Inflation or Deflation?

Plan for Both Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Inflation — or Deflation? - Which will it be: inflation leading to hyper-inflation or a deflationary collapse and popping asset bubbles?… - What if the Fed has less control than it likes to think?… - Everyone has a plan until they get punched in the face… Recommended Link [Urgent Crash Warning for Monday, May 10th, 2021]( [Read more here...]( Everyone already knows that the stock market is in a bubble… But now some experts are starting to predict that the bubble will burst sooner than anyone expected and hit harder than anyone could have imagined. With some experts saying that we could see a stock market sell-off of 80% or more as soon as next week… This could completely decimate the retirement saving of millions of Americans all at once. So if you care about you and your family’s wealth the time to act is NOW. That’s why we flew in one of the top traders in America to tell you exactly what you need to do to get ready for this impending crash… But hurry, because if you wait until Monday, it could already be too late. [See His Presentation Here FOR FREE]( San Francisco, California May 8, 2021 Editor’s note: Are you prepared for inflation? Are you prepared for deflation? Or some “fat-tail” economic event? Today Charles Hugh Smith shows you why you need to have a plan for all scenarios. [Charles Hugh Smith] Dear Reader, I see the same question in forums, threads, articles and emails: what can I do to protect myself and my family from whatever lies ahead? Given the uncertainties and extremes that are so evident, recognizing risk is a useful first step, a recognition that is very much out of fashion. If we glance at the charts of margin debt (loans taken against one's stock portfolio) which is at record highs, and short interest (bets that stocks will drop) which is at record lows, it seems the primary risk on investors' minds is FOMO (fear of missing out) of all the fat, juicy guaranteed gains just ahead. For the few still asking about the source of risk, the general answer takes one of two paths: inflation leading to hyper-inflation or a deflationary collapse of defaults and popping asset bubbles. It's easy to find pundits arguing for one or the other, but do we have the initial conditions, variables and functions we need to solve this problem and get a clear answer, inflation or deflation? Consider two variables that are rarely visible in pundits' arguments: 1) What will benefit the banks? 2) What will benefit the nation's place in the geopolitical pecking order? The Inflationary Camp The inflationary camp holds that the soaring debt, public and private, can only be serviced if incomes inflate so households, companies and governments have enough income to make the payments on their soaring debts. Since this is a self-reinforcing spiral — more inflation leads to more inflation — central banks will be forced to print their currencies into oblivion, i.e. hyper-inflation. If they ever stop printing, the house of cards (soaring debt) will collapse. This logic seems sound enough. But once hyper-inflation takes off and people are earning $250,000 a month and a loaf of bread is $250, how will banks profit from households paying off their once-stupendous mortgage (that required 30 years of monthly payments to pay off) with a single month's pay? Hyper-inflation will destroy not just the currency but the entire banking sector, which is politically powerful. Will the banks just sit by passively watching their wealth and income being destroyed by high inflation? One suspects they will use their political power to avoid being ground into dust by hyper-inflation. Recommended Link [Why Is the Fed Preparing for a 55% Drop in Stock Prices?]( [Read more here...]( According to the Financial Times, the U.S. Federal Reserve is “preparing to test banks’ ability to withstand a 55% fall in equity prices.” Could you afford to see stocks get chopped in half? The situation, however, is not straight-forward… And according to tech expert Jeff Brown—who picked Bitcoin in 2015, as well the #1 tech winners in 2016, 2018, 2019, and 2020—while some stocks will indeed tank… a few will rise even more sharply. Jeff appeared in a special interview to explain his views. And, already, this viral video has been watched 9.8 million times. [Watch The Video Now]( Who Benefits? The banks would much prefer defaults that they can shift to the government (via bailouts) and deflation, where every monthly credit card/mortgage payment has greater purchasing power than the previous month. Next, consider the consequences of hyper-inflation on the nation's currency: it loses virtually all its value. Nobody will want to trade real goods for worthless dollars. In terms of a nation's economic power, its currency is the foundation, because if the currency plummets to near-zero then everything denominated in that currency also loses value on the global stage. A reserve currency — a national currency that is widely held globally because it it's expected to hold its value, and the market for everything denominated in that currency is extremely large and liquid — is the crown jewel of whatever nation (or entity, in the case of the EU) issues it. Who would benefit from the destruction of a nation's reserve currency? Virtually no one. The nation would be impoverished. So why is hyper-inflation — the destruction of the currency — so broadly accepted as inevitable? Linear vs. Non-linear It's also widely assumed that the Federal Reserve and other central banks control all the variables in setting bond yields, interest rates and inflation. But what if some variables are outside the Fed's control? What if their claim of controlling all variables is mere PR? We also don't know what function inflation or deflation might manifest. Will it be arithmatic— 1 + 1 = 2 + 1 = 3, etc.