Deflation is Dead, Inflation is Coming

Deflation is Dead, Inflation is Coming

The mainstream will never win any prizes for being quick on the draw.

For the past six years, the mainstream has spun a lie.

They’ve made the public believe one thing, while the opposite has happened.

Now it seems they’re about to change their tune.

They’ve seen the light.

But it’s too late. The die is cast…

It’s amazing.

For the past six years, the mainstream has spun you a whole lot of junk about the world economy going through a deleveraging process.

They’ve said governments are imposing austerity and cutting spending.

It has all been a lie…just as we’ve told you all along.

From the start, we pointed out that the world’s economies were actually increasing their debt loads. This was largely because, rather than cutting back on spending, governments were increasing spending.

It’s the same worldwide. Even in Australia, government spending has increased. Well, now it’s not just us saying it. A big establishment name has released a report confirming everything we’ve said.

Better late than never

The clever folks at consulting firm McKinsey & Company have finally produced a report confirming what we’ve told Money Morning readers for the past six years — that the world’s economies have increased rather than decreased debt since 2007.

As the report notes:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, or 17 percent of global GDP. That poses new risks to financial stability and may undermine global economic growth.

Well, what do you know?

It turns out that printing trillions of dollars and encouraging folks to take out more debt wasn’t the smartest thing after all.

When the central banks and governments said that the solution to a debt problem was to create more debt…well…perhaps it wasn’t the best solution after all.

Remember what we wrote last July in Money Morning:

Do you remember how central banks and governments responded to the problem of too much debt? That’s right, they created even more debt. It only makes sense that their solution for too-low interest rates will be to cut interest rates even lower.

It wasn’t the first or last time we had made that point. We’ve banged on about it for years. Yet, the mainstream couldn’t see that or didn’t want to see that.

And that’s exactly why they can’t see what’s coming next.

There was never any deleveraging

You’ll read it here first. We’ll say it now, even though the mainstream will deny it — deflation is dead.

That’s right, there isn’t any deflation.

There is only inflation. Banks have printed trillions of dollars. And as this graphic from McKinsey shows, almost every nation surveyed has increased debt since 2007:


Source: Source: McKinsey & Company
Click to enlarge

The only nations actually deleveraging are Argentina, Saudi Arabia, Israel, Egypt, and Romania! India has recorded no change in debt levels relative to GDP.

Every other nation has increased its debt load. So that total debt for the countries surveyed amounts to 286% of GDP, compared to 269% in 2007. In dollar terms, debt has increased by US$57 trillion to US$199 trillion.

That’s a big increase. It’s no wonder that stock markets and asset prices have gone berserk over the past few years.

This brings us back to the point we highlighted earlier this week. Forget the worry about deflation; it’s inflation that’s the major worry.

The inflationary rally is coming

The period that we’re entering into now is the beginning stage of a massive inflationary rally.

As we explained to Tactical Wealth subscribers last week, before every period of high and hyperinflation, there is a period of low inflation or deflation.

That may seem obvious. But it’s vital to understand what the period of low inflation and deflation means in the context of central banks printing money at will.

The message you’ve heard from governments and central banks over the past few years is that inflation is low, so it’s OK to keep printing money.

The problem is that as they’ve continued to print money and keep interest rates low, the cash has piled up in reserve at the banks. That has prevented money flowing directly into the hands of consumers and businesses.

However, that’s about to change. The main reason the banks have hoarded money on their balance sheets is that they’re worried about another financial collapse, and low levels of consumer confidence.

But that’s changing. Low fuel prices, along with low interest rates and a soaring stock market, have started to lift consumer and business confidence.

And what happens when consumers and businesses are confident? That’s right, they borrow more. Now, as the numbers from McKinsey show, and as we’ve noted over the years, borrowing has kept rising.

The only issue is that although government debts have grown at a rate of 9.3% per year since 2007, business and consumer debt have only increased at a rate of 5.9% and 2.8% per year respectively.

It means that the household and business sector have a lot of catching up to do. That will happen. In fact, it has already started to happen, and the rate of growth in these lending sectors will only increase.

Commentators and analysts have marvelled that central banks could print so much money without it causing inflation to skyrocket. Well, soon enough they’ll have something else to marvel at — a surge in asset prices as the money flow starts leaving the banks’ balance sheets and makes its way to consumers and the price sector.

Inflation is coming, and it’s coming fast. Don’t get caught short.

Cheers,
Kris

PS: Last week we wrote one of the most important weekly updates ever for Tactical Wealth subscribers. It something every investor should read in order to understand why inflation and perhaps hyperinflation is an imminent threat right now. Find out how to get it here.

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Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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