Monday, September 14, 2009

The Great Unwind

Inflation or deflation… stag-flation, stag-deflation … hyper-inflation… possibly even hyper-deflation… or maybe just a bout of frisky-flation?

Never has it been so hard for the consensus to agree on the coming trend in prices but given the circumstances, it should come as no surprise.

While the “invisible hand” has been working overtime to right the ship, deflating the system of fictional value made possible only through the dynamics of a multi-decades long credit fueled speculative mania, our federal government will stop at nothing to attempt to prevent such an adjustment and its disastrous political consequences.

As it stands, the consensus expects that the feds will win this struggle with many citing the “power” of the printing press, our now more advanced knowledge of Keynesian chicanery as well as the caliber and quality of the stewardship within the Administration, the Treasury and the Federal Reserve.

Yet, in this classic “man versus nature” match-up, man must come out the definitive loser lest he stands unchallenged to invent his own future not of hard earned progress but through fraudulent planning, gimmicks and manipulation.

But will he ultimately lose to inflation, deflation or both?

Although in the long term there could be a mixture of both, deflation appears to be the larger overarching force.

First, with the mania now long gone, consider that homes were easily the single largest asset that most Americans have ever had an opportunity to speculate in.

Likely many millions of American will never again in their lifetime EVER be allowed access to the level of debt that they had at their disposal in 2005-2006.

This means that they are likely permanently sidelined in terms of consumption... they will never again be able to over-consume to the degree seen in 2005.

At the same time, it’s more than likely also true that a massive natural deflationary force will be coming from aging Boomers reverting to a more net-seller and net-liquidator posture as they struggle through their “retirement” years and especially in light of falling home prices.

This appears to be a classic trap of sorts… the unwinding of major assets, contraction of credit, aging population and a perpetual decline in consumption.

Add in declining wages and structurally high unemployment and the outcome becomes clear.

What is less clear is how hard the feds will try to prevent the inevitable.