Deflation – Is there a new depression coming?

The definition of deflation when it comes to economy is that it´s a decrease in the general price level of goods and services. As you may already know deflation is the opposite of inflation and happens when the inflation rate goes below 0%.

However, inflation and deflation can be used as a description of many things that are growing or shrinking. Like real estate prices, GDP or a balloon.

Deflation

Since I first saw the crash course series I have been keeping an eye on the posts at the Peak prosperity blog and just a couple of days ago Chris Martenson wrote an article named “the deflation monster has arrived”.

Something that I have been expecting and therefor positioned myself against in various ways is deflation. Even though the definition of deflation is that prices are going down the reality is that the currency is going up, one way to put it is that the amount of money in the system is decreasing so therefore the “value” of it goes up.

Many economies of the world have been fighting against deflation since 2008 (some a lot longer than that). Extreme measures have been taken to prevent the deflation from taking over, this includes taking interest rates to zero percent (sometimes negative), shoveling newly created money into the various markets, currency manipulation and the deflation is still just around the corner.

I´d like to give it a try to paint a picture of how I see what has been going on now for many years.

Imagine the economy as a hot air balloon, and to make this a bit simpler we will start the journey just ten years ago. The balloon was flying higher and higher and higher until one day there was a failure and it started crashing down against the ground. A big hole in the balloon was discovered and the people driving the balloon took what they had and patched the balloon together, still leaking but eventually it stopped crashing down. Instead of taking the balloon down slow and securely to fix it before going on another trip the people driving the balloon decided to put on the fire and also installed some extra new fires to get it going up again, and it worked (they thought). The balloon started going up again very slowly, but it was still leaking. The people driving the balloon put on more and more fire but that only made the hole bigger and bigger again, the hot air that was being pumped in the bottom was going out just as quick on the top. If they were to stop pumping in new hot air, the balloon would go crashing to the ground again, but there is also the hole to consider, what if there becomes too much pressure to the edge of it and it just rips the whole balloon apart?

Asset prices

While the central banks of the world have been playing the game of hangman trying to figure out how to fix the economy all the wrong guesses they´ve made have driven up asset prices to the sky.

In most countries the stocks and bond prices have been skyrocketing in the past years and many other asset classes’ as well. Things like real estate, art, antique things and collector objects have been rising like crazy.

Banks have grown now to the level where they are not only too big to fail but also too big to bail out, Good thing that our leaders figured this out and now made bail in possible. Martin Armstrong of Armstrong economics states that we are now seeing the beginning of the end of socialism.

Real shit or bull shit?

I don´t know if this all falls under the category of conspiracy theory to some of you, some of the things I read do that. With this though, if you just take a couple of steps back to see a little bit more of the picture, you might see something totally different then you saw at first. Let’s take the countries that have a booming real estate market right now as an example. Since I´m from Sweden I will make a small analysis of the situation going on there.

Real estate prices in Sweden have been rising on average over 8% per year for 20 years now, salaries have been rising less than 2,5% per year over the same period.

So how is it even possible for the average swede to be able to afford the housing prices today?

Well if we had the average house in Sweden priced at about 50.000€ in 1995 for example. Then that same house would cost 240.000€ today at a price increase of 8% per year, that seems to be fairly correct.

Now 20 years ago the average interest rate on a loan was around 10% and today the average is around 1,8% let´s see now, could it be the central bank that did all this possible?

The interest on that 50.000€ house 20 years ago was around 5000€ a year, now how does it look today?

The interest on the same house today, with loan at 240.000€ is just over 4300€ a year.

Fantastic isn´t it?

On top of this we can add in the compounded salary increase at about 2,5% per year for 20 years. I would like to say that the monthly cost for buying the average house today is about half if you compare it as a percentage of salary, even though the price is almost 5 times higher today.

Why is this a problem?

For starters, this enslaves people to the banks since paying of the house loan is close to impossible. Another thing that most people don’t think about is that low interest rates is what driver the economy today. Since the percentage of the salary that goes to pay for the house loan has gone down like crazy that means that people have a lot of more money to spend, and ass you know spending is what drives the western economies today. As if that’s not enough, since the prices on people’s homes have gone up a lot, they use them as an ATM machine. Have you ever heard of someone getting the house re-valued and the raising to loan a bit to get a new car, go on a cool vacation or maybe get some new furniture?

