First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation
The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith
The Fed’s creation of trillions of dollars out of thin air will trigger inflation. It will devalue the purchasing power of each dollar (inflation), but first all the unprecedented asset bubbles will pop and valuations will crash.
This a deflationary deluge as asset prices are eroded, and Smith provides charts to illustrate the enormity of the current stock market bubbles.
Real estate and other assets have soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.
This was made possible by an equivalent bubble in debt. Every sector—household, corporate, government—has borrowed huge sums of money to keep the bubble economy together. In this rising tide of currency and capital, whatever had scarcity value—real estate, art, stocks—was purchased with the borrowed money as a store of value and/or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.
Assets don’t have to rise, but the interest and principal on debt has to be paid; that’s the rub with buying assets with borrowed money.
The Fed can create dollars out of thin air, but they don’t have to flow into the stock market; they can go elsewhere. They only flow into stocks because the financiers, banks and other parasites and predators are counting on greater fools to pay ever-higher prices for stocks based on their misplaced faith that the Fed’s new money magically goes straight into stocks.
Once the pool of greater fools dries up, stocks crash regardless of what the Fed does, up to the point that it is given the legal go-ahead to buy stocks directly. That’s when inflation will begin. But inflation is just as unruly a beast as an asset bubble, and control is never quite as complete as the Fed claims.
First the deflationary deluge, then the tsunami of inflation. Both destroy the wealth of believers in fairy tales.