With interest rates at multi-generational lows, it costs next-to-nothing to service the debt. This post explains, COVID-19 damages our economy and society. And the cycle continues. ING warns that deflation is going to strike the U.S. economy. Deflation remains the bigger danger from the collapse in global demand, rather than a surge in inflation. Moreover, central banks continued to create huge amounts of money even after the crisis. The main reason is, that nobody likes the country which can simply create money in order to buy something (just as the US does). Currently, we have extremely reduced consumption around the world and central banks try to pump trillions into the system to prevent the economy from falling into deep deflation and at the same time into the recession. For example a mobile phone, TV or car. However, unintended errors may occur. You might think that demographics have no connection here, but believe me, it has a huge influence. Read full disclaimer by clicking below. Stagflation versus Deflation. With each financial crisis, the stock market is going down and visits extremely lows. The downward trend of all these cycles is always deflationary for the economy. You will find why hyperinflation, GoldSilberShop sells, stores and buys gold, silver, platinum, palladium and even diamonds in Germany. U.S. consumer debt hits an all-time high as it costs even less to service it. All investment and financial opinions and suggestions expressed on the website are from personal research and experience of the authors. During deflation, the turnover of companies and salaries of the employers decrease but the credit payments stay the same. They require most of the care and do not help the economy. Countries lose confidence in the US and the US dollar itself. All rights reserved. Thousands of businesses will go bankrupt and people will lose their jobs soon. A few reasons why deflation might be ahead: Unemployment in the U.S. is the highest since the Great Depression (14.7%). Entire industries, such as traveling or car rental, do not function anymore. In options markets, the "Greeks" refer to various measurements of how valuations move. Bull Market In Deflation Makes 2020 A Dangerous Year. Cue Monetary Deflation. The Fed knows that rising interest rates will reap a storm of biblical proportions. Furthermore, nowadays many young families marry very late and prefer to grow dogs instead of kids. Deflation, Hyperinflation and How To Profit from the Current Economic Situation, Why and how to invest in the agriculture sector worldwide? From money printing, which started after the 2008 financial crisis, it is quite clear, that we already live in mild deflation. Now some new monetary system should come. By the way, the middle class is doing very poorly these times. 7 cycles presented below prove, that we go into deflation. The first reason is reduced consumption because of quarantine. Older society is always deflationary as was explained earlier in the post. The same … Moreover, money printing always pushes asset prices higher, and most individuals from the middle class have no assets or investments at all. From the picture, it is clear that all cycles almost head down. In other words, as Robert Prechter’s 2020 edition of Conquer the Crash, notes: When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall. Moreover, 4 reasons are given that prove that we are already in deflation for more than 10 years in western economies. Check the western world. As an example of the following statements, I will take the US economy. Most of the world is quarantined at the moment. RA . We still require extreme recession or depression in order to restart our economy for the next healthy economic boom. A huge number of positive customer, GoldBroker is a gold and silver dealer and stores all your gold or silver solely under your name. At 25.30 mins you can see the super imposed private debt-to-GDP ratios. Should the European Central Bank Aim to Overshoot Its Inflation Target? To save the economy from the collapse during the financial crisis of 2008, central banks around the world made billions of dollars (or euros, or yen) out of thin air and bailed out many investment-banks. As an example of the following statements, I will take the US … Japan has been fighting debt deflation since 1991. The 2020s Will Be the Decade of Deficit Doomsday America will have to pay for its spending spree and its wars. Published: April 28, 2020 at 9:45 a.m. Wealth disappears extremely fast. A past performance of various assets does not necessarily predict future results. An increase in the debt of households is extremely deflationary because families spend to less to serve credit payments. Unfortunately, because of the COVID-19 in the world, people must stay quarantined at home. The classical gold standard, the gold exchange standard, the Bretton-Woods-system and finally purely fiat – the US dollar standard. In fact, that blue line which represents money supply shows that the US, in about 7-8 years, multiplied their currency supply by 5 times. Furthermore, this is