Violent Deflation
April 27, 2011 by John Myers
The other day, I walked into the Royal Café in the town of Vulcan, Alberta. The café is on Centre Street, a dozen miles west of the family homestead whose lone curator is my uncle, Dick Myers. The café has not been redecorated since I was a kid, but nobody seems to notice.
I sat across from my uncle. I could be in a time warp, except for the teenage waitress sitting nearby, eagerly texting someone.
My uncle’s sharp blue eyes looked tired. I imagine 83 years of farming will do that. He has seen much hard work and hardship. Born in 1927, he grew up during the Great Depression and the Dust Bowl.
As my uncle gulped the thick black coffee, I could tell his mind was not on the long winter that had delayed seeding by weeks.
He quickly told me he is worried about the growing protests that threaten our fragile world. I listened because I love and respect him. My uncle’s farm once spanned to the horizon, and the cattle he once herded numbered in the thousands. But he didn’t want to talk about wheat or livestock.
My uncle said that when he was a boy, hobos would come to the homestead. My grandfather did well with the section of land he farmed, so my grandmother always had some scraps to give to hungry men. But times were tough, and some neighbors did not have food to spare. My uncle reminisced that hungry travelers would tip their hats and move along without malice.
“The world has changed,” Dick said, “and not for the better.”
I sipped my coffee, which had been brewed in an old stovetop percolator, and nodded in agreement. The waitress was talking on her iPhone, loudly commiserating about her weekend plans with her boyfriend. I didn’t mention the irony.
Dick leaned over the table: “Middle East violence… these protests in Europe; I wouldn’t be surprised if it spreads. And who knows where it will end? If this economy doesn’t stay afloat, then there is going to be hell to pay.
“It won’t be like it was when I was a kid,” Dick explained. “If times get tough and people come on to a property and ask for something, there won’t be no saying ‘no.’ Nowadays, people take what they want.”
On the drive home, I thought about what my uncle had said. I wanted to share it. There are agitated protestors from London to Liberia. Some are even protesting the wedding of Prince William and Kate Middleton. Others, like Muslim rampages over the burning of the Quran, have obvious roots and will have more serious consequences. And war rages in Iraq, Afghanistan and Libya.
Much of the world is becoming violent, and I don’t have any reason to believe North America is immune from this trend.
What The Ruling Elite Fears Most
Nobody in Washington fears the deflation the way my uncle does, or the way your parents or grandparents might. Our leaders are too young to have lived through it. The closest facsimile is Federal Reserve Chairman Ben Bernanke — a student of the Great Depression, the architect behind trillion dollar bailouts of banks and automakers, and the man in charge of quantitative easing (the process in which the Fed creates money out of thin air by buying up Treasury debt).
The second-phase QE2 accounted for the purchase of $600 billion in Treasury debt. In all, the Federal government has injected about $2 trillion into the U.S. economy.
I don’t believe former President George W. Bush and President Barack Obama were eager to save their friends in the banking business. Say what you will about both of them, but I think they are shrewd men.
Instead, I believe both their administrations have systematically flooded the U.S. economy with borrowed money because Washington is terrified of what would happen if deflation ever got a grip on America.
The Obama administration and Bernanke fear that a massive destruction of wealth and jobs will lead to widespread protests and violence. As a result, the Federal government has pumped money into the economy, even as it has sacrificed the dollar.
What has yet to be determined is whether it will succeed or not.
Deflation Threat Still Lingers
Great wealth could be wiped out in a couple of weeks if a bear market commenced in stocks and bonds. Bonds might be the most vulnerable, because the Fed has said it will stop further quantitative easing. Meanwhile, the Fed funds rate is effectively at zero, the lowest it has been since the Great Depression.
The only direction for interest rates to go is up. Bond prices move in the opposite direction of interest rates, so higher rates will mean that bonds are less valuable. The U.S. bond market is worth approximately $25 trillion dollars. Therefore, even a 6 percent or 7 percent spike in interest rates could erase $2 trillion in assets.
Higher interest rates also hurt big corporations. Companies that have been able to borrow have done so at interest rates not seen in more than half a century. This has allowed at least some companies to expand. But if interest rates rise, U.S. companies will stop expanding and cease hiring.
Unemployment is already at 9 percent, and real unemployment is close to 16 percent. This is as good as it has gotten, with record-low interest rates from the Fed and the unprecedented expansion of the U.S. money supply. Higher interest rates are coming down the pike, and they could ignite another — even worse — recession. They might even lead to a depression.
A crashing economy will create social unrest. We have seen it in the Middle East and in Europe.
Action to take
Take steps now to prepare for the worst:
- Stock up on emergency rations of food and water.
- Store medicines, such as antibiotics.
- Make your residence more secure.
- Develop a plan to protect your family in case of a crisis.
- Keep on hand some cash. Store it in a home safe, if you can afford one. As a last resort, 1-ounce silver coins may come in handy if you have to barter for basics.
Should the U.S. economy crash, disaster will inevitably follow. Those who have prepared for the worst will be grateful that they did.
Yours in good times and bad,
John Myers
Editor, Myers’ Energy & Gold Report
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