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The Achilles Heel of Delfation

Charles Hugh Smith and Gordon T Long discuss the Achilles Heel of Central Bank Policy; Deflation. They feel it will be a central theme in 2015. It will foster new central policy initiatives which the financial markets will react violently to.

Real Deflation Chart


Charles Hugh Smith defines Deflation in a different manner than most which leads to some very interesting perspectives and conclusions.

"Any increase in the purchasing power of nominal wages".

  • The rise of software, robotics and global wage arbitrage is resulting in wages not rising along with prices. As a result, everyone who depends on earned income is getting poorer.
  • For the actual real-world the result of central banks easing, money pumping and zero interest rates is Deflation.
  • Central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D.
  • Central bank easing and zero-interest rate policy (ZIRP) additionally fuels malinvestment which leads to over valued collateral and an eventual collateral collapse as NPL (non-performing loans) debt cannot to "rolled" (i.e. no one no longer wants to risk financing)

Excess Inflation

Inflation creation when the business cycle needs to contract.
i.e. 2% targets during systemic deleveraging.

  • This is because the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
  • Excessive inflation results from central banks being forced to push negative real interest rates too low (to protect debt holders) relative to real economic expansion and capital wealth creation.

Purchasing Power

The store of Purchasing Power is true WEALTH which governments are transferring.

  • All the phantom collateral constructed with mal-invested free money for financiers will eventually implode.

Easy Credit Creates Excess Supply & Demand Which Eventually Reaches Equilibrium



Video: 2015 Gobal Theme: The Achilles Heel of Deflation

with Charles Hugh Smith & Gordon T Long
27 Minutes - 32 Slides


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