The ‘flations

“Data raise fears over faltering economy,” says this morning’s Financial Times.

What a surprise! What happened to the recovery?

The Dow fell another 41 points. Gold got hammered for a $39 loss.

Why would gold go down so much? Because people are finally realizing that deflation is the real risk, not inflation. Gold could continue to slip and slide for a long time now… It’s hard to say. It can rise in a deflation. But it depends on how volatile and uncertain the markets appear. In a stable, Japanese-style slump, gold could go down and stay down for many years.

But you know our thoughts on the subject. We’ll see all kinds of ‘flation’ before this crisis is over. Deflation. Inflation. Stagflation. Hyperinflation. You name it!

The latest news tells us that jobs are down. Treasury bonds are trading at their highest point in 14 months. A 10-year Treasury note yields just 2.93%.

As dear readers know, the feds can’t really make bad debt go away. All they can do is move it around. The parties to the transaction – creditors and debtors – usually decide among themselves who bears the losses. Typically, if the debtor can’t pay, the creditor loses his money. But when the feds step in almost anything can happen. But nothing good.

The general government plan is to collectivize losses – either by moving them onto the taxpayers or by moving them onto the general public. When the government borrows money to fund its bailouts and boondoggles, for example, it is taking losses away from the people who deserve them and sticking them on the taxpayer.

If they can manage to boil up a little consumer price inflation that is even better. Then losses seem to disappear into the air…like noxious fumes. The entire public breathes them in and gets a little lightheaded. It doesn’t know what to think or who to blame.

(More below…)

In the present case, some economists favor sticking taxpayers with the losses. Others are squarely against it, preferring to force the losses on the general public by means of inflation.

The trouble is, these cockamamie plans tend to have unanticipated consequences.

The Japanese feds really pulled a fast one, in this regard. They borrowed from their own people in order to fund a 20-year bailout/boondoggle program. The idea was to provide “counter-cyclical stimulus.”

Naturally, the stimulus never seemed to stimulate anything but more stimulus. The program went on for two decades…and, as far as we know, the Japanese economy is still limping along.

The effect economists did not anticipate was that the economy did not take off. Instead, there followed two decades of on-again, off-again slump. Which is why it would have been better to let the creditor and debtors work out their problems on their on…let them take their losses back in 1990…and be done with it!

Another unanticipated result has not yet been fully realized. The government took savings from Japanese households and spent it. Now, a whole generation of Japanese old people looks to government bonds as the source of its retirement wealth. Trouble is, there is no wealth there. The feds took credits and turned them into debits. They took the surplus wealth of an entire generation and squandered it. Now, instead of looking to stored-up wealth for their retirements, the Japanese have to hope that the next generation will be kind enough – and able – to keep up with the debts laid upon them.

Trouble is, the next generation has too much debt to carry. Government bonds outstanding equal nearly 200% of GDP. At zero interest rate, it’s not too hard to keep up with the interest payments. But even the Prime Minister is beginning to wonder how those debts will ever be repaid. And interest rates will not stay low forever.

Imagine that inflation rose…and that investors got nervous. Imagine that the carrying cost of that debt rose in Japan as it did in the ’70s in the US. At 10% interest, the cost would be one fifth of GDP – or about as much as the entire government budget.

Obviously, the system will fall apart first…leaving Japanese retirees with a lot less money than they thought they had.


Here’s a thought. The G20 meeting ended with a call to reduce deficits. The Obama team, on the other hand, warned that cutting deficits might undermine a very fragile recovery.

There seems to be no understanding of what is really going on. We are in a spell of debt de-leveraging in the private sector. There is no way to make the problem disappear. The only real question is who will bear the losses. We’ve seen what happened in Japan. That’s the alternative that most economists are urging (only they claim that this time the stimulus will work…if we keep at it).

But what if governments really take the path signaled by the G20? What if they cut spending? What then?

Well, then you’d have de-leveraging in the private sector. And de- leveraging in the public sector. At the same time. There would probably be hell to pay for a while. But it would at least cure the real problem rather than just disguising the losses and collectivizing the costs.

But don’t worry, dear reader. There is almost no chance that governments will follow through on their promises to de-leverage. Instead, they will reduce the rate at which they are adding debt. The private sector will continue to de-leverage. Government ‘austerity’ measures will be blamed.

And then? Well…who knows? But that’s probably when the printing presses get turned on…and gold enters the third and final stage of its bull market.

Stay tuned.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

3 Comments on "The ‘flations"

Notify of
Sort by:   newest | oldest | most voted

“Why would gold go down so much?”
Because its being short sold with a printing press.


“Why would gold go down so much? Because people are finally realizing that deflation is the real risk, not inflation.”

Perhaps that’s true in the US. While I’d rather _enjoy_ deflation, I can’t see it happening in Oz. Perhaps the true economists here can list either the PIs which indicate this is happening here; or what we’d expect to see if deflation set in, in Australia. Does the Japanese experience provide such indicators? (eg., very low interest rates, property plateaus, share market plateaus, falling consumer demand, increasing move to cash/saving, etc… .)


Gold is a deflationary hedge.

” Gold could continue to slip and slide for a long time now… It’s hard to say. It can rise in a deflation”

Gold does not rise in a deflation, it maintain’s it’s principle.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to