Until recently we’ve been on the fence as to which economic disorder will take hold of us first, Deflation or Inflation. But we are leaning towards deflation now. Our case for deflation can be summed up as of Economic Nationalism.
“As global credit risk causes lending institutions to decrease international loan exposure, banks begin to repatriate their money and lend more locally. This is an economic nationalism, and can have the same effect as the political ones did in the 1930’s. Governments have little choice but to engage in competitive devaluations in an attempt to stave off the effects of these (localized) lending practices” 3/01/10
We are more in that camp now than ever before. Why? Because, despite every effort to reflate economies, fiscal realities are slowing the velocity of money. Interest rates are exploding in countries like Greece, but because of the risk of default, not inflation. Secondly, news like the Goldman Sachs SEC case only serves to further slow down commerce as banks will pull in reins on clients. Borrowers will only do necessary deals, and those will be with “trusted” local names.
We think statements like this by John R. Taylor Jr. today:
“Congressional hearings on the seamy undersides of financial power and goings-on will become popular news as the banks are forced to turn conservative, cutting gearing and slowing the economy.”
And this (also today) by Senator Kaufman who is seeking debt ceilings on lending institutions:
"The prudent solution is to shrink these institutions to a manageable size at which they can actually be effectively regulated."
Are harbingers of a changing zeitgeist in capitalism. Welcome to the 1950s; a time when finance was slower, assets had less fluff in them from leverage, and companies with free cash flow were more coveted than pie in the sky growth projections.
And this fresh news as reported by Zero Hedge today
“Here comes protectionism: South Carolina Senator Lindsey Graham has told reporters that he has 80 or 90 votes of support in the Senate (guaranteed passage) if his Bill to stop Chinese currency "manipulation" were to ever get to the Senator floor…..The end result, of course, will be the same not matter what: tariffs, duties, subsidies, and generally protectionism.”
Who is going to borrow to grow a business going forward with this going on? The guy who needs money can’t get it at all now. The guy who can get credit isn’t going to take it because growth prospects are for shit.
It is starting to look like despite best efforts, a deflationary phase of the Economy will hit before we have our hyperinflation debacle. Unless of course you believe what the stock market is cooking.