String Music

"Sun don't shine on the same dog's ass every day but, mister, yours ain't seen a ray of light since you got here."
--Opal Fleener (Hoosiers)

A central argument for a continuation--and perhaps more extreme--deflationary environment going forward is that, despite central bank balance sheet expansion and government stimulus programs, credit is no longer pyramiding through the system. Banks are reluctant to lend, and borrowers don't want to borrow. As such, policymakers are 'pushing on a string' with their interventions. Consequentially, deflation will persist and those fearful of extreme inflation will have a long wait.

I get that argument, believe me. Indeed, I was camping with deflationistas for quite a while.

But this line of thought assumes that governments will 'give up' once they see that current measures to revive credit markets aren't working. This may be shortsighted, as I believe policymakers worldwide have signaled that they are ready and willing to go to utmost extremes to reverse deflation.

If current measures don't work, then future initiatives get more radical. Two that come to mind:

1) Loosen credit via nationalization. Nationalization of a large portion of the banking system may be eminent. In such a scenario, reluctance to lend decreases, as there is no longer need for prudence to preserve balance sheets or profits. The government could fix interest rates lower to encourage borrowing.

2) Bypass the credit system. If the credit system still isn't working, then why would policymakers not try to work around it? Money could be sent to people directly. Current 'tax rebates' are but one example of the classic 'helicopter drop.' Sure, people may pay down debt with some of the paper (this will hasten the end of deflation as debt gets retired). Regardless of how risk averse they may be, people will still use a portion of their windfall funds buy things they need. This behavior is likely to increase prices of core goods, as more fiat currency chases them.

The dollar, of course, goes to dust in either scenario. In desperate times, however, bureaucrats won't care about that. When facing a deflationary bust, policymakers will endeavor to create an inflationary holocaust instead.

Perhaps gold is sniffing this out.

position in gold