I have heard of that!

Now I would like to say that people are stupid, but it´s not their fault. If you have done like that, don´t feel bad. The crooks here are the bankers, they gave the idea to people that it´s ok to take out home equity loans. The banks hired sales people who’s only job is to call people up that have a overvalue in their home, with the loan as a reference and then convince them to use it as a ATM. Sounds familiar?

So let me ask you this, what will happen if the real estate prices stop going up by 8% per year?

Or if interest rates goes up?

Do you think that there will be less spending?

If people stop spending, what will happen?

You know the answer to this, we went through it before, and yes that’s correct!

Deflation will come, the economy will slow down, people will spend even less, business will have less customers, unemployment will go up and the more deflation will hit.

The system so fragile now that even the small changes will have big effects.

What happens if some big changes were to appear?

One more thing before we let go of this

I want to say that I’m sorry for the language used in the coming text, it will be a bit rough but that´s only because this has been bugging me for a while and I don´t like screaming in peoples faces.

The one argument for the real estate boom that swedes are using and have been using for years is that there are too few homes available, that why prices are rising and have been rising. This bullshit has been fed to people by media, “experts” and politicians for as long as I can remember. If you just repeat something enough times people will think it´s true.

Now if there has been a shortage of homes for 20 years, WHY THE FUCK DIDN´T THEY FIX THE SHORTAGE BY NOW!?

There is no shortage in 300.000€ one bedroom apartments. There is a shortage in cheap rental units in central locations!

That’s it the truth, I’m sorry to tell you that. Now if you like to think that the “shortage” of homes is what is driving the prices and not the fact that it´s basically free to borrow money that’s up to you.

We have gotten spoiled in western countries, if there was a real shortage people would be living together. One reason for a shortage in rental units is because most people live alone.

If it´s not the central bank and regulations from the government that has been driving the housing prices to the stars, and it really is the shortage that is the reason. Please write to me and explain how the situation would look if the interest rates were still at 10%. I bet that if the average family had to pay 2000€ a month in just interest to have an average house, maybe the shortage would suddenly not be there at all? Maybe the prices would be lower?

The increases in money that is created through bank loans is what drives the economies of most countries today. Borrowed money drives the GBP up. It´s no surprise that Sweden’s GDP has high growth in the past year, all the money created to drive up real estate prices 14% on average could have something to do with it! Don´t you think!?

 

What will the deflation monster do?

Deflation can happen in two different ways, one is that the currency supply shrinks (deflates). The other is that the velocity of money transactions goes down, that means that every dollar, Euro or whatever currency used in your country gets re-used less times (people stop spending). When people stop spending the economy stops and later on businesses go out of business, when businesses fail unemployment goes up and people spend even less and so it goes on.

Last time the deflation came in 2008 the central banks of the world reacted to this, they are so shit ass scared of deflation that they did something that hadn´t been done before. Zero percent interest rates and QE programs stopped the deflation and the economies started moving again, they thought. Now the deflation monster is back and they are out of ammo for the machinegun (interest rates) and the grenade launcher (QE).

As it looks right now the central banks have 2 options when the real deflation hits. Either let it be and the deflation will take the world into a depression because less consumption means less jobs and again less jobs means less consumption. This happened during the great depression in the 1930s, and back then it was the same creators to the problems as it is today, Banks, central banks and politicians. The second choice is to bring out the “Atom bomb”, since the grenade launcher (QE) didn´t work. No one can really know what the “Atom bomb” will look like but as Chris wrote in the article, one possible thing is that the central banks actually “throw money” at the public in a desperate attempt to make them pick up spending again.

Final thoughts

Of course, no one can say with certainty how and what will happen but a lot of the known facts are not looking so good. As I like to say, it’s better to be prepared for problems and don´t have them than to have problems that you weren´t prepared for.

As Chris also states in the crash course series, this is not a message of gloom and doom there are lights out there. It might be rough at first but humanity will fix it and we can all make the best of our future and see to it that we prosper.

To protect my wealth I do 4 different things: exchange some of my currency to gold and Silver, own different currencies, invest in fruit trees (foods will always be needed). The last thing is that I short the stock market through options contracts, which basically means that I buy insurance against the financial problems that might come.

Feel free to leave a comment .

 

Kind regards 

Robin Flint

Passive income together

 

 

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