2025: Deflationists…Scored A Point
I’ve been saying for the past year or so that just because it is not covered on Fox Business–doesn’t mean we’re not in a global recession. It was interesting that we came to a point in the road where the Federal Reserve had to make a decision whether to bail out the US economy or the global economy and so far, they’re letting all parties bleed. Everywhere we look, we now see massive pullbacks in the “real economy”; the economy that means producing goods and services. The government’s doctored numbers are no longer cutting it since so many real citizens are either losing, or can no longer obtain employment to service their payments. With prices contracting, jobs being cut left and right, Central Banks cutting interest rates trying to get ahead of the fact that there’s no “bounce back” and a significant decline in real estate prices, we’re now seeing currencies around the world strengthening.
[% Change,Weekly, Monthly, YTD, YoY]
Currencies are strengthening not as a result of economic growth, but as a result of weakening of asset prices–even the DXY is gaining strength IN SPITE OF Trump’s talk of global tariffs.
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Real Estate
Home Sellers outnumber Buyers by almost 500,000, the largest gap ever recorded
Why does this deflation happen?
Selling homes, business, land doesn’t mean just selling these assets but it means “buying” currency which adds to the strengthening of the currency. Every transaction has a buyer and seller, and when people sell something they more often than not jump into a currency. In this sense, holding currency, despite a long-term picture of fiat being glorified toilet paper, is a smart move during huge pullbacks. It allows you to go “shopping” when things are cheap as well. Look who seems to be prepared for things to get worse:
What is the Danger of Strong Currencies?
In economic history, it was actually price declines that lead to the “long depression” of 1871-1879, the great depression in 1929 and briefly and less significant with the great financial crisis of 2007-2009. On the surface, it would seem that owning currency worth more would be a good problem to have. However, economically, it slows everything due to the weakened velocity and volume of money by requiring less of it to change pockets.
Put simply, if money supply contracts too quickly (due to government or banking interventions), the value of each individual currency unit will gain in value relative to goods and services. This would mean that earnings and wages would be reduced in size (since each each individual unit of currency is stronger than it was yesterday) but the input costs to produce goods and services are still running higher inputs costs. In other words, there is a divide between what someone says a currency is valued at, and the economic inputs behind production–or what I’ve written about before as the “real economy”.
This divide makes production uneconomical and people are forced to be laid off as businesses collapse. It generates what we is referred to as a deflation doom loop:
- Business is no longer [as] profitable
- Fire workers
- Less workers means less people earning
- Less earners means less people spending
- Less spenders means the Business is no longer profitable
- Repeat
The danger of this price collapse is compounded if a significant level of debt has been accumulated. In the event that you survive this crash but you were a business or individual with debt–then your debt trap grows in size.
Take for instance you owe 20,000 USD of debt for something and you were able to receive income from employment and after the end of the year on expenses and taxes… you’re left with 4,000 USD to put towards this debt (assuming interest free). At this steady rate, you’ll have paid the debt in 5 years.
But, in the exaggerated event of a crash where each individual dollar is worth double the amount–then in theory–you should be left with 2,000 USD left after taxes, cost of living and so forth. But hang on, this is a major trouble for you because your debt owed is STILL 20,000 USD. At this rate, you will not pay it back in 5 years, now you will pay it back at 10 years.
Of course, these are simple numbers but currently we’re looking at multiples of leverage (borrowing) far higher than this. Therefore, this effect becomes incredibly dramatic especially if we consider right now where people may scheduled to pay off debt in 25, 50, 100 years. Given a deflationary event, we’d be looking at families in debt for not multi-generations, but multi-centuries.
Switzerland has been known for having 3-generation mortgage loans; where the grandchild would finally complete paying for the house
Planned?
With each contraction of the money supply, there is another major stage of consolidation where more and more production, control and capital becomes ever-more centralized. In the United States, long gone are the day where you could easily open a bank which was nothing more than a safe keeping for gold and an inked paper of receipts; now there are about 5 major US banks and that’s it. Like I said, every seller has a buyer in a transaction–assets to currency or business to business.
The USA has Big Tobacco, Big Food, Big Beverage, Big Pharma, Big Tech, Big Banks, Big Retail, Big Real Estate, and so on. Every collapse of the money supply and hence prices, allows for an opportunity to knock off upcoming competition (or buy them out at cheap prices) and provide benefits to those who have large bank accounts [who benefit from deflated money values initially and who can buy again at bargain prices]. In effect, the bigs getting bigger, and the number of wealthy getting fewer unless you’re amongst this class of so-called elitists.
In short, our misery, suffering and struggle in our financial lives is a major “get rich’er”opportunity for those who can stomach large losses or those who are close to the foundation of new credit from the bankers–> why wouldn’t you want to destroy your serious competition or buy them out for pennies on the dollar? However, for your freedom lovin’ don’t tread on me Americans out there, this ultimately means more and more centralization to look something like Communist China.
My Position
I still believe that due to the debt, with no obvious buyers to monetize it, we will still see immense levels of credit and money printing again. This will serve to bail out those closest to the central government (the “Bigs”) as well as others who didn’t topple the first time, but they will the next time by taking on even more debt to survive a little longer. You can read more about it here:
Closing
In short, while I am still in the Inflationist category for the long-run, I admit that matters seem to be developing that look like prices are deflating amid weaker economic growth, lower demand, regulations/taxation and immediate economic uncertainty to deploy capital. This shakiness and breaking economy will lead to a strengthening of the currency that will only harm those individuals and companies with ample amounts of debt on their balance sheet. Warren Buffet isn’t holding record levels of cash by mistake.
It would seem throughout history that this accordion effect of expansion & contraction is a coordinated, planned effort to consolidate & expand more power, control and wealth from others who have produced it in the past or those who continue to innovate.
The upside of this, is if we as investors can find the bottom to deploy capital towards depreciated assets during the decline, at a time when this “feels” very risky. Of course, nailing the bottom is often anyone’s guess, but playing this dynamic can work in our favour if we have patience and another money to hold us over during the weight back up again. This is why I offer the subscription below!
