Austerity Measures and Deflation

Deflationary crash continues. As we hear more and more austerity action, we will see less and less spending and as debt deflates, money supply will continue to shrink. UK, other European nations, many US states and local governments are going to cut spending and start saving:

http://www.marketwatch.com/story/uk-plans-59-billion-of-spending-cuts-new-taxes-2010-06-22

This trend of austerity is deflationary. Here is what else is deflationary in the current economic environment:

http://www.tradingstocks.net/html/signs_of_deflation.html

In the past economy seemed to be doing OK solely due to credit inflation that FED and other central banks have fostered. FED made it easy to borrow. The world borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.

http://www.tradingstocks.net/html/banks_create_money.html

This new money expands the money supply. It makes it easy to earn. Our economy is now addicted to the ever expanding credit supply. For decades, our total debt (not federal debt, but the debt people owe) increased faster than the GDP. For every unit of GDP increase, we had to borrow more and more every year.

Why does it matter? Well, all of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Debt problem:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

There is a limit to how much people can borrow. To make it last what did they do? They allowed people to deduct mortgage interest from income while calculating tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected...

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Government talked about the American Dream and Affordable Housing. Now home prices are becoming affordable, but instead of celebrating, they are scared to death, they are trying to inflate prices again. Home prices are down, sales volume is down. After prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. No 20% down, liar loans were all to inflate total credit. Now sub-prime is exhausted and the crash has started. 8K tax credit won't work. Home prices must increase exponentially to sustain a recovery. People must borrow HUGE amounts to provide new money to the economy. Who is gonna do that??? Here is why FED's easy money policy does not work beyond some point:

http://www.tradingstocks.net/html/jaguar_inflation.html

Where does that leave us? It leaves us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!

All of the prices, and salaries you see around you were based on inflated credit that happened over 50 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course!

Deflation is here! Understand the economic environment we are in:

http://www.tradingstocks.net/html/prepare_for_market_crash.html

Austerity measures are the harbinger of the tidal wave that will wipe us out. Deflationary crash is not over. 2008 was just the warm up. Japan had it for 20 years. Do not think we are immune.