Inflation is an increase in the supply of “money,” which causes prices to go up in a currency, this case being dollars. Deflation, is a decrease in the currency supply, causing a decrease in prices, in this case, dollars. Sounds simple? It is, except we are soon going to be faced with a combination of both at the same time. When this happens, and it will, it will be a first-time condition, as far as I can determine. Here’s the scenario.
The fed is injecting a trillion new dollars into the economy this year, and the increase in “liquidity” (printing press money) will increase each year, as far as the eye can see, till the currency gets to absolute zero, as all un-backed currencies have in recorded history. It will be replaced by another currency, as has always happened in history. When, no one knows, but it has gotten a good start so far. At the same time, we are facing a tremendous bust in real estate, and this will mean deflation. Let me elaborate.
Housing is way over-priced, and getting more so. Housing is like the NASDAQ at 5,000. Everyone thinks it will go on forever, but it won’t. It can’t, because wages have not gone up nearly fast enough to pay mortgages on hugely over-priced homes; plus jobs are disappearing with alarming speed, regardless of what the phony statisticians in DC say. New jobs being created, are either fictitious or low paying, and neither go far in paying huge mortgage payments. When the top is reached, just as did the NASDAQ, it will crumble. How? Because of abandonments or foreclosures. Credit card debt is at all time highs, and 44% of credit card payments are of minimums allowed, with little or no reduction in balances. Foreclosures and bankruptcies are already at record levels. This means that at this time, perhaps a million families are now late in payments on mortgages, or on the verge of foreclosure. American home-owners and credit card holders, are on the very edge of disaster.
Don’t expect the government or media to admit this dire situation, as it could cause a crash immediately. Imagine what would happen if CNBC or NBC came out with the actual statistics of the bankruptcies, late payments, and imminent foreclosures. People would stop buying new homes, awaiting a bargain from mass foreclosures, and you couldn’t blame them. The home-building industry would grind to a halt, and this could provoke a drop in construction materials, land sales, and layoffs of labor. If the American public were informed of the true picture of the economy, it would hasten its demise, or at least decline. Bad news sells papers, and prisoner abuse draws attention, but economic bad news, must not be printed or broadcast. It is impossible to keep stock market figures secret, but the rest are very well hidden.
With foreclosures or abandonments, the money supply will decrease, as in deflation. Why? Because the lenders of the dollars for the mortgages will find themselves with huge defaults and fire sales on foreclosed homes, causing real estate prices to plummet. Unpaid mortgages and foreclosures, means that the money supply will go down. Home prices will decrease, but butter, beer, and bullets will continue to rise in price. For the first time, we will have deflation, and inflation. This is only my opinion, of course, but I’d bet gold on its being true.
Housing is about the only thing holding the economy together currently. Tens of thousands of homes are currently under construction, and will sell, because of low mortgage interest rates. A 6% interest rate on a $200,000 mortgage, is $136 per month higher in payments, than a 5%, causing fewer to qualify for a mortgage. Interest rates will go up, and this will be a fact of life even if they go up by as little as 1%. How many jobs have been “created,” which allow a worker to buy a $500,000 home? This is supposedly the average price of a southern California home. These people also drive millions of miles a day on freeways, to get to work, and fuel will go up in price as well, decreasing the amount left in a paycheck to pay a mortgage. Mom and Dad both have to work to afford current homes, so if one gets the pink slip, the mortgage will eventually go into default.
Additionally, there are hundreds of thousands of ARMs, or adjustable rate mortgages, with an interest rate guaranteed for a certain period of time. At the end of the time, they are adjusted to a usually much higher rate. As these ARMs expire, and lenders want more interest, the payments will skyrocket, and cause further abandonments or foreclosures. America hasn’t seen mass foreclosures and abandonments since the depression and dust bowl days, but it could, and probably will happen again, because the tens of trillions in debt can never be repaid. It’s just that simple. When debts get so high, and unserviceable, family units will take the only exit available, and that is usually bankruptcy.
As opposed to the depression era, defaulting home-owners can stay in their defaulted homes for as long as a year, thanks to lenient laws. Such was not the case 70 years ago. How many families are living in their homes with foreclosure proceedings already under way? Don’t look to the media for this information, but a quick search on Google, indicates that there are 1,350,000 foreclosures now for sale. Imagine it! Over a million and a quarter foreclosures ALREADY on sale, and this may not be the true figure, because are all of them on Google? Probably not, and this does not include the millions that may be already in the process of foreclosure. How many homeowners are behind a month or two in payments, hoping to catch up, or get a decent job? I am afraid for the housing prop that is holding up the economy. The prop is rickety.
With the war costing hundreds of printing press billions, plus the fact that millions of baby boomers are beginning to receive Social Security, which hasn’t a dime in the till, how great is the economy? With the trade deficit going to be probably $600 billion this year, how long can the economy stand erect? Wal Mart is China’s 8th largest trading partner, and America’s largest employer, with employees making small wages. Do Wal Mart employees live in $300,000 homes? How many paper dollars and checks can be issued without a Humpty Dumpty fall? If China ever de-links its paper money to the paper dollar, and it probably will, it could have far-reaching and devastating effects on the American economy what remains of it.
All of the above sound terribly negative, I know. But at age 70, when many my age are dead, and most seem to have various old age symptoms, I don’t have any, and my mind can easily remember when the US economy was strong, and robust. I can remember when the buck was backed by gold, and coins were made of silver. I can remember when we were the king of the world, with everyone else being envious of us, rather than us now being a laughing stock. When a new Ford cost under $700, a Coke was a nickel, and my parents buying a 6 bedroom home for $3500, is what I remember. I remember McDonald’s hamburgers at 13 cents in 1962, and I bought a new Mercedes for $3700 in 1961. This is what I remember, not eggs at over $2 a dozen, and butter over $3.00 a pound, as are currently the prices. A new Dodge truck approaches $40,000, as opposed to my 1941 Plymouth one selling for under $500 when new. I am old. So What? My remembrances are merely indicative of what has happened, and what the future holds. It isn’t pleasant. Maybe advice would be to go long on gold and silver and short on Fanny Mae and Freddie Mac. Gold and silver have taken a dump, like the stock market and especially bonds. Gold and silver will go up, but I am not so sure about the stock market. We will see real estate deflate, while every other thing continues to inflate in dollar prices. Protect yourself.