Deflation is a real threat. Save and hide your money, NOW! Watch out for the M2 Money Multiplier!

Update: Pimco has said that inflation is a threat because of the dollar being replaced as the reserve currency. That is truly a threat, but would likely cause a depression in the end. Certainly, we know that the banks cannot afford to have inflation because they would have to write down their loans even more. Still, Pimco has a lot of credibility. I am not offering forex advice here people, but certainly sans oil, there is mostly deflation in prices. Milk is down, beef, etc. So then, keep an eye on inflation, because if it does come back I see higher interest rates, and a possible reapplication of mark to market on the sorry, toxic bloated big US banks. We will keep watching!

Update: We now know that the Federal Reserve wants no inflation and may risk deflation. Inflation will cause the foreign debt holders to abandon their ownership of our bonds. Indeed, for some strange reason, the Federal Reserve sneaked around and bought the 7 year treasuries in July 2009 from dealer banks rather than from the auction directly. Indeed, this is a way for banks to make more, but also it is a clear signal that the Fed wants everyone to believe that there is demand for our bonds.

 If this monetizing of the bonds fails to work who will buy our treasury bonds? I say they would have to allow the stock market to crash, causing the investors to flee to the bonds. By taking away liquidity from the markets this crash could occur, leaving the small investor to take the loss as always. So the Fed fears inflation because they will have to raise interest rates and THEY MAY RISK DEFLATION in order to drive folks into treasuries.

It will be interesting to see if this event occurs. With the toxic bank assets still a problem, and with the likelihood that FASB will allow some tough Mark to Market to come back on November 15, inflation will likely not be a problem. All the above are deflationary pressures that could come in the fall. We will be watching. 

This is the problem folks: While the money supply measured as M2 in increasing the money supply is not growing at the rate of M2 in the real economy. Therefore, the chance for deflation is rising. It is necessary that you save, and walk away from debt while saving those dollars. You need to keep your money out of banks if you are walking away from credit cards. You need to preserve capital for the time you will need this money to buy necessities.

Is there a chance that we will avoid a depression? Yes there is. However, it is a chance that grows smaller with each passing day as we confront major house foreclosures on Alt A and prime loans. We also are facing major commercial real estate dangers with the inability of commercial mall owners and others to roll over their debt. This is a major danger for the banks.

While it is likely that the banks can survive a system wide bank run, it is not a guarantee. That situation has never been faced before by our FDIC. Therefore, I would not put even half of my money into a bank. It is too risky right now.

Since bank excess reserves are increasing and that is dead money, the chances increase for deflation. The M2 money supply is increasing, but the M2 multiplier, which indicates how much money there is available to lend versus actual reserves is SHRINKING. I have links here to show you those facts. This is a very Japan-like situation that we are facing. Only the consumer has more debt and less savings here, so it could actually be worse.

I urge everyone to take these precautions, because if the danger passes what have you lost? However, if the danger proves true you could be hurt badly if you don't listen. In the great depression, my father had no decline of bills but did have a decline in wages. That could happen in addition to the furloughs that are happening in some states and hours being cut in the private sector. 

Some have said that the money multiplier will improve as the excess reserves of the banks ( which is about 800 billion dollars of dead money, at the time of this writing) decreases. However the likelihood of that happening is weak. It would seem that these excess reserves would have to increase continually if the banks would be able to cope with toxic assets that they are overvaluing. Many will never be repaid, but the banks are counting them as if they will be repaid. The banks are hunkering down while the economy winds down before their eyes. 

You almost get the feeling that the federal reserve is afraid to pump the economy too much, because bonds will fall in value and the Chinese will quit buying them. You almost get the feeling that the fed is afraid to create inflation because interest rates will no doubt skyrocket and kill the housing market even more. But if the chairman of the Fed, helicopter Ben Bernanke is afraid to drop money from the helicopter, we are headed for a long drawn out deflation.

However, if Larry Summers replaces him, the inflation that the Chinese and the housing market fears could come as he would seek to inflate. That could be even worse than deflation, because we are in such debt to the Chinese. Truly the Federal Reserve Bank is boxed in. For more information about the Fed see American Fascism and the New World Order