Wednesday, 31 August 2011
Decline of GDP per capita should cause deflation
Deflation can not occur in the Anglo zone because unlike the Japanese we are happy to let foreigners own our debt.
Japan does have deflation because it has retained sovereignty over its money supply by buying all its own debt.
More than 50% of the US debt is owned by foreigners in this circumstance reducing the money supply would mean exporting deflation to another country.
The size of the debt means that servicing costs would become increasingly expensive i.e to prevent money being borrowed into existence (the basis of fiat fractional reserve currency) interest rates would have to rise.
Inflation is the only option.
A key problem with this view of the milieux is it breaks down when fiat currency is seen to be approaching the point of valueless.
As the US dollar is the worlds reserve currency all face the same fate.
Who wants to be left standing when the music stops - competitive currency devaluations are inevitable.
Eventually a new commodity based currency will emerge leaving those holding the fiat with perhaps 1,000 times less buying power.
What ever does eventually happen GDP is declining in the West and with peak energy worldwide.
The ability to borrow money into existence (M1) must logically decline.
Looking at the growth in debt chart (previous post) M1 by definition should be declining.
The fact that it is not leaves only two explanations either the general population are drawing out all their savings and buying durable goods fearing hyperinflation and or government is faking the figures to justify creating money into existence to pay the US debt.
Chatter on the web suggests American retirement funds are increasingly being borrowed against to buy real assets under the direct control of the individual - like high value metals and that legislation is pending to restrict this practice.