There has been debate about how this entire misguided financial experiment/episode is going to end, will it be inflation or deflation? The deflationists have argued that the worlds’ economies are going to collapse, real estate and many commodities will collapse along with the stock markets and credit markets. I don’t entirely disagree. IF they are using Gold as a measuring stick or ruler, I believe they are correct, most everything will go down in value versus REAL money, Gold. It only makes sense, “deflation” is when the “money supply” contracts and basically this is what is happening. Gold production only increases above ground supply by little more than 1% per year at the same time investors are gobbling up all new supply and then some! “Gold on the streets” is becoming more and more scarce so most everything else is “deflating” versus Gold..
On the other hand, paper money supplies have been and are expanding faster than 10% per year and will have to explode much further as the economies and sovereign budgets implode. The “deflationists” have done all the logic and have been correct except for one minor detail, the Dollar is not even a shadow of it’s former self, no longer good as Gold and not the “savior” of the system. No, quite the contrary, it IS at the heart of problem! They explain that a “currency crisis” will follow the deflation but that hyperinflation cannot happen. I’m sorry but a “currency crisis” not only including but FOCUSING on the reserve currency is the DEFINITION of hyperinflation. I might add that because the reserve currency is what the crisis will surround, rather than a regional hyperinflation, the upcoming event will be global and all paper currencies will hyper-inflate. Martin Armstrong can take the fact that the Dollar is backed by nothing and stuff it in his pipe because whatever he is currently smoking is seriously messing with the logic lobe in his brain!
Jim Sinclair has explained until he’s blue in the face that what is coming is NOT an economic event, it is a currency event. The deflationists say that as defaults cascade, money supply will contract and thus there is your deflation. Yes, maybe for a week, 2 weeks, maybe even a month, but, and this is a huge “but”, the Fed will supply the Treasury (and whatever other “important” foreign entities in need) with whatever amount of cash that they need. Normally, the issuer of “the reserve currency” is not a fiscally bankrupt entity, this time it is. Normally, the issuer of the reserve currency does so against Gold or Silver reserves, not this time. This time, holders of Dollars will spend them on anything and everything not nailed down out of fear of holding onto something that will end up valueless. Dumping Dollars for real stuff is not really an economic decision, it is a currency decision and it is this getting out of fiat and into something real that will be the “face” of hyperinflation. This “velocity” of paper money is about to explode. Think “hot potato” and you’ve got it.
So you buy barrels of oil, copper tubing, lumber, guns, artwork, gems or whatever, and they become “worth more Dollars” as others do the same thing and “bid” the price up. These things do not “morph” into better quality and become “more valuable”, no, the value (perceived or real) of the Dollar has declined and it takes more and more of them to “trade” for the same item. Deflation cannot be the final outcome, because if the government isn’t (they are) broke enough already, what will happen to tax revenues and the budget when the proposed deflation takes more and more over the edge? Bottom line is that the Treasury will go over the edge along with everything else and bankrupt, default or just outright print. In any instance, the Dollar cannot become more valuable when it’s issuer is going through bankruptcy. This is such a simple concept, “you don’t lend money to a deadbeat OR to someone who pays back with a cheaper currency”, I can’t believe that the “deflationists” who pride themselves as the intellectual elite of the planet cannot grasp the concept. Simple 2+2 math tells you that when everything is collapsing in default, capital will not accrue to the currency of the BIGGEST bankrupt.
I have just one question (OK, maybe several) to ask the “deflationists” which will probably cause all sorts of short circuiting and smoke billowing from their ears, “why exactly did the Dollar perform so well back during the Great Depression?”. Come on, you can say it…because…because the Dollar was backed by what? ….Gold? Which made what? Gold as good as the Dollar…or the Dollar as good as Gold? …and the saying “as good as Gold” is used why? Yes, go on, SAY IT! Because Gold, is THE BEST MONEY THERE IS and ever has been throughout history! So…Martin, in case you get a chance to read this piece…do you get it now or do you need more help?