Deflationary Depression

A deflationary depression is the direct result of excessive debt. There is no way to avoid it. Here is why in layman terms: When we borrow, we borrow from the future. If we don't pay back, and the future arrives, we find it empty, depleted, consumed.

What was borrowed will be paid back. Since we never paid back in the past (and always postponed every recession with more borrowing), we now have to face a deflationary depression.

Why can it not be postponed again? Because when the debt accumulates, there comes a time when interest burden on existing debt becomes unsustainable. It is like a family who borrows a big mortgage. Rates edge up and poof. Foreclosure. Here is the debt problem:

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

Printing money does not prevent the crash. It only changes who pays for it. When money is printed, savers pay. Banks etc get bailed out at other people's expense. Eventually, the value of what was borrowed gets deducted from the economy. Keep in mind, the threat of money printing may cause credit markets to freeze at the beginning, causing deflation (credit deflation) effecting prices of credit dependent items such as housing. This is because if creditors suspect US dollar will loose value, they will stop lending long term in US dollars, or they will demand very high interest rates.

Almost all of our entire money supply is borrowed money. It was created by the banks when we borrowed:

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

If you add others IOUs, especially social security, medicare etc, then we can assume that the economy is built based on the assumption that 50 to 300 trillion of money supply would some day exist. This money supply needs to have purchasing power. If it is diluted due to printed money, it won't serve it's purpose. For example, if social security paycheck does not buy you lunch, it does not matter that government obligation to pay it was satisfied. In such a scenario, consumer economy will collapse. People will not have money to buy anything other than necessities. Salaries will stagnate, thus it may be stagflation, if not hyperinflation.

Then, since hyperinflation is not the solution and may make things worse, FED may as well settle with a deflationary crash, at least for a while.

Remember that for FED to print more money, things need to get bad so that there is political will to print money. This is why deflation is likely to happen first and inflation may happen later. Here is a report of deflationary forces in 2010:

http://www.tradingstocks.net/html/2010_stock_market_forecast.html

Coming back to the excesses mentioned in the article, here is a chart that shows excessive paper trading which cannot be sustained:

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

Here is why the stock market is a bubble:

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

This is like Tulip mania, South sea bubble. This one is Financial Mania. People who live through it do not notice it because it is so big. It is like walking on Earth and not noticing it is round, because it is so big.

The stock market crash will be visible in 400 year market charts, just like other major crashes.