Credit Inflation

The root cause of the crash is the excessive inflation of bank credit. An entire nation cannot borrow for 50 years and then expect that all will be fine when the pay back time arrives. FED policies have inflated bank credit for decades. When we borrow, banks create new money. They do NOT lend existing money. Learn how banks create money out of thin air here.

Our entire money supply is borrowed money. When we borrowed, we promised to pay back principal + interest. The problem is the interest portion is not even created yet. The ponzi scheme must continue with even more borrowing so that principal + interest exists in the future so that people can earn it and pay it back.

Do you see the problem with this picture? What happens when borrowing stops? The expectation that principal + interest will be available to earn cannot be realized. People start having difficulty paying their debt. When people see this, they start saving. When banks see this, they stop lending. Deflation kicks in with full power.

This is why government allowed sub-prime. So that borrowing could continue. They removed 20% down requirement so that more money could be borrowed. This is why the government offered 8K home credit, so that people borrow and inject new money into the economy. They used housing bubble to keep the ponzi scheme running.

Debt and Deflation: Three Financial Forecasts

There’s more to deflation than falling prices

Inflation ruled from 1933 to 2008.

Yet in the just-published Elliott Wave Theorist, Bob Prechter’s headline says, “Deflation is Starting to Win.”

Take a look at this chart from The Telegraph:

… the number of countries experiencing ‘lowflation’ has been steadily rising from 2011 (blue line). The eurozone tipped into outright deflation in December, with Germany, Britain and the US also seeing prices rise at near record lows.

The Telegraph, January 14

But as Prechter explains, falling prices are an effect of deflation.

Deflation is not a period of generally falling prices; it is a period of contraction in the total amount of money plus credit. Falling prices in an environment of stable money is indeed a good thing. In fact, in a real-money system, it is the norm, because technology makes things cheaper to produce. But when debt expands faster than production, it becomes overblown, then wiped out, and prices rise and fall in response.

The Elliott Wave Theorist, January 2015

So a major debt buildup is a precondition of deflation. Do we see this today? The third edition of Conquer the Crash shows the answer.

Total dollar-denominated debt has skyrocketed since 1990. The upward trend turned slightly down during the 2007-2009 financial crisis, but has since crept higher.

How fast and how far can this nearly $60 trillion in debt dwindle?

It’s instructive to review the collapse of the 1920s credit bubble.

On the left side of the chart, note how debt deflation needed nearly a decade to unwind.

Today’s mountain of debt is far higher than in 1929, yet our indicators suggest that the next debt deflation could unfold much more rapidly.

The third edition of Conquer the Crash provides 157 forecasts. Here are three:

  • Real estate values will begin to fall again, ultimately more than they did in the 1930s.
  • Hedge funds, mutual funds, money-market funds, managed accounts and brokerage accounts will go out of favor — many will go out of existence.
  • Financial corporations previously bailed out by the Fed and the U.S. government will fail again, as will new ones.

Deflation Rearing its Ugly Head report

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Deflation Rearing its Ugly Head in Subtle and Not-So-Subtle Ways Around the Globe.

You still have a small window of time to prepare for a scenario most investors don’t even know is possible — and now even more likely.

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FED works for the banks. It was created by the banks. It is bailing out the banks at the expense of tax payer. Our financial sector is too large for the real economy to carry. Instead of letting the financial sector to shrink, they are letting the productive portion of the economy carry the burden of the crash. There will NOT be a recovery until we let the zombie banks go away or they will continue to suck the blood of the economy. All the money is going to the financial sector that cannot produce anything.

An entire population cannot get wealthy by trading paper, flipping homes, investing in granite counter tops. Everybody hopes to sell high in the stock market. That won’t happen. By definition, for every seller at the top, there is a buyer. This is a zero sum game. When we read the news, they say DOW is 10000 and wealth has increased. No, nothing has increased. Stock holders do not have money until they sell. And well they all sell, they are not going to get the price they hope for.

Borrowed money cannot make a recovery. What is a recovery? Recovery is when we produce a real product in 1 hour and exchange it with another product that another nation produced in a month! That is increase in wealth. That is productivity. We are going the opposite direction! Innovation is not happening in America. Giving banks free money is not recovery. It merely transfers wealth from tax payer / savers to the banks. And they pay big bonus to themselves. There is no recovery. There is only robbery!

Prepare yourself for the coming stock market crash. Economy is not as good as the stock market tells! The crash will go into history books. The root cause of the crash is not fixed. It is getting worse! Government debt is getting too big to sustain and future tax increases or money printing will not leave any disposable income for the consumer. That is not a recovery.

France and Italy are the Next Causalities of the Credit Bubble

Workforce is still shrinking

These two charts depict two imminent casualties of the credit bubble — France and Italy — where sentiment has decoupled from reality.

In November 2014, yields on 10-year French and Italian bonds fell to fresh multiyear lows (the sentiment), while unemployment pushed to record highs (the reality). In December, France reported the largest monthly spike in unemployment since February 2014, with more French workers now jobless than ever before. Italy, too, just got hit with a double whammy. At 13.2%, Italian joblessness also hit a new record, while CPI inflation came in at just 0.2%.

Keep in mind that these are Europe’s second- and third-largest economies.

The data, meanwhile, confirms one of our longest-standing forecasts: that deflation will triumph over central bank stimulus, because consumers will delay purchases once they start to see that prices are falling. In November, a Reuters special report, “Why Italy’s Stay-Home Shoppers Terrify the Eurozone,” sought to explain why efforts to resuscitate Italy’s moribund economy have failed.

Sure enough, the chief executive of a Milan-based shopkeepers association reports, “People aren’t stocking up because they know prices will be lower in a month’s time.”

Moreover, shoppers are simply demanding steeper discounts. Italy’s largest supermarkets, for instance, sell up to 40% of their products below their recommended retail price, yet the price cuts still routinely fail to increase demand. Says Reuters, “Italians are hoarding what money they have and cutting back on basic purchases….” Indeed, consumer prices in Italy have fallen on a yearly basis for the first time in half a century. Meanwhile, the country has lost 15% of its manufacturing capacity and more than 80,000 shops and small businesses since the country first entered recession back in 2008. “Those that remain are slashing prices in a battle to survive,” Reuters reports.

Editor’s note: This article is excerpted from The State of the Global Markets Report–2015 Edition, a publication of Elliott Wave International, the world’s largest financial forecasting firm. For a limited time, you can download the full report, for free, and use its year-in-preview insights to prepare, survive and prosper through the global investment landscape of 2015 and beyond. Click here to download the full, 53-page report.