The causes of deflation are linked directly to fractional reserve banking causing fiat money inflation and the massive credit inflation of the past 70 years. The only cure for credit inflation like we have had is a big credit deflation (See page on Austrian economics). Thanks to government protection and encouragement banks were able to lend with first only small cash holdings in reserve. In the last decade our government and the Federal Reserve Bank required no reserves backing your deposits. None! We had a credit binge. Even the FDIC (Federal Deposit Insurance Corporation) and FNMA, Fannie Mae – the Federal National Mortgage Association both went bankrupt and had to be nationalized. You and I the taxpayers now own them. We are on the hook to pay for future failures.
The following is a long list I think shows why the argument for a deflation leading to hyperdeflation is valid. The GREATER DEPRESSION that started in 2000 and may not end until 2016. It’s an end of a mania bubble and an 80 year long Kondratiev long wave cycle that all capitalist economies apparently go through. See the article on Kondratiev wave economic cycle. We are in a Kondratiev wave winter right now. Most asset values will drop by 90 percent into 2016 and unemployment may hit 30%. Even the price of gold may drop in half. All this according to Robert Prechter of Elliott Wave International – Join Club EWI free at links on this site.
When seeking the cause of deflation we need to remember that the real cause was credit inflation. Many items on this list are manifestations of the credit bubble popping. What is remarkable is the depth and number of related items on the list.
1. Growth of government at all levels federal, state, county and city due to the socialist neo-Keynesian belief that the economy can be micromanaged. Money is sucked away from the free market economy to fund inefficient and bloated programs. Eventually the largess grows to be one third of the economy and then causes it to get top heavy and crash. The big government parasite that is welfarism sucks all the life from the economy.
This Kondratiev long wave took some 80 years start to finish and the next on may take 100 years. The Obama administration has added 250,000 new federal positions and raised wages to government workers at a time when the private sector is hurting.
“As government expands – Liberty contracts” by Ronald Reagan
2. Military waste. Wars and much of the money spent by all the different divisions of our defense departments is poured down a hole in the ground-never to be seen again. Oil, food, time, materials, manpower, blood and lives wasted.
3. Governments support of favorite industries that would not make it in a free economy. Real estate bubble – unwise lending practices such as everyone should own a home nonsense. Government Oil depletion allowances meant there was no incentive to conserve or develop alternate energy sources. Solar best!
4. Real estate deflation – end of a mania – Prices down 33 per cent already leading to reduced wealth of individuals, reduced capital gains tax revenue and reduced real estate property tax revenue. Robert Prechter says there will be a 90% drop by 2016.
Accounts lose money on stock
5. The coming stock market losses will make people feel poorer so they don’t spend. Pension and retirement accounts lose money on stock and bond investments hurting ability to pay those retiring. 90% drop predicted. In a secular bear market with a bear market rally (B wave) rally topping in the first months of 2011. 13 year head and shoulders top formation. If you draw a line connecting the bottoms of the index moves you get a straight line pointing down to the right. This is a bearish technical chart pattern called a declining neckline.
6. Oil. High petroleum prices sucking money out of people’s pockets that could have gone to purchasing goods and services in the market. We are all on an oil food chain using dead dinosaur and prehistoric plant deposits for our energy instead of whale blubber like we used to. Oil money is sent to foreign countries, which, in some cases is used to pay for attacks on America. Then there is the inefficient gas guzzling autos, appliances, lighting and phantom loads on TVs, computers, microwaves etc. Heat rises right. Why are all the working parts of refrigerators underneath the area meant to be cooled? Heat rises up through the whole refrigerator or freezer box. What a waste of trillions of dollars of oil all these years. Go solar.
7. Job losses – high unemployment meaning less money is around to buy goods and services. Thus, slow sales causes businesses to lay off more workers in a vicious circle cycle snowball effect. Here at the start of 2011 there are 14 million plus unemployed in the U.S. This is the multiplier effect in economics in reverse which will feed on itself creating hyperdeflation.
Feel less wealthy
8. Collectable items, antiques, art and possessions in general loosing value. Lower prices when people try to sell. They feel less wealthy and cannot buy as many necessities. There will be many bargains in all kinds of property and possessions at the bottom as people sell assets to stay afloat. Antiques Roadshow on TV is seeing a 30 percent drop in some prices and their estimates of value range has widened greatly. I expect it to go off the air in the next several years. John Lennon’s white suit recently sold at a 50% drop.
9. Credit tightens up. Banks and other lenders fears lead to strict lending standards. Businesses can’t expand. A low interest rate is sure sign money is on sale. It is a sign of weak demand and deflation. Transparency is code for more oversight & rules, by the way.
10. The Internet has lowered the cost of doing business online. This means it is easier to startup a business. Business and jobs also go offshore to cheapest providers. Prices drop each year due to this and quantity of scale price reductions. Think calculators.
11. Food. Farm commodities prices drop eventually due to weak demand. Small farms get hurt most. Reduced income means they cannot buy as many goods and services as well as new equipment. Now, in 2011 prices are up due to reflation by the government and high oil prices. Right now, the high cost of food sucks money out of people’s pockets. They can’t afford to buy stuff or go out to restaurants. Layoffs result. It’s deflationary!
12. PIIGS – Portugal, Ireland, Italy and Greece. Inefficient government leads to high unemployment causing spreading malaise in Europe and a spreading banking and labor crisis.
13. Interest rate drops. Savers and retired people counting on a safe return on their money have less money to buy goods and services and to make rent or house payments. Then interest rates spiral up as businesses borrow at any rate to stay afloat. Bond prices tank meaning massive loses in value of debt instruments with junk bonds and corporate bonds hurt the most. Cities, States and Counties that cannot print money (like the federal government can) can have the most trouble.
14. The saving rate has climbed from 0 to 5% already in 2010. Means there is less money for purchases. This hurts business.
15. Increases in debt and credit card repayment means there is less money for purchases. This hurts business and the trend will continue.