money is betting on hyperinflation.
The regular and central banks (along with their political hirelings) keep saying that our enemy is deflation. But that’s a somewhat inclusively dishonest use of the personal pronoun there: deflation is their enemy, not ours. They’re the ones with the whopping great sovereign and derivative debt exposures. The only way the banks can survive is through enough easing and printing to inflate away their debt. Those on low wages and fixed incomes will get killed by inflation, but they don’t care about us. We will reach the point where we can’t consume anything any more….but they don’t care about that either.
Look at the US at the moment: consumer credit card debt leapt hugely – by $8.6 billion – in April. This was a ginormous slice of the total increase in credit, which shot up by $20.5 billion. Economists insist that this is a sign of confidence; I take the contrary view: this is the strugglers maxing out plastic cards because their incomes aren’t enough to live on.
Investors are waking up to the truth of what’s been happening since 2009. Near-zero interest rate ‘Zirp’ protected bank exposures: but as I said at the time, it stopped wealthy retired Boomers from consuming. The motive wasn’t economic, it was about saving the financial system.
The élites claim that deflation is the enemy, but this is in part a justification of why chucking fiat currency at the economy isn’t a problem. QE has been rationalised as safe economic stimulation, but its real raison d’etre wasn’t economic turnaround: it was to provide banks and multinational businesses with free money, thus enabling balance-sheet shrinkage and retention of stock market confidence respectively.
The time has come when we need to understand that Zirp and QE were used to buy time until they had their ducks in a row. The enemy for ‘Them’ is deflation…because that makes their debts bigger and bigger every year. Their greatest saviour can only be hyperinflation: wiping out fiat currency’s value such that their debts can be repaid with ease, and the fiatometer then rewound back to where it was in the year of our Nixon, 1972.
With all the debts in paper toilet tissue – and all the assets in safe havens like gold – the banks can leap from ruin to riches in one mighty leap. So while gold looks uncertain and the Buck looks strong, remember that both those valuations are manipulated to suit the financial system and Western debt…not us, the citizens. The Libor rate was fixed for them, not us. Real price deflation for the ordinary citizen would be bad for them, not us.
The acid test as always is to ignore what the media-sovereign-banking axis says, and instead watch how the savvy folks are behaving to ensure their survival throughout the madness to come.
Australian author and financial guru Jim Rickards has changed his portfolio to minimise fiat deposits, instead borrow in ropey currencies, and use that to be solid-value assets. He wrote a piece two days ago, and this extract is telling:
‘[Warren] Buffett has purchased large offshore assets in China and elsewhere that produce non-dollar profits that he can retain offshore tax-free….A huge part of Buffett’s portfolio is in financial stocks — particularly in banks and insurance companies — that are highly leveraged borrowers…..Buffett can profit when inflation wipes out the liabilities of these financial giants….in short, Buffet is using leverage to diversify into hard assets in energy, transportation and foreign currencies.’
This is the classic hyperinflation escape route: borrow in doomed currencies, buy assets that will massively increase their value during hyperinflation, then pay off the debt in the near-worthless currency…..and thus profit from reduced debt alongside rising asset values. Result: wealth if you’re lucky, survival at worst.
Hedge fund billionaire Paul Singer, founder and CEO of Elliott Management, is making similar moves. In his latest letter to investors, released towards the end of May, Singer boldly asserted that by far the best trade now is to short “long term claims on paper money.”
Former Pimco boss Bill Gross moved to short German bunds in April – that is, betting that in the end, bond yields based on a toytown currency like the euro must rise. This is fundamentally the same strategy as Singer, and closely related to Buffet’s: no confidence in fiats.
Five days ago, Gross looked at The Shenzhen Composite Exchange – a sort of latter-day USM in China that tracks newer and younger shares. He thinks that assets on this exchange have risen far too quickly (108% so far this year) to be maintained, so he’s shorting that too. When the correction takes place, he’ll move in and pick up cheap assets.
When everyone with a genius for spotting ends and beginnings starts to play variations on the same theme – borrow in over-valued currencies and buy undervalued assets/ speculate in undervalued currencies and short overpriced assets – then it seems to me obvious that the positions being taken add up to a certainty that the main preparation they’re making is for out of control hyperinflation among those with unrepayable debts.
When things reach this point, the idea of deflation being ineluctably tied to low consumption becomes risible: once confidence is lost in the currency, the rush for the exit is unstoppable. The best example of this on the planet at the moment is Venezuela – where economic muddle and rising poverty have produced all the signals of chronic deflation: but it is, clearly, teetering on the edge of a German 1923 moment. Yet some as yet unexploited assets in that country mean that investment in those assets at the right moment could make a person Gatsby-rich.
Some of us have been saying since around 2008 that deflation would come first due to falling real incomes produced by neoliberal austerity…but then hyperinflation would be induced to both wipe out Western debt and create a more competitive exporting currency. Nobody seems to have thought about what happens when the time comes to buy raw materials in Reichsmarks: but as I wrote earlier, that isn’t really their concern. The goal is to remain upright when The Bomb goes off, and then revalue. What happens to the citzenry is of zero concern to these odd people.
I’m not a qualified adviser and so you must do what you think fit in this context. But today, I’m happy about having switched massively from cash to assets. And once the signs are clearer, I’ll be happy to take on debt on a rubbish currency (eg, the euro) – both for living expenses, and in readiness for the moment when hyped assets (eg, the UK property market) go from correction to collapse.
Fiat currency destruction is coming. Good luck, keep calm, and don’t ignore it.