I was wrong and right about deflation.

Last year, in 2020, I stated on livestreams that I believed we were in danger of entering a deflationary cycle. A follower asked if I still believe this to be the case.

I’m not sure.

My arguments for deflation were based on how money is created . It’s no longer printed, it’s created by issuing debt. The federal reserve creates bonds (debt) or loans money to member banks (debt) for them to loan out. Your bank does not finance it’s loan portfolio solely by lending out customer deposits. Most of those bucks are borrowed from the fed.

Money is borrowed from the fed. It’s lent to someone who then buys a house or other asset with that money. If that collateral declines in value or the loan defaults, eventually some amount of the loan, maybe all of it, is destroyed. When that happens the money supply contracts. When the money supply contracts you get deflation.

Demand for nearly everything but masks and toilet paper has collapsed over the last 18 months. That’s deflationary.

Asset prices should be collapsing, demand has collapsed for most goods and services. My predictions are right on track, except……

I had no idea that the US Federal reserve would create 22% of all the money ever last year. 9 Trillion dollars. They continue to print. The other big banks are doing the same. TRILLIONS IN EXPANDED MONEY SUPPLY WORLD WIDE.

I had no idea that the government would pass the CARES Act, allowing mortgagees to go into “forbearance.” As of late March approximately 5% of all mortgages were in forbearance, many of which should be in foreclosure, adding to the housing supply and pushing prices lower, causing more houses to experience downward pricing pressure, causing more foreclosures, etc.

I underestimated the lengths to which central bankers and the big four governments (EU, Russia, China, US) would go to stop this.

Central bankers and economic planners are in a high stakes game of chicken at this point. They have to go all in every day, pulling out more and more of the traditional stops in order to stop a devastating asset collapse.

It’ll keep working until it doesn’t.

Our choice is only between being of this world or in it.

7 thoughts on “I was wrong and right about deflation.”

  1. I think you’re right, I’m noticing higher prices for most staples and when inflation starts to get out of hand to the point where it can’t be ignored and the Fed is forced to raise rates to avert disaster, it’s going to get ugly.

  2. How do you play a game with ever changing rules?

    Staying debt free won’t hurt. I can’t lose any equipment that I don’t have debt on unless someone else shows up to break or take it. I have too many friends and family members who are rushing out to go to college on the idea that the U.S. will forgive all debt. I think they’re trying to catch a falling knife.

    Keeping crypto in your own vaults and precious metals physically near you instead of in an etf. Housing, stock, and bond markets have to crash eventually. Buying food storage as another asset class would help as well. Is there any other assets we should be looking at?

    Getting multiple ways to gain an income.

    Buying an appliances that you need or know that are about to go out.

    1. Go ahead and by durable goods you know you need and will use. They are just going to get more expensive AND more scarce. I’m afeared there just aren’t any refuges from this junk.

  3. We are seeing plenty of inflation, and while the fed -should- raise rates, they are hesitant because they have to service that debt. Like you said, 22% higher money supply makes an even harder case for them to raise rates. Yes, they might jump rates up 25 basis points, maybe they even go as high as 1%. It needs to be 3-4%. I think we will see stagflation since unemployment is remaining high and so many still unwilling to work.

  4. Pingback: More on inflation – ScottHambrick.com

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