Not to gloat or anything but in my opinion Warren Buffet, or rather, the funds he manages are the ultimate barometer of whether we are to die by hyperinflation (as he predicted numerous times over the past few years – links below) or whether we are to implode in a deflationary super nova.
Though till recently only anecdotal, evidence is slowly emerging that deflation is again nipping at the heels of the economy and is certainly not sparing Mr. Buffet’s appendages.
“OMAHA, Neb. (AP) — Warren Buffett’s company reported a 40 percent drop in second-quarter profit Friday because the improvement at Berkshire Hathaway Inc.’s operating companies couldn’t overcome $1.4 billion in paper losses on derivative contracts.”
I know. Gloating is unbecoming. But considering that shadenfreude is inappropriate, then gloating it is.
Incidentally, what is happening to Buffet is clearly reflected in the charts I maintain for the public. Look at charts on page 6 and 7. That is deflation at work. Look in particular at the last chart on page 7. That is Mr. Buffet’s Berkshire Hathaway stock performance. Now you see that mine was not much of a prediction as much as a statement of fact.
The moral of the story
We know for a fact that our “leaders” are in full deflation fighting mode. Ben Bernanke is on the record saying: “[I will make] sure it does not happen” and he keeps repeating he has the tools to do so.
Now, in light of the unprecedented nature of government intervention over the past 24 months (interventions that have only become more blatant, more frequent, overbearing and criminal if the letter of the law should be applied but that are a hallmark of our monetary system) many independent thinkers wonder whether in the West we have now not transitioned to a socialist/fascist era of state mandated economies. To which I would have to answer with a most emphatic “yes we have”.
And here is the moral of the story.
Deflation is not the enemy. Quite the contrary. If you are not in debt, deflation will make for a much more wholesome and pleasant life style. Deflation increases your purchasing power making your money go farther.
So then, why should government fear deflation like a vampire fears light? For many reasons but, chiefly, because at this stage Western governments are the largest debtors in the history of the world and the USA alone is THE elephant in the room. And here is the rub. Since our leaders unilaterally and arbitrarily abrogated Bretton Woods in 1971 and opted instead for US Dollar based floating exchange rates, we now all globally have to contend with an inflationary dynamic that is just shy of 100 years and that, since that fateful night on 23 December 1913, has now eroded the purchasing power of the US Dollar by over 95%. That’s a lot of inflation. And due to the magic of fractional reserve banking, that translates to a lot of debt. To be precise, the BIS estimates the amount of outstanding financial obligations to US$600Trillion. To put that number in perspective, the global economy is estimated at about US$50Trillion so that outstanding financial obligations globally are over ten times our output capacity. Think of it this way. It is the equivalent of someone with a 100K salary that has 1M in obligations.
Government minions and main stream pundits will tell you that the 600 Trillion is only notional value. This is technically correct. But notional value can only remain so for as long as the economy can expand ergo that inflation remains on a positive trajectory. But if, as demonstrated by the Lehman pile of notional value obligations, expansion in the economy slows down, stalls or, Ye Gods!, reverses, that notional value becomes real value real quickly.
So that if truly we should have entered a deflationary spell, this is the end of life as we know it.
War by 2013/2015