Deflation has become inevitable

For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy.  I’m now coming down on the side of deflation for a very simple reason:  there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.

In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates.  By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.

The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007.  They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory.  Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.

While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.

Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market.  As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.

If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous.  Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.

During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage.  During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.

The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations.  It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.

The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract.  Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout.  Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.

It’s this simple:  I won’t invest in a country that bails out failure and punishes savers.  I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return.  In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks’ stupidity in buying into foreign excess.  I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.

While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses.  They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.

The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies.  This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble.  Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.

Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance.  The market has failed, and officialdom is collaborating in perpetuating that failure.

Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management.  Until that happens, those that invest will continue to lose money.  Once deflation is exhausted, then those that invest can expect to make and retain profits again.

I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation.  Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised.  The US exported inflation in the boom years, and now exports deflation in the bust years.

Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies.  The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress.  The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter.  When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again.  The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth.  If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).

In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off.  That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.

I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day.  One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold.  What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess.  As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world.  Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again.  In the meanwhile, any wealth saved securely from state seizure will “swell” to buy more assets in future – a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”  The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking.  The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss.  Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.

Some day soon savers will revolt at financing further depredations.  They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return.  When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.

When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising – and retaining – a positive yield.


Apologies for not posting last Friday.

Writing for this blog has been a great experience, forcing me to refine my views about current events and the principles which should underpin financial market interactions and supervision.   In parallel, I have been forced to re-evaluate whether I should commit to sorting out some of the practical aspects of the future of banking in the global economy.  Writing takes a lot of time and passion, and these are limited commodities for any of us.

I have accepted a full time executive position which will take all of my time and passion going forward in 2009, so the blogging has to be suspended at year end.  The job will enable me to put into practice the principles I’ve illuminated here, hopefully mitigating some of the impacts of financial instability.  I’ll still lurk, and maybe comment on Professor Roubini’s thread from time to time.

Wish me luck!

48 Responses to "Deflation has become inevitable"

  1. mirko dardi   December 12, 2008 at 6:18 am

    dear banker,I wish you any luck…you and all of us need it a lot: the acts and wills of governments and central banks are going to dig us in a deeper hole,I fear.It will be extremely interesting to read you again.Warm regardsMirko Dardi

  2. Detlef Guertler   December 12, 2008 at 6:29 am

    All the best for you, LB! Your voice and thoughts will be missed here. I`m sure it`s better for you to leave the sideline and to go where the action is. I can only hope it`s better for us, too.

  3. lenny   December 12, 2008 at 6:36 am

    Good luck indeed…and thanks again for all the insights…your posts will be missed…I keep reading about growing concerns regarding UK banks and recall you writing that you bank with Barclays…any thoughts about HSBC offshore (Channel Islands)…I have an account with them where I can hold yen…but it’s uninsured…the representatives say they have the backing of the group…understand if you’re reluctant to comment…

  4. lenny   December 12, 2008 at 6:44 am

    …also wonder what you think of government debt from Norway, Australia, Brazil and Switzerland…is there any safe place to hide cash?…noted in FT that auctions for Austrian and Dutch debt didn’t go well last week…

    • RED   December 12, 2008 at 7:20 am

      working in the Australian financial services industry, I can say the Australian market is well regulated, well capitalised, has a solid export base of energy, materials, and soft commodities, and has a quality legal system. Well worth to invest in.

      • lenny   December 12, 2008 at 7:42 am

        thanks RED…I’ve taken a hit on the currency but will likely hold to maturity…same goes with all the other bonds…as I have time to wait and see what happens to the US dollar…

        • RED   December 12, 2008 at 8:14 am

          The US Dollar has to fall from here, there cannot be any scarier place for an investor than the USA at the moment

  5. Guest   December 12, 2008 at 6:53 am

    Wow! Congratulations to you. A rare voice combining intelligent discourse with an ability to calmly (with rare exception) present your views. Please do chime in on the Roubini blogs from time-to-time as your perspective is refreshing and not bound by US- or UK-centric views of the world.If you ever venture to Costa Rica I would be honored to invite you to dinner.