—or geometric— 1 + 1 = 2 + 2 = 4 + 4 = 8 + 8 = 16? This makes an enormous difference: arithmatic inflation is predictable — 5% a year, for example — but geometric increases lead to hyper-inflation and complete destabilization of the economy and society. Very few pundits reckon the central banks and governments will choose default and deflation because these will be painful — but what could be more painful than wiping out the value of the currency? If the wealthy elite own precious metals, farmland, manufacturing, government bonds, etc., then the default of zombie households and corporations (zombies defined as entities that have to borrow more to remain among the living), then why would they care? Corporate bondholders and marginal lenders would be destroyed, but again, the wealthy need only avoid owning marginal debt to avoid the debacle of default losses. Ace in the Hole The politically powerful elites have their ace in the hole: they can demand politicians (who need their contributions to fund their re-election campaigns) bail out the banks, transferring the losses from defaults from private banks to the public sector, exactly what happened in 2008-09. But once again, are the elites and government fully in control of all variables, or could they be assuming arithmatic functions when geometric functions might actually manifest? Deflationary defaults can destroy bank assets just as quickly as hyper-inflation, as once buyers vanish (markets go bidless) then the value of assets pledged as collateral plummets to levels no one believes possible. Entire highrise buildings are sold for the value of the elevator system. Yes, it happened in the Great Depression. A little inflation or deflation is a good thing, manageable by the government and elite, but geometric inflation or deflation undermines the entire financial system, including the finances of governments and elites. How do we calculate the probability and potential intensity of destabilizing social disorder? Humans Are Only Human It's widely assumed that the U.S. could never experience the sort of massive, widespread social disorder that occurs in developing-world nations during crises. But humans are humans, and when put under pressure by high inflation/deflation and declining prosperity, people respond in ways that can very quickly escape the control of authorities. If the consequential variables and functions are not measurable, then seemingly small disorders can spread throughout the entire society — or supply chain. Where does all this leave us? Recommended Link [The Truth? You can actually choose…to BE RICH]( [Read more here...]( I’m not talking about wishing, hoping, or believing that a miracle is coming your way. I’m talking about making a choice, setting a course of action, and then going out and making it happen. I make that choice every single day. And I believe you can actually achieve it. If you want to make the choice to be rich – here are three things you can do today: - Commit to getting financially educated. - Be ready to let go of the old-school financial advice you’ve been taught. - Join me for a free training this week. (It’s 100% FREE for you this week) [Click Here To Sign Up]( We know from studies of human psychology that humans don't feel comfortable with uncertainty and seek a haven of certainty as quickly as possible. They will cling to anchored beliefs in the face of conflicting evidence and strengthen their attachment to beliefs when challenged. We're wired for a decisive commitment to a belief structure. Sustained indecision and ambiguity is uncomfortable. We want an answer, and if there isn't one, then we'll make one up or commit to an answer proposed by a pundit, even though that person has no better grasp of the initial conditions, variables and functions as anyone else. Alternatively, if we can't possibly answer the question of what happens next, we have to accept that this era's uncertainties may not be resolvable. This is an exceedingly valuable insight, as if we embrace this uncertainty, we can avoid defaulting to a rigid, brittle false certitude that can only lead us astray if events don't follow the path we've committed to. In other words, we all want certainty, but this isn't possible because 1) the variables are invisible 2) the functions are unknown and 3) the "solution" (predicted path) depends entirely on the initial conditions, in which small changes completely change the outcome. Faced with the knowledge that so-called fat tail risk (i.e. a geometric function replacing an arithmatic function, and small events triggering large consequences, i.e. non-linear dynamics) is real but unpredictable, then we're forced to think through these supposedly low-probability risks and devise a response that we can implement because we already thought it out. This is the difference between having a pre-planned response and panic. Everyone Has a Plan Until... Mike Tyson's memorable quote offers great insight into risk and uncertainty: "Everyone has a plan until they get punched in the mouth." The average person considers the odds of getting punched in the face as very low. The martial arts student doesn't follow the line of thinking that because the odds appear low, there is no need to learn self-defense. Rather, being prepared to defend oneself is a permanent state of readiness, perhaps rusty and imperfect, but there nonetheless. Events that devastate the majority financially greatly enrich the few who bet on non-linear dynamics. But that doesn't mean we can't embrace uncertainty and fat-tail risks and think through responses in advance, and plan a hedging strategy that accounts for possibilities from 1) nothing changes to 2) everything changes. We don't have to respond perfectly to be successful. We simply need to have prepared responses for contingencies from whatever we consider most likely to whatever we consider very unlikely but still possible. The point here is that embracing uncertainty means we accept that the market might still punch us in the face, and we might make mistakes or fail to perform as we'd hoped. But the process of planning layers of response may well help protect us from irreversible losses and bad decisions made in the chaos of fear and panic. Regards, Charles Hugh Smith for The Daily Reckoning Editor’s note: Please [read this urgent message]( as soon as possible… Because even though we were warned that the stock market could “disintegrate” under Biden… No one took it seriously… and now we could be heading for [one of the biggest stock market crashes in history…]( with some experts predicting the Dow Jones to get butchered by as much as 80%. If you’ve got money in the market to protect you’ll want to see this message right away. That’s why we’re forwarding you this [quick video clip]( from two of our colleagues. It contains details on [when exactly we may see this “stock market slaughter.”]( More importantly, it shows you exactly what you need to do to prepare. [Go here for the critical details.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Charles Hugh Smith][Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at feedback@dailyreckoning.com. If you are having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox [by whitelisting The Daily Reckoning.]( [Paradigm Press]© 2021 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Email Reference ID: 470DRED01