Posted on 02/09/2015 10:55:30 AM PST by blam
February 08, 2015
Chris Mayer writes: That chill in the air? This is what deflation feels like...
Right now, the 10-year U.S. Treasury pays just 1.8%... oil is $50 a barrel... commodity prices drift near to chilling lows... and the dollar is near multiyear highs. These are all deflationary trends.
What deflation means for you as an investor is what I want to explore today. As an investor in stocks, there is a safe path through a deflationary Ice age.
I'll get to that in a moment. But first... what exactly is deflation?
The economic word deflation, says the Oxford English Dictionary, first appeared in print in 1920. The idea, I'm sure, is much older. But it is the economist Ralph G. Hawtrey who gets credit for putting the thing into words when he wrote, "Deflation... is a reversal of the process of inflation." For the record, Hawtrey was against it.
Hawtrey may be the first to define it, but definitions are dry, dead things, especially in this case. Deflation is so much more than falling prices. It is also distinctly chilly.
Barton Biggs used to write about Fire and Ice, always capitalized, borrowing from Robert Frost. Ice was deflation. In a memo dated Aug. 18, 1997, the former Morgan Stanley strategist defined Ice in more certain terms than Hawtrey:
Ice is a loss of pricing power and a world where prices are as likely to go down as up. Ice is an erosion of profits. Ice is excess capacity. Ice is developing countries with low-cost factories and huge new labor forces. Ice is creative price destruction from technology. Bursting stock market bubbles cause Ice... Ice is also about competitive devaluations, as countries try to export their unemployment and lack of growth.
(snip)
(Excerpt) Read more at marketoracle.co.uk ...
None of which is relevant unless we default.
Which is not unlikely.
Debt deflation is all about default. Persons, Companies, Banks, Cities, States, Nations.
It's about future capacity not being able to pay off the largesse of the past as well as current needs.
Capital retracts and waits for the dust to settle as the real economy contracts, seemingly endlessly.
If you have CASH assets (not debt assets like T-Bonds), but actual cash, you are KING.
If you have all your cash tied up in Commodities and Real Assets, while you get to keep those, they are not worth nearly as much cash...but probably kept their relative wealth.
If you have debt, you are dead meat and will be driven to certain default...losing any real and cash assets you may have.
The issue is Debt Saturation slows the circulation of new money.
The Velocity of Money is at historic lows not seen since the early 30's.
Doesn’t seem to explain anything. In theory then, if people kept assuming more debt money would continue to slow down forever. I agree velocity is low, with $10 trillion sitting on the sidelines waiting to be invested.
Correct.
And it will.
That's why the entire world order is on the cusp of change.
A "New Debt Economy" will emerge as the most likely scenario.
But it won't be dollars. The dollar is destined for the dust-heap.
I suggest the new instrument will be the "New Dollar" after the USA repudiates it's debt.
Of course, that implies enormous upheaval, millions dead...if not a billion...and an entirely new governance in the US.
Regime Change.
No nation/regime has ever survived the collapse of it's currency...From the diluted Roman coins until today.
We'll not be the first.
And no, I'm not a conspiracy theorist. Or subscriber.
I don't think anyone is in charge...except the devil if he exists.
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