Just One Small Problem – Bill Holter

So here we are at a point in time where reflation is no longer possible and the deflationists are being proven correct. They are correct in regards to a credit system working in reverse with a negative feedback loop stoking a deflationary death spiral.
There is just one small problem…

There can be little contention the world is experiencing an economic slowdown. The problem is this; the slowdown is occurring at a time when credit levels have never been higher than they are today. The logic is simple, less activity, less turnover, less velocity of money with such high levels of debt make the debt unpayable. This is the classic case of deflation the Dent’s and Armstrong’s of the world speak about …but they all stop one step short of where this really ends up.

I have noticed recently via e-mails and comments, “they can do this forever, nothing will stop them from printing and doing QE so nothing will change” is almost becoming a national mantra. I would say, “well, yes, until it does not work any longer”. If we look at just one market alone, the oil market, it is clear the point of “unsustainability” has been reached. In the oil patch alone, the amount of bad and nonperforming loans has exploded. Because of the fractional reserve nature of the global banking system, bad oil loans by themselves are probably enough to wipe out the underlying equity of lenders.

My point is this, we now face the other side of the coin in the debt markets.

What was “good” is no longer because new marginal debt does not produce growth, in fact it now only speeds up the moment of systemic seizure! “Slowdowns” in the past were turned around because governments, central banks, lenders and businesses had the ability to reflate. This ability is now gone as the episode since 2008 has been an “all in strategy”. The ability to borrow more is largely gone by any and all entities including central banks and treasuries. The amount of unencumbered assets available is nonexistent as new collateral is also largely gone. The ability to “reflate” does not exist in any corner of the financial world.

So here we are at a point in time where reflation is no longer possible and the deflationists are being proven correct. They are correct in regards to a credit system working in reverse with a negative feedback loop stoking a deflationary death spiral. There is just one small problem, what will happen to the currencies of these issuers (including and especially The Fed) who are also caught up in the negative feedback loop?

This is THE biggest and most pressing financial question you will ever face in your lifetime. Will the currencies survive and thrive in the deflation or will they be seen for what they are, IOU’s of bankrupt issuers at the very center of the credit crisis vortex? If you answer this question incorrectly, you may end your own financial life. The key to this question is what will assets “deflate” against”? The answer of course is as it has always been, “money”. While Martin Armstrong will have you believe “gold was devalued versus the dollar in 1934″, I assure you it was quite the opposite. And while Harry Dent will have you believe the “dollar” was THE best investment in the 1930’s, again I assure you he is wrong! Dollars were “derivatives” (derived from) of gold. They were freely interchangeable at banks until 1933, then the dollar was devalued from $20.67 cents to $35 dollars required to purchase one ounce of gold. In other words, it took nearly 75% more dollars to purchase an ounce of gold… end of story, gold was King during the last and only deflation since then, dollars (and other currencies) were and will be devalued versus gold.

The two most important aspects of gold is it cannot “bankrupt” nor can it be freely “printed”. Those who say the U.S. can never “go bankrupt” because the debt is in dollars and we will just print more are 100% correct but horribly wrong! Correct, the U.S. can print any amount of dollars necessary to pay off debt. This still doesn’t mean they do not “default”. In other words, if Wimpy fails to give you a promised hamburger next Tuesday but instead promises you a hamburger every Tuesday for the rest of his life, where’s the beef? It never ever comes just as there will be zero value to any dollar bill should the U.S. decide to print the $trillions needed to avoid default. This falls under the crazy category of SUPPLY AND DEMAND! In case you don’t understand what I just said, “old” dollars will become worthless as they became over printed to avoid “default” …devaluation is a default in its own right.

In the meantime while we wait for the currency event termed “hyperinflation”, we must navigate a deflationary environment where credit is drying up everywhere you look. It should amaze you that the world is facing a liquidity crisis after all the trillions of digital currency units added to the system since 2008… it seem almost impossible to have a lack of liquidity doesn’t it? But this is the fact we face globally and what threatens to shut the system down, no liquidity!

Taking this two steps further than the deflationists, what exactly will happen once credit does collapse and the spigot gets shut off? In the case of the U.S., we most likely will “print” to the point of full (rather than the current partial) monetization of all the debt. This printing will be done by a bankrupt entity with more IOU’s around the world than can be humanly counted. How will the massive supply of dollars issued by a bankrupt and fraudulent issuer possibly be a “good thing” for value of dollars? This thought process no matter how simple seems to be two steps too far for the deflationists!

The real world result of credit freezing up will amount to a national and probably global hunger fest. For those of you who just recently went through the northeast winter storm, what did the shelves of your local grocery store look like going into Saturday morning? Could there be a bigger storm than existing credit collapsing and new credit no longer being issued? I find it incredible that the aspect of credit is almost never connected to “distribution”. Forget about actual farming or production needing credit to function, how will product make it to store shelves without credit even if it does “grow”?

Empty shelves at Walmart in Ocean Township, Monmouth County.
Folks, when I use the word “grow” I am talking about FOOD! Even if you are part of the “government will never let it happen” or “they can just print forever” army, what if you are wrong and instead common sense is correct? How will you fare when “WHEN” comes since “IF” has already left the building? Without a doubt, the alarm clock wake up call for a sleeping public will be when their stomachs start growling. Nothing will make stomachs growl more than an overleveraged system with no credit forthcoming!

On a side note I have a prediction for you. When credit does collapse, “Jesus Christ” will surely make a comeback for some. No, I would never try to predict the timing of His second coming nor would I ever want to offend the non believers out there. When credit ceases we will see the absolute worst humanity has to offer, and as the old saying goes, “there are no atheists in a foxhole when the bombs are dropping“. In the aftermath, I predict the world will turn to whoever their God happens to be and religion will make a long overdue comeback!

Please, don’t throw any flaming e-mails my way as I am not trying to turn this into a God or religious site.

What I am trying to say is simply; without a doubt we will exit what is coming with grossly changed social values, ideas and beliefs. While truth, honesty, one’s word or whatever are seemingly meaningless today, this will not always be the case. History has shown the need for great calamity and upheaval to force change. A great financial calamity is mathematically coming, great “change” in values of all sorts will result!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
February 2,2016