    • crgordon   December 12, 2008 at 6:54 am

      BTW, I neglected to mention that I am crgordon

  6. London Banker   December 12, 2008 at 6:53 am

    @ Mirko and DetlefMany thanks for your kind wishes.@ LennyYou are the living example of why deflation is inevitable. You have cash, but you cannot be secure of a positive return even in relatively “safe” banks and relatively “safe” jurisdictions. Your fear makes you confused, and confused investors don’t invest far from home.

  7. Medic   December 12, 2008 at 6:54 am

    LB,All the best to you. May your work have purpose and effect change. Your intellect and presence will be missed. Thank you for adding so much to this forum.Medic

  8. London Banker   December 12, 2008 at 7:01 am

    @ Guest in Costa RicaI’ve been there twice, most recently in 2005. My youngest said it was his favorite holiday of all, especially the villa in Jaco on the beach, complete with 6 foot iguana eating mangoes above the tile roof that woke us every morning. My eldest is less enthusiastic, remembering the huge orange and blue sand crab that came into his bedroom the first night – a real live monster rattling across the floor.I have always admired Costa Rica for rejecting a standing military (and thus becoming the longest enduring democracy in Central America) and spending a large proportion of revenues on healthcare and education. It is a model the rest of the region would do well to emulate – even up to the Canadian border.

    • crgordon   December 12, 2008 at 7:11 am

      Costa Rica does have its problems but its values are oriented toward independent thinking, pura vida, no military, strong education, universal health care. On your next trip to this paradise, do ring me

  9. Lord Sidcrup   December 12, 2008 at 7:14 am

    All the best!It has been illuminating to read your posts.

  10. Little Saver   December 12, 2008 at 7:18 am

    >It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors<you read my mind!

  11. jomos   December 12, 2008 at 7:18 am

    LB, check out Robert Prechter work on society-economics. He will give you insight years in advance. One of the most difficult things for people to do is to change a mindset or belief system that you have wholeheartedly committed your life’s work towards. The renewing of the mind is necessary to completion of a life worth spent.

    • Nick Marshall   December 19, 2008 at 5:47 pm

      I wholeheartedly agree. Much as I applaud LB’s comments, he and many others are way behind Robert Prechter who set out the likely course of deflation in 2002 when “Conquer the Crash” was first published. His explanations of the cause of deflation and the difference between deflation in a money printing regime and a credit creating regime are lucid and unparalleled in financial writing. Unfortunately, i think most people read Prechter looking for a quick way to achieve success in the markets. Elliott Wave analysis is not easy and the longer you study it, the more the subtleties and complexities of markets reveal themselves. In addition, to gain the full value of Robert Prechter it is necessary to come to grips with the theory behind Elliott Waves which are revealed in the remarkable “Wave Principle of Human Social Behaviour and the new Science of Socionomics”. Despite the fact that it all sounds a bit too like Ron Hubbard, this is groundbreaking stuff for which Prechter, Elliott, Collins and Frost will, no doubt, be duly recognised and celebrated.

    • imranqqq   January 7, 2009 at 6:11 pm

      I know Prechter and Elliott wave analysis pretty well and am a fan. Made a lot of money this last year with his help. What’s made me uneasy re his deflation argument is that none of the various responses he and his team give directly answer why an immediate, massive injection of dollars into various sectors of the economy won’t stave off deflation. LB’s article makes a decent prima facia case.Would love to hear if I am missing something.imranqqq

  12. Steve D   December 12, 2008 at 7:32 am

    Good luck London Banker, your insights have ben enlightening. One thing though. like the elusive zorro, won’t you reveal your identity since you are now riding off into the sunset- please?

