No Historical Precedent
Earlier this week I wrote a note that used the phrase that I believe there is no historical precedent for what is coming our way in the near future. I see many “experts” out there giving opinions that we are more likely to see a 1929-style depression. I see others out there giving the opinion that we will have a 1970s style bout of inflation. Still others are calling for “soft landings” or collapse. Personally, I am sticking with “NO HISTORICAL PRECEDENT” for these reasons.
- 1929 Deflationary Depression: This lasted for nearly a decade. At the time we had a currency that couldn’t just be conjured up out of nowhere. There had to be a physical asset (GOLD) to back it up. This restrained the central bank from just conjuring up any amount of “money” like they do today. Because of this, while it is not impossible, it is highly unlikely that we will see this type of deflation. First of all, they COULD create deflation just by reducing the amount of “money” and debt being created. This, however, would likely lead to an immediate implosion of the system and would lead all blame back to the central bank- where it belongs but heaven forbid!
- 1970s Inflation: While I believe we could see inflation that will be WORSE than the 1970s I don’t see the same type of outcome. Back then, our total outstanding national debt was LESS than we are borrowing in the next 3 MONTHS. Paul Voelker was able to raise interest rates to 20% and the economy was still able to function. I can guarantee if rates were raised to even half that amount it would destroy the economy because of the $34 Trillion plus (admitted to) debt that is growing exponentially with no end in sight. The chances of being able to tame inflation appears to be a pipe dream unless there is an economic collapse- which certainly can’t be ruled out. Rising interest rates are already causing MAJOR problems for real estate- particularly commercial real estate and the banks which have financed all of the collateral that is collapsing.
- Weimar-type Inflation: While this could happen, it is unlikely that the outcomes would be the same. The German currency was not the world’s reserve currency, so the collapse was far quicker than has happened here. This was also a situation that was confined to one country that abused its printing press. Today, the entire world is awash in freshly conjured up cash and many are in the same boat. In the Weimar days they just had to peg their currency to a US dollar or British Pound. Today, all currencies are fiat (backed by nothing) currencies. It is highly likely that, as this unfolds, all fiat currencies will need an anchor. My best guess is that gold will again play a MAJOR role- likely why central banks (who are thinking a few moves ahead) have been buying gold in record amounts for the past 5 years. Of course, all the time telling retail investors that it is a barbarous relic. Since we are certainly in uncharted waters there could be other assets to anchor the financial system to also like silver, energy, etc. Notice these are all ASSETS and not someone else’s promise to repay.
- Soviet Union collapse: This one is eerily similar to what we are seeing today as the population struggles with the economy imploding and those “in charge” declaring that all is GREAT! Pravda (official communist propaganda newspaper- similar to our NY Times) put that out right up to the day of collapse. Again, the difference here is that the USSR was not the world’s only superpower at the time as the US has been recently. Unfortunately, history has shown that great empires, as they are dying, go to war to try and stave off the inevitable. Similar to the Soviet Union, we have become lazy, complacent and willing to give power to the government for perceived “safety”. History has also shown that this is a fantasy also. Giving up freedom for safety has always led to the loss of both.
There are many other outcomes that could take place but just using these four examples I will explain what I believe could happen.
We could have a 1929 deflationary depression in all of the things that people were buying with cheap money. We could see deflation in real estate as people are more focused on the necessities of life than a larger house. We have already seen massive deflation in commercial office space and it will likely get worse with high interest rates and low occupancy. In addition, many of the CRE loans are non-recourse which makes it easy for landlords who owe more than a property is worth to just walk away- AND THEY ALREADY ARE!
We could also see MASSIVE deflation in asset prices (stocks and bonds) as the economic reality affects where most of the inflation from cash conjured up from nowhere has gone.
We could have MAJOR inflation in the cost of necessities like food, oil, gas, and any other necessities of life that people will be bidding for. This COULD lead to Weimar-type inflation, or it may be more like Brazil or Argentina where there is painful inflation but not total loss of value as in Germany.
It is likely that we WILL have a Soviet-type collapse, and many will be left wondering “WHAT HAPPENED?” Just last week they said the economy was great. It will be too late when the majority find out the truth. They lied.
To me, it appears that we could have all of these calamities hit us at the same time. It may be blamed on wars, terrorist attacks, etc. but the reality will be that this was done on purpose. We were warned over 250 years ago by Thomas Jefferson. If we allow a central bank to control our money, we will be renting back the land that we conquered. They will do it first with inflation (check) and then with deflation.
There has never been a time in history where the entire world has been so indebted. There has never been a time in history when so much manipulation has taken place over so long a period of time. There has never been a time in history where there has been such a chasm between PRICE and VALUE. These are just two reasons why, when economic reality rears its head, most people’s heads will be spinning.
Look out for just about anything and-
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