Britain showing signs of heading towards 1930s-style depression, says Bank

This is what I’ve been harping-on about. If I am correct and we have entered a deflationary era, all assumptions have to be revised and/or scrapped. Most people alive today have lived in an inflationary environment. Many things that are taken for granted in inflation will no longer apply in a deflationary era. Most people alive today take it for granted that prices always rise for example. In a deflationary environment, some of the things that will be more readily apparent will be a general decline in wages, the price of houses and cars and a less enthusiastic stock market for example. Broadly speaking, a deflationary environment should increase the purchasing power of a currency. Thus even though wages should decrease across the board, your purchasing power should increase in relative terms. So, broadly speaking, deflation is not an undesirable outcome… EXCEPT … except if you are running substantial debts. If you are in debt, a deflationary environment will bury you. Hence the reason governments are frantically trying to prevent anything resembling deflation.

However, we are coming out of an inflationary environment the likes of which has no precedent in the sheer size of asset values that it has fostered; we’re talking here of several hundred Trillions of Dollars worth of value with some estimates going as far as 1.4 Quadrillion Dollars – Geek note – Billions are expressed with twelve zeros, Quadrillions take fifteen zeros. As reference, world GDP is something in the order of fifty Trillion Dollars and dropping fast. What is notable is that a significant chunk of  the dizzying valuations reached in recent years have been achieved through the magic of sustained, deliberate and fierce deficit spending not only at government level but at corporate and individual level too.

Things are made more complicated by fractional reserve banking and fiat currencies. Fiat currencies in particular pose a unique problem as although some countries have experimented with this type of monetary regime in the past (notably France see John Law and the Mississippi Company), I believe that never in history has the entire known world operated on fiat currencies at the same time.  Therefore, guessing which currencies will increase in purchasing power henceforth is something of a toss up.

Anyway… here’s the article


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