Deflation

… and this, if ever it were needed, is more evidence that we’re well and truly into deflation. Not only that, but this sort of thing reinforces deflation.

Once again. Inflation or deflation are monetary phenomena. When money and credit expand you have inflation; when they contract it is deflation. Right now the monetary base might be goosed and pumped by the authorities BUT there are two main problems. First the amount of money being created is insignificant when compared to the mountain of credit that is being destroyed. Second, whatever money the authorities are creating, is not entering the economy as attested by a still falling velocity of money.

GM temporarily closing plants is deflationary and the ramifications are many and deep. In a first instance, closing plants temporarily means decreased wages for GM’s employees but it also means less consumption of material and, therefore, diminished wages for GM suppliers. But more importantly, decreasing activity at GM also means decreased tax contribution to municipalities, counties and, therefore, the Federal Government. At a time when the gov is taking on ever increasing debts in a situation where most consumers are already saddled by unsustainable debts… you are looking at a picture of true insolvency both at government, corporate and individual level.

That being the case, if some bright bulb can’t find a way to get inflation started again, we are hurtling towards a world war.

http://news.yahoo.com/s/ap/us_gm_factories

http://www.ft.com/cms/s/0/1dde339c-23a4-11de-996a-00144feabdc0.html?nclick_check=1

Excerpt from FT article:

Unlike company pension plans, state and municipal retirement funds have no federal guarantee fund. This has led to predictions of benefit cuts and possible federal intervention.”

Once unemployment will reach levels deemed to be a threat to national stability, once social violence will reach a level deemed to be a threat to the state, once the state no longer has sufficient earnings (taxes) to service its debt… the only option is bankruptcy.

If you believe a Western industrialized country can declare bankruptcy then I’ll readily admit my entire line of thinking was ignorant and wrong. If you also believe that the excess industrial capacity brought about by decades of unrelenting inflation can be unwound without fuss I’ll readily pack it in and apologize for any inconvenience caused.

I’ll take the other side of this bet. I say that not only industrial capacity cannot be taken off line without violence but I can also tell you that before the West declares that, in fact, we are no better than your garden variety Mugabe, it will engineer a war somewhere…

Here is some serious saber rattling

http://news.yahoo.com/s/mcclatchy/20090422/wl_mcclatchy/3218081

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