From Ol’ Remus on the coming deflation

Ol’ Remus and SLL are in agreement: it’s going to be bad. From Ol’ Remus at woodpilereport.com:

Imagine a deflation so severe, so catastrophic and long-lasting, with so many banks collapsing that cash all but ceased to circulate. Imagine towns and cities so desperate for physical currency they printed their own . Imagine cash having measurably more buying power with each passing week. Imagine half of all banks closing their doors forever. Imagine surviving banks making a dependable and risk-free real profit from money they didn’t lend. This was the Depression, and it lasted for about a decade.

Before the Crash of 1929 there had been pullbacks, in 1923 and again in 1926, significant but short, each lasting a year, each followed by greater expansion than before. Soon everything that wasn’t agriculture became a bubble. It’s understandable, everything was new—radio, paved highways, movies with sound, refrigerators, air travel and skyscrapers—it was the dawning of a new era with an incandescently bright future.

The forward looking would be the foremost citizens of this new era, which meant buying in. And buy in they did. Mortgages, car loans, time payments—and for 16% of the population, stocks on margin.

If the crash was unimaginable, the follow-on catastrophe was unthinkable. The economy immediately contracted in one memorable spasm. In mere weeks the future went from daydreams of opulent splendor to a search for lost change in the couch cushions. The middle class became the poor, the poor became the destitute. Then it got worse. The gross national product declined by a third. Trust in government and finance crumbled away. Populism ran the table. Regime change was in the air.

Today a dark consensus is forming of a similar debacle, probably in the fourth quarter, possibly sooner. The evidence is compelling: record highs in the stock market supported by inflation* and bubbles and the Plunge Protection Team, a Shiller price-earnings ratio at 29x, negative returns for the bottom 250 of the SP500, accelerating consumer and retail bankruptcies. Major crimes on Wall Street and in DC go uninvestigated, trust in government and finance is in the single digits, unsold new and used cars are constipating the pipeline, real unemployment is far above official numbers, and the middle class is tapped out.

It’s a given the stock exchanges will crash. Beneath the financial highway lies an ever-growing sinkhole and one day the market will be overweight enough to crash through. Price discovery will have been served at last. The prudent are thinking past it to second order events, where the demons live.

More photos from the Crash of ’29 will appear in upcoming Woodpile Reports.

* Inflation since 1929 is 1,330%. This gives an idea of how severe a runaway deflation could be. Using 1929 as the base, if we squeezed the accumulated inflation out of it, a twenty dollar bill would be worth $286 in purchasing power.

http://www.woodpilereport.com/html/index-480.htm

4 responses to “From Ol’ Remus on the coming deflation

  1. I think Bill Bonner is as close to the truth as anyone with his tsunami analogy:
    [snip]
    Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

    Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

    The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

    The same thing could happen to the money supply . . .
    . . .
    A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

    So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction?
    . . .
    But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

    A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

    All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

    They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

    No. People will hoard the kind of cash they understand . . . something they can put their hands on . . . something that is gaining value – rapidly. They’ll want dollar bills.

    Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes . . .

    Let us stop here and remind readers that we’re talking about a short time frame – days . . . maybe weeks . . . a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system . . . and before the government’s inflation tsunami has hit.

    [snip emphasis added] RTWT.

    Liked by 1 person

    • That’s one of the best explanations of a phenomenon I’ve been warning of for years. Thanks for bringing it to SLL.

      Like

  2. Keynesian socialism has run it’s course,
    It’s time to dismount from this dying horse,
    The social engineers have had their kicks,
    Time to send them across the river styx,
    The republic needs to file for divorce.

    Like

  3. It’s not that I don’t have the time
    But I’m too tired to make a rhyme
    Others’ work I will not borrow
    Perhaps something original comes tomorrow

    Like

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