Thursday, September 17, 2009

Deflation and Bankers Mix Like Oil and Water

Why is deflation bad? If one can manage to keep one's job and one has some savings, deflation is the greatest thing since sliced bread. Stuffing cash under the mattress is actually profitable during a true deflation, as the prices of most goods fall during deflation. Why exactly then is deflation bad?

Deflation is bad for debtors and bankers that have made loans on assets that are declining in value. Debt increases in its relative burden during deflation, as a $100 debt is a heavier burden on the debtor once money itself increases in value and the debt must be repaid with more valuable money. For bankers, deflation means too many defaults and too little money recovered when the assets backing debts-gone-bad are liquidated.

One of the hilarious and clearly fallacious arguments from those aboard the paper fiat economic train to hell is that a Gold standard is too restrictive and prevents "adequate" monetary expansion. This, it is so postulated by the people who pretend to know, is bad and results in satanic episodes of deflation. In other words, if we had a Gold standard, savers who didn't want to take risk in the asset casino markets would be periodically rewarded by having their savings increase in value. The horror!

Now, please don't misunderstand me - I am not saying a Gold standard is the answer to the world's problems. Far from it. But to say that a paper fiat system is the best we can come up with is so ridiculous that it is only worthy of rebuttal because no one seems to want to let the emperors know that they are not only naked but ugly and incompetent. Economics has become a political science disconnected from reality. Should the mighty wizard of a private central bank corporation pull the lever slow or fast - should they push button A or button B? People honestly and truly believe that central bankers set short-term interest rates and control the bond markets! This is a really bad joke and as untrue as any of the other myths about financial markets and our monetary system.

The reason deflation is feared and even hated is because the study of economics is perverted by the thoughts and desires of banking interests. Bankers hate deflation because they have a hard time making money during deflation. Again, I am not saying that deflation is a desirable situation, but to pretend that it is worse than inflation is not only dishonest, but absolutely false.

Inflation benefits those with assets and debt, because assets increase in value as currency is debased and debt can be paid back with devalued currency. Deflation benefits savers and anyone else who holds cash. In a "modern" fiat system, deflation is death because every unit of currency brought into existence is a debt.

Those who want to live beyond their means and extend themselves financially benefit from inflation because inflation bails them out of their debts (much like a bull market bails you out when you time your purchase wrong). In a sense, inflation allows us to live "the dream" that we cannot afford. I am not saying this is a bad thing, but people who want to live prudently and within their means are punished by inflation because their savings decline in value as currency is debased. Conversely, those who live beyond their means are punished by deflation while savers are rewarded. In other words, deflation and inflation reward and punish different groups but to say one is bad and the other is good is economic bigotry.

In the end, bankers hate deflation and thus the field of economics hates deflation. It really is as simple as that when you understand who sanctions, edits, approves and publishes the economic textbooks that make their way into the schools of developed nations around the world. This is not a conspiracy theory, it is a true conspiracy embraced by economists who want to make a living just like everyone else. Paul Krugman was actually given a Nobel Prize in 2008 - need I say more?

Just because deflation and bankers mix like oil and water doesn't mean that deflation is bad. It just means that a modern fiat paper money society ridicules savers and glorifies debtors. You gotta bring, bring the bling, bling to get respect 'round here. Up is down and right is left - which part don't you understand?

Physical Gold is a vote of no confidence in the current state of paper affairs and is the easiest, no-brainer investment out there if one is willing to price things in Gold rather than paper fiat units. Stocks, corporate bonds, real estate and commodities will continue to decline in value relative to Gold in the longer run (short- and intermediate-term swings aside). I also believe Gold will continue to outperform paper cash over the next few years as a critical mass of people begin to question how a government can create unlimited amounts of money to service the so-called "needs of the people." Gold is debt-free money and nothing else. Gold is not a get-rich quick scheme, it is a way to save money while the paper fiat edifice erected over the past 38 years is burned in effigy.

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