  13. Guest   December 12, 2008 at 8:50 am

    If Fisher was “confusing” its because he didn’t really understand the nature of business cycles, he simply advocated perpetual inflation. Mises provides a much better explanation of business cycles and therefore and much better prescription for the current situation:

  14. OuterBeltway   December 12, 2008 at 9:09 am

    London Banker:You’ve helped us. I think you provide the example of a talented and well educated person that puts his people ahead of himself.This is the classic ethos of a “gentleman”. It’s not defined by position in society, it’s defined by contribution to humanity.We’ll remember you long.OuterBeltway

  15. Anonymous   December 12, 2008 at 9:38 am

    Good Luck!!Thanks for taking the time to share you knowledge & thoughts.

  16. interested reader   December 12, 2008 at 11:45 am

    “Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates.”That’s what the IMF advised Asian countries to do during the Asian Crisis and it worsened the economic fallout significantly.

    • Nick Marshall   December 19, 2008 at 5:30 pm

      Of course it worsens the fallout in the short-term – that is what writing off mis-allocated capital does. There is no easy way out. I don’t know what the interested reader uses as a benchmark for judging whether the fallout was worse or not. Worse than what? The fact was that the S.E. Asian nations and China recovered very rapidly from the Asian crisis. Perhaps the most remarkable recovery was that of Australia whose exports are very dependent on its closest neighbours. In fact, Australia was hardly touched by the crisis. Mainly, I believe because the Reserve bank was running a very robust interest rate regime – the then head, Ian McFarlane, was his own man unlike the present Reserve Bank which has fallen into line with the central banks of the US and Europe. The consequences will be long and drawn out and very very destructive.

  17. 2cents   December 12, 2008 at 12:14 pm

    Good Luck indeed LB!

    Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.

    Juxtaposed for clarity.I think the disgust of the past and actions currently being taken (first sentence quoted) will cause those able to weather this storm (second sentence quoted) to move to greener pastures afterwards. This is what will ultimately doom the financial center countries. The critical point being “so long as a globalized economy survives”.LB as you go to spend more time in the “real” world — grass, trees, cubicles — please keep in mind that while the world here on the blogs is ethereal, its views and postulates are much closer to the earth than those practiced in the “real” world. I look forward to continued visits and updates.

  18. MA   December 12, 2008 at 12:29 pm

    Hello LB,I know you like quotes, so I will leave one here today. It’s a bit long, (more like a speech) but it is the quote that stands out above all other quotes for me. It describes being part of “something”, and knowing your place in that “something”. Many didn’t like Hunter S Thompson’s Gonzo journalistic style, but it is my writing style inspiration. (Maybe you can tell based on my ramblings???)If you’ve never read Fear & Loathing, I hope you give it a chance. (In between the drug induced descriptions, lies genius.) The quote I mention is a retrospective look on the hippie generation, …and how they new they were trying to make a difference.If it were written again today, it would be: Fear and Loathing in Wall Street. …and it would be about the RGE community’s support group / social network for concerned people like us.I hope you enjoy:“Strange memories on this nervous night in Las Vegas. Five years later? Six? It seems like a lifetime, or at least a Main Era — the kind of peak that never comes again. San Francisco in the middle sixties was a very special time and place to be a part of. Maybe it meant something. Maybe not, in the long run . . . but no explanation, no mix of words or music or memories can touch that sense of knowing that you were there and alive in that corner of time and the world. Whatever it meant. . . .History is hard to know, because of all the hired bullshit, but even without being sure of “history” it seems entirely reasonable to think that every now and then the energy of a whole generation comes to a head in a long fine flash, for reasons that nobody really understands at the time — and which never explain, in retrospect, what actually happened.My central memory of that time seems to hang on one or five or maybe forty nights — or very early mornings — when I left the Fillmore half-crazy and, instead of going home, aimed the big 650 Lightning across the Bay Bridge at a hundred miles an hour wearing L. L. Bean shorts and a Butte sheepherder’s jacket . . . booming through the Treasure Island tunnel at the lights of Oakland and Berkeley and Richmond, not quite sure which turn-off to take when I got to the other end (always stalling at the toll-gate, too twisted to find neutral while I fumbled for change) . . . but being absolutely certain that no matter which way I went I would come to a place where people were just as high and wild as I was: No doubt at all about that. . . .There was madness in any direction, at any hour. If not across the Bay, then up the Golden Gate or down 101 to Los Altos or La Honda. . . . You could strike sparks anywhere. There was a fantastic universal sense that whatever we were doing was right, that we were winning. . . .And that, I think, was the handle—that sense of inevitable victory over the forces of Old and Evil. Not in any mean or military sense; we didn’t need that. Our energy would simply prevail. There was no point in fighting — on our side or theirs. We had all the momentum; we were riding the crest of a high and beautiful wave. . . .So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark — that place where the wave finally broke and rolled back.”Good luck on your journey.Miss America