not the final value… Other countries around the world do the same. How can you achieve Japanification? Learn what is deflation, how bad is it and how to get rid of it. PlutoniumKun April 25, 2020 at 11:40 am. Posted on October 5 2020. Because of various surveys and science of demographics, it is possible, for example, to see that people spend the most when they are 45-55 years old. Wealth distribution varies over time and currently, a very small number of individuals in the world control more wealth than 90% of the rest. Debt deflation is a big problem. Moreover, 4 reasons are given that prove that we are already in deflation for more than 10 years in western economies. Because of their selling, various assets slowly drop in price. Furthermore, they sell almost everything (real estate, stocks, bonds, everything they have) and put deflationary pressure on the economy. The world map below shows the average age of each countries population. The experience of Japan shows policy makers may struggle to reverse the phenomenon of dropping prices should it occur in the U.S. But as Steve Keen writes, it is all about debt deflation. This is totally crazy! This is crazy and pushes our western economies even further into deflation. ... April 14, 2020 at 7:39 pm | Source: corlaffra/Shutterstock.com. With deflation, debt gets more expensive over time, taking a bigger and bigger bite out of your real income. Following the stock market crash of 1929, American economist Irving Fisher published his book The Debt-Deflation Theory of Great Depressions, in which he devised a theory on why economic recessions occur and how a country’s debt burden can affect price levels. And so the change will take time to absorb. Over-time, because of the decreased turnover of businesses, companies must decrease salaries and then employers earn less. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending. It means that we get small commissions if you end up buying products through our links. Nikolai Kondratiev – Russian economist who was supposed to prove that capitalism does not work. However, with the 2000 dot.com bubble, the P/E ratio didn’t drop to the lowest levels as it always did. Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Cross-posted from Steve Keen’s Website Rebuilding Macroeconomics. Learn in this post and find possible stocks and ETFs, Trade Ideas stock scanner filters the stock market for you and offers automatic trading with Artificial Intelligence. Look at the title below. Do you know that deflation creates the best investment opportunities? This fast reduction in consumption is the main reason for short but extreme deflation in 2020. British Supermarket Chain Cuts Prices “Across 400 Staple Products”, A View on How the U.S. Can Prevent a “Japanese-Style Deflation". It creates huge deflation because of extremely reduced consumption. In fact, all 7 show coming deflation in the economy. In normal times, this … FED will pump $4 trillion into the system. Basically, every individual and company has more or less debt. Basically, central banks created wealth by creating more and more money instead of producing real goods and services. The majority opinion is deflation … Eurozone slides further into a debt-deflation trap, risking a protracted economic depression in the south and slow-motion insolvency crisis Ambrose Evans-Pritchard 2 October 2020 … Check the world map below. – 7 Reasons, 12 Tips and Tricks for Investing in Gold and Silver, GoldSilberShop Review 2020 – Buy Gold and Silver in Germany, Bullionstar Review – Buying Gold and Silver in Singapore 2020, Regal Assets Review 2020 – Gold IRA Rollover and Investing in Gold and Silver, GoldBroker Review 2020 – Invest in Gold and Silver Offshore, Capitalist Exploits Review – Best Investment Newsletter. The outbreak of COVID-19 pushes the whole globe deeper into deflation and trillions will be printed to fight it. It should be obvious to anyone with a brain (and just a modicum of math skill) that there is a terrifying risk here. Everything in the world works in cycles so does the economy as well. Around every 30-40 years, the monetary system is slightly adjusted or changed in the world. History shows, that this won’t last long. ... It’s hard to think of a world leader dreading 2020 more than Japan’s Shinzo Abe. ... That makes debt deflation likely, increasing the risk of insolvency. Everyone was expecting that this currency creation will create inflation, but it didn’t. However, he found that capitalism is the superior system and works very well, but it would always have boom and bust cycles. Made me think – if we had moderate controlled rents, security of tenancy, and little house price inflation, why would anyone taken on the burden of a house purchase? Very mild inflation (up to 2%) is not bad for the economy and we lived in it for the last 12 years. Look at the picture below. Learn how to profit from current deflation in western economies in this post: The economy in 2020. Nowadays, individuals take more and more credit for various consumables. Usually, each system lasted for around 