Even with the trillions of dollars pumped into the system over the last few years, the economy is in the midst of a massive deflationary crash. Central Bankers of the world are trying to unite to ensure that it doesn’t happen (and that we instead end up with massive inflation), but a deflationary crash is well under way and there might not be anything they can do to stop it.
When we first started this series, the financial media was practicing their annual tradition of telling us that everything was A OK and that the economy would be growing from here. If you’re new to this blog, you might have been surprised to see this prediction of a deflationary crash….didn’t we just go through one of those?
Well, the crash that needed to see a completion and a true bottom formed before it could recover, was stalled out by a combination of tremendous money printing and all sorts of government and banker malfeasance which has delayed the inevitable.
You see the real estate market is still in serious trouble. And the banks still hold a lot of ugly mortgages on their books. Rules were changed so that banks did not have to admit the true value of these mortgages on their books. This allowed them to quickly get back to “profits” without admitting the carnage on their asset sheets. The problem with this is they couldn’t foreclose on homes because then they would have to admit the damage. So the real estate market has been stalled out. It’s been slowly dropping, but it hasn’t fallen nearly as hard as it naturally should if bankers were being prudent. Of course, the government has done other things to try to prop up the market (such as paying people to buy homes), but all this does is convince people who would have bought a home in 2011 to buy it in 2010 instead. Not a long term solution.
We mention real estate here first because it has by far the biggest impact on the overall economy and whether we’re seeing technical inflation or deflation.
The other strong determinant is employment. Pundits were excited in the first quarter of 2012 because the unemployment numbers were coming down. They completely ignored the fact that the percentage of Americans who were able to work was not moving up (which would happen if we had true employment increases.) Instead, the focused on doctored numbers that kick people off the list if they’ve been out of work too long, or if they work part time even though they need full time work. The numbers even showed improvement that got the media excited which simply indicated we had a warm winter.
But all that seems behind us now. Friday’s job report was ugly and showed the world that there is no real improvement in the jobs outlook. The reality is that the US economy is bumbling along without any real growth, but without falling too terribly hard either.
The catch to this however, is that this comatose economy needed trillions of dollars printed to keep it in this catatonic state. Can you imagine how bad things would have been if they hadn’t printed trillions extra dollars? The fact that that tough medicine would have been the best and fastest cure is beside the point we’re making here. It’s unbelievable that all this printing could only produce a growth rate that is less than inflation!
Unfortunately, we can’t be consoled by the fact that we’re plodding along. Yes, the Fed is sure to start up another round of money printing…which they have to do for multiple reasons with the pertinent reason here being that they feel they have to try and keep the economy from dropping off a cliff.
What’s coming soon is far too big for even another trillion of printing to fix. The “too big to fail” banks have about a quadrillion of derivatives on their books that look to finally be coming apart.
This is the story of JP Morgan that the mainstream press is ignoring. Yes, JPM lost $2-3 Billion Dollars. Yes, Dimon admitted they don’t really know how much they’ve lost. The truth is the losses already are probably multiples of that. $10Billion? $100 Billion? Anywhere in that range seems very possible when this all shakes out.
But what’s truly scary is that these derivatives are a giant pyramid scheme. As it begins to unravel, many more will quickly become losers. The chain reaction between banks will be terrifying. Banks will be shutting down everywhere as they don’t have the capital to cover the losses.
They’re exposed to interest rate swaps as JP Morgan shows us. It’s an interesting question as to whether these swaps are what allowed the US Government to foist such massive amounts of debt on the world at such low rates when the countries with assts seemed to be fleeing the US Dollar. Perhaps, this teamwork is seeing its unholy conclusion? They’re also exposed to Credit Default Swaps which mostly focuses our attention on the problems in Europe. As European countries and banks go under, the chain reaction will take most large international banks down because they are all connected to each other’s risks through massive leverage.
We can’t yet know which way this pyramid will come crashing down, but it appears to be in progress. Whether that means things will be extremely ugly this summer or if they’ll take another 6-8 months is hard to say, but the process has begun.
This is a deflationary crash that you will be describing to your grandkids. When we come out the other side, everything will be quite different. As we always try and remind you, Seek the Lord in these times so that they are the blessing in your life that they are meant to be. These things are happening for important reasons!
This is the 27th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, 25) US Recession., & 26) Currency War.