  19. Morbid   December 12, 2008 at 12:33 pm

    Thanks LB,For all your thoughtful reflections.Just one request if you are inclined to respond.What leads the global economy into a monetary hyper-INFLATION? What would it take?

  20. Miss Italy   December 12, 2008 at 12:43 pm

    Just to be sure you get this (from the main blog):Thank you LB for all the interesting posts and articles. I’ve enjoyed them immensely and appreciated very much both the original point of view you provided on the financial and banking world and the clear honesty of your message and your work. I’m sure this will guide you on the rest of your carrier and engagements. Wish you good luck. Thanks again. Come and visit soon.

  21. Econophile   December 12, 2008 at 1:29 pm

    I just discovered your posts and am sorry to see such analysis disappear. Good article, though I would agree with the Austrian comment on Fisher.Good luck

  22. hazleton   December 12, 2008 at 3:08 pm

    London Banker:You are a banker with ethics. I guess there is still hope in this world.

  23. Anonymous   December 12, 2008 at 4:11 pm

    “In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth”Hi LB,I believe your analogy is posing a false dichotomy. There are no peons in the current world economy.A better analogy is that we have competing feudal fiefdoms. At the top of which sit corrupt elites that are complicit in a vast cross-border covenant designed to perpetuate their own power and wealth.In the Chinese fiefdom, savings are controlled by a landed technocracy. That cliche deploys those savings in such a way that its peasants invest in production destined for the neighbouring fiefdom. Its does not invest in domestic productivity nor in services that support its local citizenry. It invests in neighburing demand. This system has created vast over-capacity in the local economy.The ruling technocrats know that without the demand of the neighbouring fiefdom this over-capacity will collapse and its power will be threatened by peasant riots. The elite also understand that its immature capital markets, no reserve currency and lack of legal clarity mean it is unable to finance its own economy. Moreover, its default politics depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. Just the way they like it.They will therefore continue to finance the neighbours ad nauseum.Deflation may have its way but not through a collapse of foreign flows into the US.Good luck with the new job.DS

    • Jack Parsons   December 12, 2008 at 10:33 pm

      <em>America and China are like two scorpions in a bottle.It’s someone’s quote, but I don’t know whose.

  24. Free Tibet   December 12, 2008 at 5:13 pm

    Fairwell, Sir.

  25. Guest   December 12, 2008 at 8:31 pm

    Thanks LB, I love the truth in your writing and hope the best for you in your new adventure. I’m sure it will be a sucess.Miss AmericaMy fav, I think that why I look for LB.jo6pacThe race to the bottom continues.Hi JR a little long winded but sometimes close to the truth.

  26. Vitoria Saddi   December 13, 2008 at 2:21 pm

    LB – It’s been a great honor to have you among our bloggers at RGE. You will be missed by our readers; your advices and opinions will not be replaced by anyone. We, from RGE Monitor, wish you the best in your new endeavor and we are sure you will shine bright at anything you do. Come back home (RGE) at anytime. You will be always welcome.

  27. DocBerg   December 13, 2008 at 4:46 pm

    LB, I wish you the very best of good fortune in your future endeavors. I have learned much from your posts, and thoroughly enjoyed reading them. It is very heartening to know that there is at least one central banker laboring to clean up the current mess who is both brilliant and ethical.Thank you Sir!