30-40 years, but we are already 50 years with our current fiat currencies system. Please seek professional assistance before engaging in any financial transaction. It means that the P/E Ratio drops significantly to extreme lows. The demographic cycle shows that society in western economies is getting older. There is only one long-term call in the market now: will there be inflation or deflation in the post-Covid-19 world? No. Over time, families take to much credit and later it becomes hard to sustain it. Some cycles are shorter while others take hundreds of years. And if there’s a debt deflation in the United States, which looks pretty much in the cards right now, it’s going to leave our economy looking like that of Greece. In short, 1st is East/West cycle which is the longest cycle that takes around 500 years to swing. While spring, summer and autumn provide economic growth, winter is an economic slowdown and is always deflationary. For instance, the Delta of an option is the sensitivity of how the option price moves in relation to a change in the underlying instrument, and Theta is the relationship between the option's price and the passage of time. While I will not cover all the history in detail, but in the last century, we experienced multiple monetary systems. This page contains affiliate links. This reduction in consumption will change the way how many businesses work around the world. Yet some economists and investors still insist that the monetary stimulus of 2020 will inevitably tip the scales towards rising inflation. © 2020 Investing-ABC. During deflation, everything becomes cheaper (including real-estate, gold, silver, stocks) and cash increase in value, because with the same amount of cash you can buy more over time. Getty. The only way is to understand them and use them for your advance. And in Greece, maybe 10% of the population had to emigrate and neoliberal countries like Latvia over 25% … Hurrah!! Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. That would result in debt deflation on a massive scale as people default and/or repay the debt if they can. Over-reaction to 2008 financial crisis. That should terrify us. When they earn less, they spend less, thus the prices of goods and services decrease even further. Moreover, millions of events were canceled. They will lose their homes, then rent the homes back from the original lenders. The company. U.S. consumer debt hits an all-time high as it costs even less to service it. Definition, Causes, Impact, Worldwide Deflation In 2020. One key impact is that deflation means prices will be cheaper tomorrow, and so it pays to wait before buying if one can. National Debt. I am sure that the recession will be announced in the next months around the world. If everyone (both rich and poor) becomes poor at the same time, then the economic cycle can restart. However, other countries around the world followed the same pattern and only the amount of currency supply differs. Today’s debt bubble, as a percentage of GDP, is far greater than the bubble whose deflation coincided with the Great Depression. I thought of interest rate sensitivity when reading the latest report from the Federal Reserve Bank of New York, which shows that household debt in the U.S. surged last year at the fastest pace since just before the financial crisis of 2008-2009. It has no influence on the product price you pay but helps us to maintain this website free and provide the highest quality educational material for you. Highly recommended podcast – especially liked the comments on property and debt. Steve Keen is Distinguished Research Fellow, Institute for Strategy, Resilience & Security (ISRS) at UCL. Before taking any actions please do your own research and consult with registered professionals. Date: April 10, 2020 Time (UTC): 5:22 pm As lower prices make it harder for businesses to pay back a record corporate debt bubble, deflation will trap the economy in a vicious cycle. This is also deflationary for the west because some investors will invest in eastern countries instead of western countries. While originally the length of the cycle was around 50-60 years, these days it is stretched and is somewhere around 90 years (the lifetime of humans). As more and more debt is piled on, the sensitivity to rising interest rates increases. Rates and bond yields structurally collapsed there in the 1990s, but that was also accompanied by the beginning of private sector debt deflation, a trend that existed for a couple of decades thereafter. Copy Japan. In options markets, the "Greeks" refer to various measurements of how valuations move. ... monetize government debt. But it is extremely painful when it happens. This is basically exactly what helped the 2008 financial crisis in the US to happen. The owners of this website may be paid to recommend some companies. Countries around the world had to print money because the economy was already going to deflation after the 2008 financial crisis. Maybe that will be enough to keep inflation-expectations well anchored and to spare us from a 1930s style