Asset deflation could begin any day - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 20 March 2014
Asset deflation could begin any day A  A  A

Buenos Aires, Argentina

As, we enter the time that hasn't come yet...the point where the poor camel's back gives way.

Hmmm....yesterday, the Fed confirmed that it would withdraw another $10 trillion of QE. Stocks fell 114 on the Dow. Gold dropped $17.

What to make of it?

You'll recall that as long as ZIRP (zero interest rate policy) continues, the feds are draining more and more resources from the future. They encourage people to borrow - by dangling near-zero interest rates in front of them. The debt must be serviced and retired, of course, from future earnings, reducing the amounts available for current wants and needs. Thus is the future placed in debt bondage to satisfy the desires of the here and now.

The whole world is in on it. With total global debt of $100 trillion, even if the world could set aside $5 trillion a year, it would take about 30 years to pay off the debt (including interest at 'normal rates).

--- Advertisement ---
3 "Rare" Small Caps with Strong Growth Potential...

We both know that small caps are usually the first to take a hit when the market takes a downturn.

However, small caps are also capable of creating immense wealth when the market reaches its true potential!

So, if you are interested in small caps, can make smart investments and invest from a long-term perspective... We have 3 "Rare" Small Caps you could Buy Today.

And here's something that makes it even better...

All 3 of them are known to pay regular dividends too!

So, don't delay... Click here for full details...

But the world cannot set aside $5 trillion a year. It can't even stumble along at breakeven. Instead, it needs an additional $5 trillion worth of borrowed money net, annually, just to stay at current level s of unemployment, asset prices, consumption and interest rates! In other words, today, instead of paying down the past debt, we borrow more from the future just to stay in the same place.

The question on the table yesterday: how much future is left?

We didn't have an answer. Today, we tackle an easier question: what will the future look like when it comes. We refer, of course, to that part of the future when the you-know-what hits the fan.

As we began to explain two days ago, the typical result of asset inflation is asset deflation. That much is guaranteed. And it could begin any day. US stocks were the main beneficiaries of the credit bubble. They will, most likely, be the main victims when the credit bubble bursts. Then, the record highs of the recent past will be matched by record lows.

Nature loves symmetry. That's just the way it is. What goes up must come down. Booms in margin debt, stock buybacks, junk bond issuance, and stock and bond prices will all be followed by terrible busts.

That is as it should be. It is natural. It is healthy. The junk is flushed out...the bad decisions and mistakes are cleansed...economic life can go on. A new boom can begin.

Of course, a real recovery would moderate the bust. Higher sales, higher incomes, higher profits - all contribute to the kind of growth that makes debt less of a burden.

Do we have a real recovery? The official statistics tell us that we have the weakest recovery since the Fed began instigating them. A closer look at the figures, however, tells us that there is no recovery at all.

Auto sales, house sales, household incomes -- all are either flat or falling.

You have heard, of course, that the unemployment level has fallen to 6.7%. You have also heard, we suppose, that much of the drop is attributed to older people who have simply retired.

But it isn't true. Instead of retiring, old people have held onto their jobs like drowning men clutching to their life preservers. The numbers tell the tale. The age group that has contributed most to the falling participation rate is the group in the prime earning years, 25 to 54. Older workers, over 55, on the other hand, have actually increased their participation in the labor pool. They added 3% to the labor force, while the younger group subtracted 4.7%.

Why would older people want to keep working? The obvious answer is that they don't have enough money to retire.

Young people, meanwhile, need to work. There is no question of retirement. But they can't find jobs. In other words, the data used to prove that the economy is well and truly recovering proves just the opposite. And here's something more...the failure to bring a real recovery is the only thing that allows the bubble to continue expanding...

More on this important point tomorrow...and why a real recovery or the lack for US asset prices... More tomorrow...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Asset deflation could begin any day". Click here!

1 Responses to "Asset deflation could begin any day"

RS Rathore

Mar 20, 2014

As per Bill Bonner's views on Asset Deflation, the ensuing time seems to be extremely horrifying. If it so turns, no one in stock market globally will be able to save their fingures from the burn. The prevailing circumstances indicate that Towering Tempest is not far off. Feeling like a hole in the head.

Equitymaster requests your view! Post a comment on "Asset deflation could begin any day". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.