  28. Fool's gold   December 14, 2008 at 9:37 am

    LB, I find it difficult to imagine that you exist in this day and age of bailout madness and officially sanctioned fraud and deception, because you sound like you are from another age, another time. The madness which you describe so lucidly is the last throes of a rotten and decaying financial system in the US and UK which is hurtling towards its inevitable demise. What is so shocking about the whole thing is the utter silence and complicity of the mainstream media in the face of brazen official corruption and moral bankruptcy. LB, your post gives me some hope that maybe the system can still be saved from the brigands as impossible at this seems at the moment. May God bless you and reward your decency for speaking out in the face of the mind boggling waste of taxpayers money and economic idiocy by arrogant incompetent and desperate politicians.

  29. Average Jane   December 14, 2008 at 8:17 pm

    “. . . two roads diverged in a wood, and I–“I took the road less traveled by.”And that has made all the difference.”Godspeed.

  30. MarkJ   December 19, 2008 at 8:01 am

    London Banker:Good luck to you in your new endeavor.I have enjoyed and learned a great deal from your posts.

  31. Scott   December 19, 2008 at 8:41 am

    So he sees the same problems as Peter Schiff yet he comes to exactly the opposite conclusion (deflation instead of hyperinflation). I’m so confused!!

  32. Gerd in Canada   December 19, 2008 at 11:58 am

    I have $100,000 cash at hand, but there is no way I am going to lend it out, at this time of huge risks, at one or two percent interest. I will sit back and wait for something easy to catch later on. Thing are about to get a lot cheaper.

  33. Guest   December 19, 2008 at 2:13 pm

    LB,I basically agree with you analysis and the logic behind it… but one wild card for your deflation call is that you seems (purposefully??) ignored the recent adopted “quantitative easing” policy by Fed. do you think there’s a danger that the Fed is on the path to flood the system with its zero cost paper and force the liquidity to flow again? What it will take to stop that from reflating everything from the assets prices to debt lending?

  34. Nick Marshall   December 19, 2008 at 6:26 pm

    Dear London Banker, I am very pleased to see that you have come into the deflation camp. As someone whose commentary has been as thoughtful and measured as anyone i can think of, it was a puzzle to me why you were so leery of the concept. Two comments I have about your most recent piece:1. You talk about market failure which implies that there is something wrong with the market. I don’t believe that the market has failed – in fact it is working beautifully as it punishes the gross mis-allocations of capital. It is struggling, though, to do the job efficiently and economically because of the maqnipulations and interference introduced by governments and special interests. The end result, as you so well point out, is that the period of destruction, which cannot be avoided, is unnecessarily prolonged and more damaging.2.With regard to your re-reading of your piece on Fisher. Did you really mean “that deflation increases the quantity of assets”. That is true in a relative sense of assets available compared to dollars available but the outright quantity of assets must surely lessen as the destruction and writing off increases. It would be truer to say that the quality of remaining assets increases as the value of the rubbish is destroyed. The process of value destruction is a process of dollar destruction – dollars which never really existed but were book entries brought about by credit creation. The end result is many less dollars in circulation chasing somewhat fewer assets. That is deflation.With all the best for your new life and hoping that we have not heard the last of you.

  35. Eye   December 21, 2008 at 3:54 pm

    “there is no longer any incentive to save” pp one………Are you sure about that?I can understand a loss of incentive to invest but deflating economies reward savers. Now, where to keep your savings is another problem.The global economy will survive. The resurgence will be marked by a willingness to return capital to the more conservative and least “derived” investment vehicles. Boring stuff we never should have left in the first place.Great piece.

  36. imranqqq   January 7, 2009 at 5:56 pm

    LB,Thanks for this. For the last couple of weeks I’ve been deeply pondering about this very issue, trying to sort and think through the Schiff vs. Prechter arguments. After hours of research I came across your article – it was just what I was looking for.I’ve never heard of you or this website before, and unfortunately it looks like this piece is your swansong. Sorry to see you go, but good luck and thanks again for taking the time to write this article.imranqqq