These Lies Could Trigger Another Market Collapse

Email
    Text size
Author Image for Shah Gilani

The public has been brainwashed about deflation.

We've been hoodwinked by central banks, governments, and the manipulators who pull the reins of those Trojan horses into believing that deflation is a deadly disease. It's not.

Deflation, left to its own devices, is nothing more than a necessary and healthy corrective counterbalancing of excesses that build up in free-market economies.

So, why are we browbeaten into believing that deflation is so bad?

Here's the truth about deflation and how its fearmongers are really screwing us over.

Why Deflation Fears Drive Policy

First of all, deflation is when prices of commodities and goods and services fall.

When they increase, that's inflation.

Historically, deflation is woven into our subconscious as causing the Great Depression.

Which is convenient for the fearmongers, who swear they'll do everything in their power to prevent another depression. Their rallying cry is "stamp out deflation."

But deflation didn't cause the Great Depression. Deflation was a byproduct of a series of bad government and central bank decisions.

The Great Depression resulted from the excesses of the Roaring Twenties, which triggered the stock market crash of 1929. That on its own didn't cause the Depression, either.

How the government and bankers handled the crash exacerbated what would have been a tough recession, but their mishandling blossomed it into the Great Depression.

That's where the fear of deflation comes from. But that's rubbish. In fact, it's a lie.

Fast forward to 2008. We had another stock market crash, once again caused by excesses. The crash led to the Great Recession. And we're still nursing the hangover.

All that happened, really, was that interest rates were driven down by the Federal Reserve and lending standards were lowered to allow mortgage borrowers and corporations and banks to leverage themselves to take advantage of rising home prices, rising stock prices, and rising derivatives prices in an orgy of excess and greed.

No big deal, that happens. When the game ended, as it always does, the free market, as it always tries to, hammered home prices, stocks, and derivatives.

But while consumers could have largely benefited from the resultant deflation, wealthy investors in financial assets, governments, and the private bankers who run central banks, lose money in deflationary times.

And they're just not going to let that happen.

How the Fed and Banks Benefit from Inflation

As prices of homes, stocks, derivatives, commodities, and just about everything were falling, the Fed and the government went into high gear, ratcheting up fears of another Great Depression and lowering interest rates as their first line of deflation defense.

Now, here's the thing. As consumers, we are better off when prices decline after they've been artificially inflated by excess capital coursing through the economy with increasing velocity and speculative leverage that accompanies fast-rising prices.

When the speculative bubbles burst and leveraged consumers, producers, banks, and speculators get margin calls, dump assets, and stop buying hand over fist, prices drop quickly.

That's the free market doing what it does best, correcting excesses.

But, while that's good for the economy and especially middle-class Americans struggling with limited resources, it's not good for banks and it's not good for governments.

Banks and governments want inflation. They pretend they're afraid of inflation and say they'll do whatever it is they have to do to make sure inflation doesn't get out of control. But the truth is, they want inflation, they need inflation.

Inflation is caused by increasing amounts of cash and credit in the economy. Sometimes the added money comes from central banks "printing" money; sometimes more money becomes available because money is turned over (used more often and lent out over and over) in what's called an increase in the "velocity of money."

Sometimes inflation results from the high-powered effect of the combination of more printing and greater velocity of money.

If you're a bank and you lend out money, and there's more money circulating in the system all the time, your borrowers will likely have more money to pay you back.

If you're a government that runs deficits and has to borrow all the time, if there's more money in the economy you preside over, resulting inflation pushes people into higher tax brackets and elevates prices of goods and services that are taxed (so the total tax collected rises with rising prices). This all adds to government revenues and at the same time, like banks, they benefit by there being more money circulating to buy their bonds.

Inflation lowers the cost of fixed debts. It's great for banks and governments.

Deflation is good for consumers because it lowers the cost of goods and services after they've been artificially inflated. As long as deflation is allowed to squeeze out excesses, it's a very healthy part of cyclical economics when leverage and speculation run amok.

But governments and banks can't stand deflation. So they artificially manipulate free markets to stem what would otherwise be a healthy correction of excesses.

The reason the Fed lowered interest rates to essentially zero, for banks, not consumers, while fearmongering that deflation would lead to another Depression, was to pump banks full of money so they could buy the government's debts. The banks would use leverage to earn a decent return on the low-yielding bills, notes, and bonds the government was dishing out (as other international buyers pulled back).

When zero interest rates weren't enough, the Fed, with the government's approval and applause, embarked on quantitative easing (buying the same government bonds from the banks that they were buying from the Treasury so they could buy more of them, and buying their mortgage-backed securities that no one else wanted) so banks could return to record profit-making, increase their dividends, and lure more equity capital investors to make them stronger.

The Critical Lesson They Ignored... That Is Already Costing Us

There's no way after the crash and Great Recession that interest rates would have risen much. Prices of most goods and services would have come down a lot more and eventually found an equilibrium bottom in a more protracted recession. When it had run its course, it would have yielded a more advantageous level of prices for average Americans.

Instead, the Fed pumped banks full of money and lowered rates for corporate borrowers and the richest 1% in America.

The 1% could afford to borrow and leverage themselves again with financial assets that increase their wealth exponentially as they rise in yet another speculative pump-priming, asset-inflating binge.

By artificially manipulating interest rates - once again, for the benefit of banks, the government, and the richest 1% of Americans - the Fed has gotten prices up before average Americans could ever have benefited from what should have been a much lower, naturally settled base.

Are average Americans better off? No.

Is the economy growing again? No.

Are prices of goods and services at low and sustainable levels that encourage healthy consumption? No.

We've turned Japanese.

We haven't learned that the Japanese had a property bubble that led to a stock market bubble, and when both peaked in 1989 and crashed by 1992, the central bank artificially lowered rates and the government propped up insolvent banks.

And the country is still doing the same thing 22 years later.

That's what we're doing.

We're relegating the middle class to oblivion while the rich get richer and corporations get fatter.

And we're heading towards another speculative bubble in financial assets.

So, the next time someone warns you about deflation, tell them you'd love to see the free market back in operation and that a healthy dose of deflation is what really sets the stage for sustainable economic recoveries and feeds a growing middle class.

Instead of the 1%.

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

... Read full bio