"Clarifying our depression forecast
Although we are anticipating another great depression we want to emphasise that we are NOT anticipating a replay of the 1930s. We are anticipating a drawn-out period of economic contraction, but the details will almost certainly differ markedly from previous depressions.
One of the most important differences between the coming -- actually, "current" is a more appropriate word since it has probably already begun -- great depression and the 1930-1945 episode is that today's version is likely to be inflationary. An inflationary depression is potentially worse because the inflation (money-supply growth) leads to more mal-investment (more wasted savings) and higher living costs relative to incomes...
...Based on emails we have received, a fairly common view seems to be that the government will "inflate away" its own debt problem as well as the problems of debt-ridden private-sector consumers. Our view is that the government will TRY to do this, but as is typically the case it won't work as planned/expected. Let's think this through. Monetary inflation causes a NON-uniform increase in prices throughout the economy, so someone can only benefit from inflation if his/her income and assets are amongst the INITIAL prices to rise in response to the inflation. ...
...The average person is rarely helped by inflation because he/she is usually near the end of the line when it comes to the so-called 'positive' effects of inflation. Furthermore, in the current economic environment there is even less chance than usual that the average person will be a beneficiary of monetary inflation, and an even greater chance than usual that they will be hurt by monetary inflation, because the inflation will likely increase living and debt-servicing costs relative to incomes and will very likely do little to support home prices (at least initially). Only those average folk who have substantial exposure to gold-related investments stand a good chance of coming out ahead.
It is always the case that the biggest beneficiaries of inflation are the entities that get the new money first. Therefore, the biggest beneficiaries are usually the government, the banks, and large speculators. And as far as the next few years are concerned it is likely that the government will be the biggest beneficiary by a huge margin. This is because the government can borrow in terms of its own currency without giving any consideration to how the loans will ever be repaid, thus allowing it to grow rapidly at the expense of the private sector. Note, though, that the government can never actually "inflate away" its debt; rather, each new dollar that gets borrowed into existence necessarily results in a liability in excess of one dollar due to the obligation to pay interest. In other words, the debt always grows faster than the money supply. It is therefore a good bet that the quantity of debt will continue to expand until the entire monetary system collapses.
In summary, under the current monetary system the debt can never be "inflated away" because inflation occurs via the creation of additional debt. Furthermore, the people and organisations that benefit from the inflation, at least in the short run, are those that get the new money first. In the long run nobody wins, but if you are a Keynesian you don't care because in the long run we are all dead anyway." Steve Saville email: email@example.com Hong Kong