Deflation and the Credit Crisis

By Britt Gillette

The world economy continues to falter, prompting the expected response from world politicians of calls for greater control of financial markets, increased regulation of everything, and greater cooperation (i.e. liberty-curtailing regulation) among nations. In times of such crisis, the world needs to be on guard against demagogues. History illustrates that tumultuous times often lead to the rise of despots. The French Revolution gave us Napoleon. World War I gave us Lenin. The Great Depression gave us Hitler.The world needs to remember these lessons of history as we venture forward through this present financial crisis. Each day brings more bad news on the economic front, the silver lining is that many people are quickly learning that the faith they placed in this world, and particularly its financial markets, was extremely misplaced. Hopefully, the broken faith of these people will soon be replaced with a new faith that will never leave them disappointed – faith in Jesus Christ.

I’ll lead with excerpts from two excellent articles by Mike Shedlock:

Extreme Leverage In Reverse Portends Global Systemic Collapse

From Mish’s Global Economic Trend Analysis:

“In Brink of Debt Disaster we looked at how consumer debt has the United States and the United Kingdom standing on the brink of the largest debt crisis in history. Together, these posts show the threat of an outright global systemic deflationary crash is very real. This is not a call for a global crash, rather a warning that one could easily occur.” [Read more…]

The world financial system has long been based on fiat currency and an ever expanding debt load. By necessity, such a system can only exist so long as the world maintains faith in it. This faith is quickly fading as trillions of dollars in wealth is drained away in an accelerating deflationary spiral.

Fiat World Mathematical Model

From Mish’s Global Economic Trend Analysis:

“Conditions today are essentially the same as during the great depression. I talked about this in Humpty Dumpty on Inflation. When I wrote that piece, I listed 15 conditions one would expect to see in deflation and the score was a perfect 15-15. I recently added a 16th: bank failures. Click on link to see the conditions table. Those who stick to a monetary definition of inflation pointing at M2, M3, MZM, or base money supply, as well as definitions that involve prices are selecting a definition of inflation that makes absolutely no practical sense.” [Read more…]

I made similar comments in two previous articles: The Great Depression 2.0 and Hyperinflation? Too many people are looking at the base money supply and thinking the Fed is going to print its way toward inflation or hyperinflation to help prop up the economy. But such an assessment fails to account for the fact that credit is a much greater portion of the world money supply than is base money. As a result, the money supply is shrinking and the world economy is shrinking along with it.

It is the destruction of credit, coupled with the fact that what the Fed is printing is not even being lent that matters, not some Humpty-Dumptyish academic definition that has no real world application! I have long been arguing that we are in deflation based on the following definitions: Inflation is a net expansion of money and credit. Deflation is a net contraction of money and credit. In both definitions, credit needs to be market to market.” [Read more…]

Both of the above articles are excellent, and I highly recommend reading them in their entirety. Each communicates in very clear language why the world is currently mired in a deflationary spiral, and why fears of hyperinflation are unjustified for the next several years (at least).

The money supply is contracting rapidly due to debt default and repayment of debt. Without a significant increase in willing credit worthy borrowers and lenders willing to lend to them, a period of monetary deflation will continue to persist. With unemployment on the rise, we’re clearly in a deflationary spiral. What remains unclear is just how far down the spiral will take us.

Minister Fears Rise of Fascism Amid Economic Gloom

From the UK Telegraph:

“The row over foreign workers has gathered momentum in recent weeks and Mr. Balls seemed to suggest the recession could trigger a return to the Far Right politics that prospered in the Great Depression of the 1930s. He told Labour’s Yorkshire conference: “The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years. ‘I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy.’” [More…]

A return to the 1930’s and Depression Era politics is an ominous prediction coming from a European leader. The 1930’s brought Adolph Hitler to power. As a worldwide economic depression takes hold, who will fill today’s leadership vacuum?

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