Harry S. Dent | Thursday, March 21, 2013 >>
In the years that will follow the end of this stimulus-driven bubble market, a certain group of economists and economic historians will regard these times as the greatest debt bubble in history. And we’d agree with them… at least on this particular point.
In fact, it will become obvious to all, in the end, that central-bank stimulus and government bail-outs were simply covering over the crisis and kicking the proverbial can down the road.
Most of these same people argue right now that we face a crisis of inflation, and more likely hyperinflation ahead, thanks to the Fed’s unprecedented strategy of mass money printing.
On this point, we couldn’t disagree more!
You simply can’t solve a debt crisis with more debt and the continual printing of artificial money.
Do yourself, your business, your investments and your wealth a favor. Don’t listen to this hyperinflation B.S.
Fact number one, is that every major private debt bubble in history – whether it was the westward real estate bubble from 1820 to 1835, or the railroad bubble (even more western expansion) from 1857 to 1873, or the auto and electricity bubble from 1914 to 1929 – was followed by a period of austerity and deflation in prices.
Fact number two, is that we need two criteria to fall into place here in the U.S. before there’s any true threat of hyperinflation:
1) Inflation trends must already be rising because of slowing productivity trends, and
2) There must be a major “supply shock” to the economy, like a war or resource shortages.
And we have neither.
For centuries, the greatest inflation trends in the U.S. (and the world) occurred when the massive, unproductive baby boom generation was entering the workforce at great expense in the 1960s and 1970s.
Young people are unproductive until they enter the workforce and mature. Time and again we’ve seen a greater correlation with workforce growth and inflation than any other trend in the last century, thanks to just that one factor. With baby boomers retiring, our workforce will slow and we’ll have more deflationary trends ahead.
The other factor tends to be major wars, which require huge investments without productive results at first, and that create supply shocks of normal consumer goods in the economy.
But wars typically create major innovations and productivity to follow, especially for the victor nations. Major wars create inflation and then are followed by falling inflation. Look at history!
A great new report from James Montier of GDO’s asset allocation team, called “Hyperinflations, Hysteria and False Memories,” shows that all major hyperinflations have had such supply shocks.
Hyperinflation is not merely a monetary phenomenon of printing money.
Yes, when inflation shocks from sharp productivity declines, or resource shortages, or lost wars hit a country, governments often react by printing money massively to cover over such a crisis. Such a reaction, especially to extremes, can cause a hyperinflation bubble and collapse.
The best classic example of this is the German hyperinflation into 1923. Germany lost World War I, which left it with massive debt and exhausted resources from fighting the war. The victors didn’t help to re-build the country either.
Germany was bankrupt. Then, the Allies put major reparations on Germany on top of that. Talk about a supply crisis!
Germany’s only options were to declare outright bankruptcy, or to print more and more money and hope things would work out in the end if their economy finally recovered.
Of course, governments always go for “denial” and they ended up with wheel barrows of money and hyperinflation, and that can only lead to a greater collapse… like taking more and more of a drug to cure the initial problem. In Germany’s case the problem was both bankruptcy and an extreme supply shock.
However, during a period where inflation is falling due to higher productivity and excess supply and debt, since 1983, money printing merely staves off a deflationary crisis of debt deleveraging, and business consolidation that destroys the excess asset values and money created in the debt bubble.
Just like hyperinflation, such a process of “denial” can only last so long before the debt deleveraging and economic collapse sets in. But after a debt bubble collapse (vs. a supply shock), the end-result is deflation, not inflation.
The greatest and most worldwide printing of money has happened since 2008, and we have had zero to modest inflation, at best, four years later. Hyperinflation is not even a possibility in an environment like we have today.
Our greatest challenge is to help people like you, who clearly understand you can’t cure a debt problem with more debt or money printing, to also understand that the “endgame” in this debt bubble around the world is deflation, despite massive money printing by central governments around the world.
So, listen to us, not the gold bugs on this!
Ahead of the Curve with Adam O’Dell
First, consider what 30-year U.S. Treasury rates and the Chinese stock market have in common… not much. There is simply no correlation between these two. Yet both currently show a remarkably similar technical pattern – a well-defined, down-sloping price channel.