The Debt-Deflation Trap and the Psychosis of Government Spending

Abstract: The fundamental theory is clear on deflation and debt yet our government seems to want to ignore the facts of this theory and thus trade our deliberately-ruined future for political power. We are spending too much money on phony projects that reek of Lysenkoism[1] and will face hyperinflation as the reward for such foolishness. Irving Fisher published nine points that defined a depression in the 30s and every one of his 9 metrics can be seen glaring at us in our current economy. There is some phony theory that a green revolution [EcoNazism] and massive taxes on energy can some vitalize our economy and bring us out of this economic swamp. What we are experiencing is the far left exercising their chance to wreck our economy and defeat capitalism  by crashing the world banking system and nationalizing  the resultant zombie banks and zombie corporations. We are already buried in debt and hyperinflation will destroy key parts of our society.

I keep harping on this theme—the notion that we are in a debt-driven deflationary spiral and that massive spending and more debt is only going to make it worse. People who think they can ‘solve’ this current global problem with a ‘stimulus’ are throwing money in the wrong sectors. The temptation here for the politicians currently in power to  expand government with massive new social programs FDR-style and to test new  exotic spending limits and that will some how bring prosperity. They talk about quantitative easing[2], otherwise known as just foolishly printing money, as part of some rescue plan. This must be distinguished from bank bailouts where the money posted to the capital accounts of our 19 Zombie banks is not moving—it just gives the banks the algebraic liberty to show that their assets, magically, do sum higher than their liabilities. They are thus ‘solvent.’

I have pushed the panic button for some time here trying to alert at least some of us on the path we are taking. [3] As an example of American economic socio suicide,[4] I cite the sad case of California as a place where the documented economic tests of the fruits of liberalism will be showcased for decades or perhaps centuries.[5] The pseudo economic jesters in Sacramento and Washington persist in their anti-capitalist fabrications and novel freak show-peepshow songs and dance. We have some Nobel Laureate ignoring spending limits and massive debt and groping for the power to nationalize banks. [6] The future economic landscape can, in the view of the leftists, be reshaped, honed and purified by going ‘green’ with all sorts of massive taxes on energy and other essential business parameters. They think they can both tax us into economic ecstasy and save money by radical alterations in cars, food, medical care and such. The Demon Inflation or its bigger brother Hyperinflation are known beings from the economic swamps that have only recently been given any credence from the left and that comes only from Warren Buffett.[7] The EcoNazi movement now drives to tax the world. [8] Electric cars are now ‘mandatory’ as the new transportation device as Detroit’s Big Three Zombies will be forced to make these things that people don’t won’t to buy. [9]  The batteries are not efficient enough [20-25 miles on a charge??] so this is a destructive ruse as the battery technology is just not up to speed, but we have only been working on this technology since 1805. The cars they are showing now are very small hence death traps. They will, however and to be progressive, buy some ‘research’ with our taxes or debt and schedule a few inventions to save us.

The fundamentals from Irving Fisher[10]:

“Following the stock market crash of 1929 and the ensuing Great Depression, Fisher developed a theory called debt-deflation. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:”

1.     Debt liquidation and distress selling.

2.     Contraction of the money supply as bank loans are paid off.

3.     A fall in the level of asset prices.

4.     A still greater fall in the net worth of businesses, precipitating bankruptcies.

5.     A fall in profits.

6.     A reduction in output, in trade and in employment.

7.     Pessimism and loss of confidence.

8.     Hoarding of money.

9.     A fall in nominal interest rates and a rise in deflation adjusted interest rates”

Is there anybody who can not see all of these nine points not glare out from this page if you are watching our economy? Irving Fischer died in 1947.  Is anybody paying attention to those with long records of accurate economic predictions like Ambrose Evans-Prichard or Nouriel Roubini on these very basic tenets of government finance and economics? Everybody thinks we are getting well. The stock market is recovering so we can celebrate the fine work of Congress and Obama. How about Obama for the Nobel Prizes in both Peace and Economics!

As for this rally and ‘recovery’ and green shoots:

 “Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33 percent, 55 percent, 44 percent, and 79 percent). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.”[11]-- Enjoy the rally but expect sucker punch. By Ambrose Evans-Pritchard The Telegraph, London Sunday, May 10, 2009 [Emphasis is mine in all quotes.]

Some predictions from Amity Shlaes Wednesday, December 31, 2008:

“The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers.”

The idea that experiments are warranted in current circumstances comes from the New Deal. The official history is familiar: FDR put forward multiple projects, some at cross-purposes. Yet New Deal inconsistency was not a problem and might have been a virtue. Through "bold, persistent experimentation," his catchphrase, Franklin Roosevelt brought recovery.”-- A Chilling Uncertainty. The Lessons of Roosevelt's Experimentation By Amity Shlaes Wednesday, December 31, 2008

Yes, and how is that working out for Chrysler and GM? These are now Zombie Companies whose shrunken heads are perched on some wooden stick for some primitive ongoing union Dance for the Dollars as a gift and repayment from the far leftist political organization known as the Party of Democrats. All we need are some feathers and drums and a kazoo quartet to complete the comedy.

The history and outcomes are clear from vain attempts to circumvent capitalism for the sake of political power. The USSR is the biggest example of how to best ignore capitalism. But, president Obama will surely best that puny operation as he has conjured up a sum of money equal to our GDP and will chuck it wholesale into the howling government agencies to expand their power and keep the vote advantage.  The Brits and most of the EU are close behind this mad dash to the bottom of the economic swamp.

This is the anniversary of President Franklin D. Roosevelt's first fireside chat, given on March 12, 1933. This fool tried to fix the price of gold with lucky numbers:

“Some of the worst destruction came with FDR's gold experiment. If he could drive up the price of gold by buying it, he reasoned, other prices would rise as well. Roosevelt was right to want to introduce more money into the economy (the United States was deflating). But his method was like trying to raise an ocean level by adding water by the thimbleful. What horrified markets even more was that FDR managed the operation personally, day by day, over a breakfast tray. No one ever knew what the increase would be. One Friday in November 1933, for example, Roosevelt told Treasury Secretary Henry Morgenthau that he thought the gold price ought to be raised 21 cents. Why that amount, Morgenthau asked. "Because it's three times seven," FDR replied.

“Morgenthau later wrote that "if anybody knew how we set the gold price, through a combination of lucky numbers, etc., I think they would be frightened."[12]-- By Amity Shlaes

And, we have yet to see how commercial real estate and consumer credit factors will blend in with toxic debt. Hard times are ahead and we are, I think, deliberately making exactly the wrong decisions on our economy. Our currency may collapse from all this spending.

I wish I was wrong more often. Maybe 3 x 7 will be the number of years we are in a depression the way things are going. I follow what is happening and I am “frightened."

rycK

Comments to: ryckki@gmail.com