Reader Przemek asked, "If the banks are going to pay off their debts by confiscating the "money we think we had", does that mean people currently in debt will be bailed out (their debts essentially erased)?
Absolutely not. Deflation makes debts harder to pay back, not easier. The supernova economy which I have written about for years will be massive deflation followed by massive inflation or even hyperinflation. If those in debt can survive the massive deflation without going BK or defaulting then yes their debts will be wiped out. But that could take a long time and it would take a ton of staying power and in the end would be a dumb business decision in most cases. What more likely occurs is that deflation makes it harder to service the debt (which in most corporate and government cases means higher interest rates when they roll it over). Eventually they just give up on servicing it and take a bad mark on their credit score. There is no debtor's jail in the civilized world (yet) and so people will choose to default as a matter of smart business logic. I mean, look at serial defaulter Donald Trump. He leverages up during the credit booms and then folds quickly leaving his creditors with losses once he understands that inflation is losing. He's an economic sociopath but still society has not hanged him in the streets for all the billions of good value he pissed away on malinvestment. He is the patron saint,the leader for leveraged debt and they will all be following in his footsteps soon. So, again, no, don't think that buying stuff at bubble prices today and then holding through a deflationary depression is a good idea. MUCH better to avoid debt, hoard dollars and have a cash pile in order to pick up assets after they have gotten oversold. At that point, YES abandon the dollar in all ways possible. Gold and silver (or a credibly gold and silver backed equivalent) will EVENTUALLY be the only money that people will accept in trade. So, at the bottom, expect to but rental property on the cheap and then demand payment in some metals-backed specie (or perhaps the metals themselves).
Also, what do you think would be an intelligent course of action? Should we get our hands on as many tangible assets as possible?"
During the very end game, yes but NOT YET.
Guys, please internalize that nothing goes straight up or straight down. Does TVIX? Does JNUG? Does IBM or INTC or MSFT? No. Instead they move up and down in waves toward their goal just like the herd of wildebeests will be pushed out of their intended river crossing by the detection of too many crocs in the water. The herd will eventually get to its destination but not usually by the direct route. Fight the human tendency to make big leaps and instead take it as it comes, in the order in which it arrives. Ecclesiastes 3:1 is instructive in this matter IMO.
First there will be massive deflation and it hasn't really even begun in the US yet. DO NOT trade all your cash for stuff YET. The crackup boom is not upon us yet. It will come, have no doubt. That is the eventual destination of the herd. The reason is that the dollar has been made intrinsically worthless over the last 100 years even though it is still accepted as a store of value and a medium of exchange today. At some point it will trade at its fundamental value. But how long can that take to get there and how much incredible deflation might we have to endure before that happens?
Don't jump to the end of the story! The middle is very interesting and potentially very lucrative for those with understanding and control of their emotional herding instincts. Don't panic! Avoid your instinct to fight or flee. Use your higher functions like math, logic, and careful observation of current events in comparison to events of the past.
In a word, intelligent discipline.
Did you know that "More people became millionaires during the Great Depression than in any other time in American history"? A credit crash based depression is essentially a transfer of wealth from the highly leveraged profligate spenders to the conservative savers. As the leverage goes down, the dollar will go up, perhaps for a significant amount of time. You do not want to buy assets when they are in a bubble and by all ways of looking at it assets are at bubble levels simply because the federal reserve did not allow fair price discovery by the free market. We have no free market but the manipulation will soon run out of steam and then the big reversion to the mean (with a throwunder style undershoot baked into the equation).
There are currently $700 trillion (notional value) of derivatives . Compare that to a global GDP of perhaps $75 trillion (and much of that counted rather generously in the past and even more generously of late). In other words, during this wave we have reached approximately the 10:1 relationship for leveraged bets which I have mentioned before several times in these pages including a reference to this concept regarding the SVXY ETF here. It's just time for a major unwind. The economy must inhale and exhale. The lungs are now full of an especially deep breath. Now it will be expelled. It is more the ebb and flow of the herd than anything to freak out about (especially for those who are not taken by surprise mentally by it).
Bottom line, for now conserve cash (now being a time period that could be YEARS, not months). As asset prices crumble, the $600k left and right coast house will tumble to $125k or less. Your South East Florida waterfront home which was $200k in 1995 and now 700-900k will be 200k again or less before this is over. When people can no longer get cheap loans, leveraged asset prices will tumble and it will take less dollars to buy them. That relative strengthening of the dollar to assets due to credit contraction (both in terms of availability and affordability) is what is known as deflation.
Credit deflation is really only bad for 2 kinds of people:
- Those who don't think it is coming (including those who don't know how to time it/can't see the signs).
- Those who, once it arrives and is laying heavy upon the herd, believe it will last forever.
One last thing: you will read a bunch of things from a bunch of data sources. Nobody is always right and some credible sounding people will turn out to be dead wrong. The "immediate hyperinflation" crowd has been wrong for a long time and someday the "hyperinflation can't happen in the US crowd will be wrong too. So I think it is more important to look at the data in a calm fashion than to listen to people too much (including people like me if I write something which opinion without backing data...).
The main two hard data indicators I am looking at are total credit and velocity of money. You can research these at the FRED website. When total credit peaks and begins to plummet we will all feel the deflation. Some time after that I expect the velocity of money to bottom or double bottom and then we can likely expect massive inflation to follow. We should also expect high volatility which is what will turn out to be most upsetting to market participants. Markets hate uncertainty and volatility is the nature of uncertainty. If things are whipsawing about then you can't reasonably pile into leverage short or long without worrying about getting screwed. This is why I finally settled on TVIX as a leveraged trading instrument because volatility is the one thing that I think is most likely to occur as the unwind occurs.
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