debt-deflation experience. Total U.S. household debt now exceeds $14,000,000,000,000 (14 trillion dollars). When individuals reach around 65 years old, they start to consume less and must be taken care of by social securities. A Vaccine! Japan led the way and everyone followed. The Massive Debt Deflation Risk Murray Gunn • February 18, 2020. I confirm that I have read Price / Earning is the measure of the share price relative to the annual net income earned by the firm per share. Interest rates will rise again and, when they do, be prepared for a debt crisis the likes of which has never been seen before. Deflation also can make it harder to repay mortgages and other debt, which become costlier in inflation-adjusted terms. The deflation debate is crucial for investors. It indicates, that the last 2008 financial crisis was not deep enough. All assets lose value. All shopping malls, restaurants, bars, and so on are closed. Investment value is always fluctuating over time and it can produce huge gains or loses. With deflation, debt gets more expensive over time, taking a bigger and bigger bite out of your real income. Regardless of anything, cycles repeat and repeat and are driven by human nature, fear, greed, and human psychology. Beans in the teens? Deflation, Hyperinflation and How To Profit from Current Economic Situation, Day Trading – Tool to get Familiar with the Stock Market, Trade Ideas stock scanner Review 2020 – Automatic trading with AI, JFD Review 2019 – Great Broker To Start Trading With, eToro Review 2019 – Most Important Details Inside, Why To Invest In Gold And Silver? For a technical recession, GDP in two consecutive quarters must be negative. Deflation is a decline in prices of almost everything – resources, food and services. Deflation.com is an affiliate of Elliott Wave International. P.S. In the end, it can't succeed. Debt Inflation Explodes. I highly recommend you to watch this video. That is why it is trying to artificially suppress short-term interest rates through its money market operations. According to current data, this deflationary pressure will only intensify in the coming years. It is extremely problematic for individuals or companies who have debt. Disclosure: We believe in transparency on the internet. The first one peaked in two stages in the 1930’s and 1940’s, and the second one peaked in two stages (so far) in the late 2000’s during the 2008-2014 period and again into the 2020’s. Pay off debt. Of course, they all will not turn downwards in a single day, but you see the general trend. So, it wouldn't be surprising if a similar development unfolded in the U.S. Also, keep in mind what the 2020 edition of Robert Prechter's Conquer the Crash noted: Israel Gets Surgical in Fight Against Deflation, United Kingdom: “Deflationary Imperatives” at Work, British Consumer Confidence Slides for Second Straight Month. One of the lesser-known Greeks is Rho, which measures the change in an option's price in relation to changes in the interest rate. ET By. There's no doubt that many people think, "Well, why wouldn't you?!" Can Deflation Be Far Away? Many countries around the world abandon the current dollar standard and try to trade bypassing dollars. Furthermore, at the same time, they reduced interest rates (red line) to almost 0% and kept them low for more than 5 years. It is the innovation and prosperity of society. WARNING: Information on this Website and the resources available for download is for general information purposes ONLY and is not intended to provide any legal, investment, financial, tax, or any other type of professional advice or recommendation. That was accompanied by the beginning of private sector debt deflation, which stretched for a couple of decades, as the Global Market Perspective points out. Everything points to it. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending. Mortgage debt rose the most but people are still bingeing on credit card, student and auto-loans. Debt Deflation: A situation in which the collateral used to secure a loan (or another form of debt) decreases in value. As it was explained before, currency creation is the only method to avoid deflation when consumption decreases. A reader writes to observe that the concept of debt deflation is gradually leaking out into the mainstream discourse: ... Azure Amaranthine May 15, 2020 7:24 PM "Debt exists first, then money which is why printing money is deflationary." ... A third issue is the growing risk of deflation. The debt-to-GDP ratio is down from its peak in 2009, much as it receded slightly in the late 1920s when a financial boom temporarily juiced the economy. and agree to Investing-ABC.com, Debt Cycles – How They Work and How To Use Them, What is Recession? Demographics is a science about population, based on various factors, like age. Nowadays, in most western countries exists a huge number of old people compared with young people that create products, services and pay taxes. By the way, Switzerland multiplied it by 12 times in the same period of time. Debt deflation. They do not consume many things