Asset Deflation, Goods Inflation

<< Back Home                                         Created : Jul 3, 2006
                                                 *** Last Updated : Jul 3, 2006

        Americans never had it so good. Their assets have been appreciating several times 
     the rate of inflation. The Dow and the S&P 500  tripled between 1995 and 2000. After
     the 2001 recession, they have recovered back to those levels.

        Housing is whole another story. House values have doubled on an average throughout 
     the country since 1995. Americans have felt richer. They tapped the equity in their 
     homes, to support lavish life styles.

        The Federal Reserve keeps creating more and more dollars. And then loans them out
     at record low interest rates to borrowers.

        Meanwhile, the cost of goods has been going down. As manufacturing jobs shift to
     Asia, and service jobs to India. The cost of most goods that Americans need has been
     going down.

        This has created huge imbalances in the World Economy. Americans are getting deeper
     and deeper into debt. While people in Asia keep adding to their savings.

        The M3 explosion since 1995 is beginning to show its effects. Inflation is rising
     more than the Fed would like to see.

        What we had for nearly a decade was a relatively rapid Asset Inflation, and 
     Goods Deflation.

        As home prices stop rising and Americans can't borrow more. The US Economy which 
     is 70% Consumer Spending will come to a screeching halt. Not to mention the effects
     of job losses in construction and mortgage sector.

        Recession is inevitable. And as the Economy weakens, foreign investors will reduce
     investments in the US. Which combined with the huge trade deficits, could collapse
     the dollar very fast.

       The cost of everything that is imported will go up. The assets will continue to 
    deflate. While the cost of everything Americans need will go up, which is measured as
    the rate of inflation.

       Now this cycle of "Asset Inflation, Goods Deflation" will reverse into "Asset 
    Deflation, Goods Inflation". Americans will feel a lot of real pain. 

       Assets could be valued less than the outstanding debt used to purchase them. And 
    this will also be the time to pay back those debts. Even though they will need to 
    spend more and more on goods they need for everyday life.

                   Are We Americans Ready for this?
       A weakening US Economy will continue to shed more and more jobs. More and more
    Americans will become unemployed. And this "multiplier effect" on Economy, could 
    end in Another Great Depression.

       What about those manufacturing jobs in Asia, and service jobs in India? They too
    will disappear along with, as the US consumer no longer can purchase their products,
    or use their services. Also with dollar devaluation, it will make less economic sense
    to import them. Global Recession is very likely.

       The longest experiment with fiat currency and limitless credit expansion is coming
    to an end within a few years.

       Every time the dollar has been off the gold standard, it has resulted in a currency
   crisis. Every fiat currency in the history has had the same fate. 

       The US has been off the gold standard for nearly four decades now. There is no 
   reason why it will end differently this time.
       The never ending supply of fiat dollars is the core of problem. No Society has 
   ever successfully printed its way into Prosperity.


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