The total outstanding debt in the world is approaching record levels. Most are preparing for inflation thinking that central banks will be printing money to pay the debt. What if someone told you inflation is not the immediate danger, but deflation is? Why? Because our money supply is not printed money. It is debt. When debt deflates, it is money supply that deflates. Most of the world’s debt is denominated in US dollars. Creditors are asking for US dollars to be paid back. Not gold, not stocks, not houses. This creates demand for US dollars. This is why when there is a debt crisis, US dollar goes up. US dollar has already lost it’s value due to excessive borrowing for decades. Now it is time to move up. Here is an article about the excessive debt burden of many developed countries.
By Elliott Wave International
The biggest balloon in the world is deflating.
This balloon had been inflated with a quadrillion (1015) dollars, which is to say: This balloon was filled not with air but with debt from around the globe.
What will happen as this global debt winds down? In two words: Deflationary Depression — the likes of which could be unprecedented in history. Want to Learn
How to Prosper in a Deflationary Depression?
You should not miss Robert Prechter’s deflation argument. Download 60 Page Guide to Understanding Deflation here.
A thousand trillion in debt can’t be wished away or swept under the rug. No one can “forgive” the debt. The consequences of unwinding this debt could be as massive as the dollar figure itself.
We’ve heard plenty about the debt problems of Greece, Spain, Portugal and Italy.
But how about the world’s second largest economy? Consider this fact reported in the Japan Times (July 8):
“Japan’s government debts are the highest the world has ever seen, at 219 percent of gross domestic product, according to the International Monetary Fund.”
Then there’s the world’s sixth largest national economy. In January 2009, Robert Prechter wrote this in the Elliott Wave Theorist:
“British banks have amassed $4.4 trillion worth of foreign liabilities, twice Britain’s annual GDP. … England, moreover, ‘has not defaulted since the Middle Ages.’ The possibility that it may do so again is yet another indication that the bear market is of … (larger) degree, exactly as Elliott wave analysts have predicted all along.”
Remember, Japan and Great Britain are major world economies. Imagine what the debt totals would look like in a line-item analysis of other nations, regions, states, provinces and municipalities around the world, including the U.S.
De-leveraging will likely lead to a deflationary crash — a “day of reckoning.”
How can you prepare for a deflationary crash?
To start with, keep your money safe. As Bob Prechter mentions in his June 2010 Elliott Wave Theorist:
“Investors should be primarily in greenback cash and Treasury bills.”
He also describes holdings which should be strictly avoided.
Learn How to Prosper in a Deflationary Depression?
Download Guide to Understanding Deflation here.
During the Great Depression, the FED’s structural perbloms caused the commercial banking system’s excess reserves to be quickly wiped out by massive runs on the banks (caused the contraction in the money supply). If failing to make the Federal Reserve a universal system was not enough of a handicap to effective monetary management, the Congress created twelve Federal Reserve Banks. It was not until 1933 that legislation was passed enabling the open market operations of the various banks to be coordinated. I.e., before 1933 one FRB could be expanding credit, creating bank reserves and laying the foundation for a multiple expansion of money, while another FRB was doing the opposite. Since 1933, all open market operations of the twelve FRBs are executed through the manager of the open market account in the FRB of New York (our Central Bank). From 1933-1942 the centralization of the open market power was of little consequence. So pervasive was the trauma of the Great Depression, and the lack of what the banks considered bankable loans , expansion of reserve bank credit typically led to more excess reserves rather than more loans and money. At the onset of the Great Depression, Federal Reserve Notes had to have a MINIMUM backing of 40 percent eligible paper and a MAXIMUM backing of 60 percent eligible paper In 1933 the Federal Reserve Note had to be collateralized by a least 40 percent in GOLD BULLION or COIN, and the remaining collateral had to consist of “eligible” commercial paper, principally TRADE and BANKER’s ACCEPTANCES. The FED neither had sufficient gold nor the banks sufficient discountable eligible paper to meet the panic-inspired massive demands of the public for currency. Hence, bank failures were more than numerous; they would have been virtually universal if Roosevelt had not declared a bank holiday in March, 1933. It was not until 1933 that we began to unshackle our paper money from the numerous and unnecessary restrictions pertaining to its issuance. With the numerous types of paper money in circulation at the time, this would seem to have been a nonproblem. Here is the list: Gold Certificates, Silver Certificates, National Bank notes, United States notes, Treasury notes of 1980, Federal Reserve Bank notes, and Federal Reserve notes. With that array of paper money there should have been plenty to meet the liquidity demands placed on the banks by the public. But the volume of each type that could be issued was so circumscribed by restrictions that even the aggregate group could not begin to meet the panic demands of the public. The first tentative step was to reduce the gold requirement to 25 percent and allow U.S. government obligations to provide the remaining collateral. The framers of the Federal Reserve Act did not believe that the credit of the U.S. government was inferior to that of the Federal Reserve Banks and the short-term commercial paper of business.One of the pre-conditions the U.S. needed in 1929, was a much larger NATIONAL DEBT, and a willingness on the part of the Congress, the Administration, and the business community to tolerate an adequate expansion of the national debt. In 1929, the national debt was less than $17 billion, and the banks held only a SMALL proportion of that amount. We needed a LARGER debt and a much more rapidly expanding debt in the 1930’s, not only to “prime-the-pump”, but to meet the monetary management needs of the FED. The open market operations of the FED require a depth of market that will enable the FED to buy or sell billions of dollars worth of treasury bills on any given day without deeply disturbing the bill rates. It seems more than a coincidence, that during the Great Depression, which engulfed the country after 1929, and which remained with us for over a decade, that throughout this entire period there was no overall expansion in total net debt. At the end of the 30’s net debt was actually less than it had been in 1929. Estimates of the Department of Commerce put the net debt figure as of the end of 1939 at $183.2 billion compared with a figure of $190.9 billion as of the end of 1929. During the 1940-1945 period total real debt expanded by approximately $193.5 billion. Thus in the short space of five years the total cumulative net debt in existence at the end of 1940 was more than doubled. Practically all of this expansion, or $185 billion, was accounted for by the expansion of the Federal Debt.After 1933, after we had central bank and a coordinated FED credit policy, the FED pumped billions of dollars of reserves into the banks; and nothing happened. There were years during this period when the excess legal reserves held by the member banks were larger than the volume of required reserves. The exercise of FED policy was likened “to pushing on a string”. It was true, as the Keynesians insisted, that monetary policy didn’t matter; fiscal policy was everything. Today the Federal Reserve Note has no legal reserve requirements, and the capacity of the FED to create IBDDs (interbank demand deposits) has no legal limit. There is only one restriction placed upon its issuance. No Federal Reserve Note can be put into circulation unless there is a prior transaction involving the relinquishing by the public of an equal volume of bank deposits, and an equal diminution of holdings of IBDDs (legal reserves) on deposit with the Federal Reserve District banks. In other words, the issuance of our paper money contains no inflationary bias. Its issuance does not increase the volume of money. It merely substitutes one form of money for another form.