they normally would. A Chesapeake Energy Corp. bond maturing in 2025 with an 11.5% coupon came into 2020 at a price just below 100 cents on the dollar. Usually, deflation starts because of reduced consumption or contraction in the money supply. Not yet. Another part of the newly created currency was used to fight deflation that already started in 2008. It is opposite to inflation where the prices of everything constantly increase. A similar situation could be developing now in the U.S. Debt has inflated over the past few decades. This number has 12 zeros. That should terrify us. Another article of faith: High government indebtedness must be paid with higher taxes down the road and as such is bad for future economic growth. The content on this website, including any positive reviews of those companies and other reviews, may bot be neutral or independent. The last winter according to Kondratiev cycle, was The Great Depression of 1929. Debt Leads to Austerity. Should interest rates start to rise now, debt service costs will explode higher. While demographics put strong deflationary pressure on the economy, this deflation caused by demographics happens quite slow compared with the deflation caused by the current reduction in consumption around the globe because of coronavirus. Deflation is basically good in the long-term. 2. They save every penny and do not consume much. Published on: May 13th, 2020 • Duration: 53 minutes Real Vision Managing Editor Ed Harrison talks to Richard Koo, Chief Economist at Nomura Research Institute. He called these cycles with season names: spring, summer, autumn and winter. Some of the newly created currency is held at central banks as a reserve currency and slowly leaks into circulation over time. Recession is the worst economic period because people must produce more than they consume and it is painful. Because interest rates were low, central banks were able to create currency cheap. Infrastructural investment is a smart option in the US, because there has been decades of severe underinvestment, so if done correctly, it should raise productivity within the economy. Deflation in our economy is unavoidable. With deflation usually comes recession in the economy. Sound of the Suburbs October 5, 2020 at 10:40 am. Learn what is deflation, how bad is it and how to get rid of it. I will not go into detail about all of these cycles. Later, in the middle of the business cycle, interest rates increase and people do not have money to make credit payments. Money created by the central bank in the US is shown with a blue line in the graph below. Featuring Richard Koo & Ed Harrison . Below I collected 4 main reasons that prove that currently (2020) we are in a deflation around the world, especially in the western world. In some cases, households take credit with great credit conditions (at that time) to buy a house or a flat that is extremely expensive (overpriced). This is what caused the debt deflation of the Great Depression, which Japan has been fighting since 1991. Such a situation makes the population angry, socialism and populist ideas come to society. That shift alone will add to the pressure on house prices. This picture is taken from the video series “Hidden Secrets of Money” created by Michael Maloney, where he explains these cycles in detail. By Rick Ackerman Posted on April 5, 2020, 5:10 pm EDT Last Updated April 6, ... as my commentary tried to make clear, deflation — the opposite of a debt jubilee — will come before hyperinflation could effectively let borrowers off the hook. For example, people 55-65 years old start to save a lot because they understand that they will have to retire soon. Best efforts are made to ensure that all information is up to date and accurate. I guess that most people already noticed that eastern countries started to grow and the East/West cycle turns already to east. Eric Boehm | 1.10.2020 2:50 PM 4 Reasons That Prove Western Economies Are Already In Deflation, The economy in 2020. It has a, Day trading is a perfect tool to learn to trade and get familiar with the stock market. As the chart below shows, even though household debt is at a record high, incredibly, debt service payments as a percentage of disposable income are at a 40-year record low! Investing comes always with risks and it must be properly understood. Copyrights held by individual contributors; other site material Copyright © 2020. Debt deflation is a problem that can have lasting negative effects on a country’s economy. It shows how the prosperity swings throughout the world, from Asia, through Europe to North America and back, over time. While you might think that deflation is good because cash increase in value and you can get more, in reality, it is very bad. He found out, that capitalism will always have cycles and it is impossible to avoid them. Yup, by 12 times. Each month it requires higher and higher percent from your salary to pay the credit. While rich getting richer, middle and poor classes are getting poorer. Money IS debt. Please never invest any money if you cannot afford to lose it.