The economic policy of the last 40 or so years has been disastrous, and terribly destructive. We are at a turning point, so we now begin to see the damage.
The turning point is from inflation as a policy to deflation as a reality. What was once programmed, the opposite is now out of control. For every action there is an equal and opposite reaction? In physics maybe, but in economics there is regression to the mean, which says you will overrun average, stable.
Inflation is when you create too much so it takes more to buy the same. If there is 1000 units of currency today, and a loaf of bread is 1 unit, then you print another 1000 for a total of 2000 the next day, then a loaf of bread will cost 2 units. That is the basic idea, but of course why do it? Time. It takes time for the extra 1000 to spread out, the first get the new 1000, whose job is to spread it, govt and banks, win by getting rid of debts priced at 1 before the bread gets priced at 2. Larry Lunchbucket gets a tax he never voted on.
What they discovered in the late 1970s was you could also inflate credit, that is nothing. Whereas someone might assess Chase Manhattan to be viable at 100 billion in credit, Chase might lend out 200 billion, off the books. And completely legal. I have the handbook explaining how and giving permission.
Mish Shedlock's contribution is to point out this matters, it behaves just like currency inflation.
Everyone else is largely mystified as to what is happening in the economy, but not those who have figured out we are in deflation. Those who are noticing it are mystified, unless they have read Mish.
Indeed!
So what is deflation? It too is a monetary event, in the loosest sense, wherein if there are 2000 units of currency today, and a loaf of bread is 2 units, then you destroy 1000 for a total of 1000 the next day, then a loaf of bread will cost 1 unit. And what is the operative issue? Time. Here Larry Lunchbucket wins. And now it is out of control.
You business strategy is twofold:
1. Stop borrowing at interest. This will get easier for a long while, as less credit goes looking for worse terms. People will be happy to just get their money back. Impossible? Read the snippet from Mish below.
2. Extend credit to your customers, with no interest. The longer they take to pay, the harder the currency with which you are paid. It will take awhile for your competitors to figure out you are making money at this, as their customers gravitate toward you.
3. Go cash. Keep as much out of the banks as possible, keep as much in circulation or in your safe as possible. Pay your suppliers cash if you can. if you have excess cash, loan it out at no interest with maturities dated to match your need, with such places as Kiva Zip and Community Sourced Capital.
4. Manage the lowering of your prices as your costs go down... costs will fall faster than you need to cut prices, meaning the money needed to start-up is financed by your customers. You are not competing on price, because you will still be much higher than the commodity prices, and those will be falling too.
5. Personal taxes will go up massively. In Greece this is called austerity, less services for more money. Your only defense is self-employment, since as usual, it is the wage earners who will get nailed. The longshoremen have solid economists on their side of the table. They see where this is going. I can't wait to see if the agreement gets passed, and what it says. it no doubt anticipates this.
So now what two generations thought is true, the opposite is in play. Pay cash, even for a house, because even at zero interest rate, you are losing. Housing prices will drift down as they drifted up. Dump the credit (and debit) cards. There will be more to reflect upon, but that is it for now.
I think the next forty is going to be much better for small business than the last forty. The pendulum is swinging back.
Feel free to forward this by email to three of your friends.
The turning point is from inflation as a policy to deflation as a reality. What was once programmed, the opposite is now out of control. For every action there is an equal and opposite reaction? In physics maybe, but in economics there is regression to the mean, which says you will overrun average, stable.
Inflation is when you create too much so it takes more to buy the same. If there is 1000 units of currency today, and a loaf of bread is 1 unit, then you print another 1000 for a total of 2000 the next day, then a loaf of bread will cost 2 units. That is the basic idea, but of course why do it? Time. It takes time for the extra 1000 to spread out, the first get the new 1000, whose job is to spread it, govt and banks, win by getting rid of debts priced at 1 before the bread gets priced at 2. Larry Lunchbucket gets a tax he never voted on.
What they discovered in the late 1970s was you could also inflate credit, that is nothing. Whereas someone might assess Chase Manhattan to be viable at 100 billion in credit, Chase might lend out 200 billion, off the books. And completely legal. I have the handbook explaining how and giving permission.
Mish Shedlock's contribution is to point out this matters, it behaves just like currency inflation.
Everyone else is largely mystified as to what is happening in the economy, but not those who have figured out we are in deflation. Those who are noticing it are mystified, unless they have read Mish.
Insurers have made 4% promises but long-term bonds yield close to zero.
Benjamin Serra, senior credit officer at Moody’s said "They are increasingly constrained by the high level of guarantees sold in the past." 2015 will be a “pivotal and challenging year” for Germany’s life assurance industry. Moody's maintained a “negative outlook” for the sector.
As of Friday, 10-year German bonds yield 0.39%. Five-year German bonds yield -0.07%.
Recall that the ECB pledged on January 22 to buy 60 billion euros ($68 billion) of assets a month for at least 19 months in its inane pledge to avert deflation. Buy from where?
Indeed!
"If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the CEO of Belgian insurer Ageas.So now even if your pension is fully funded, and it is not, it cannot make enough to pay you your annuity. Deflation is now a mechanical thing, policy cannot do anything about it.
RBS strategists see a 40 percent chance that ECB purchases would help turn German 10-year Bund yields negative this year.
So what is deflation? It too is a monetary event, in the loosest sense, wherein if there are 2000 units of currency today, and a loaf of bread is 2 units, then you destroy 1000 for a total of 1000 the next day, then a loaf of bread will cost 1 unit. And what is the operative issue? Time. Here Larry Lunchbucket wins. And now it is out of control.
You business strategy is twofold:
1. Stop borrowing at interest. This will get easier for a long while, as less credit goes looking for worse terms. People will be happy to just get their money back. Impossible? Read the snippet from Mish below.
2. Extend credit to your customers, with no interest. The longer they take to pay, the harder the currency with which you are paid. It will take awhile for your competitors to figure out you are making money at this, as their customers gravitate toward you.
3. Go cash. Keep as much out of the banks as possible, keep as much in circulation or in your safe as possible. Pay your suppliers cash if you can. if you have excess cash, loan it out at no interest with maturities dated to match your need, with such places as Kiva Zip and Community Sourced Capital.
4. Manage the lowering of your prices as your costs go down... costs will fall faster than you need to cut prices, meaning the money needed to start-up is financed by your customers. You are not competing on price, because you will still be much higher than the commodity prices, and those will be falling too.
5. Personal taxes will go up massively. In Greece this is called austerity, less services for more money. Your only defense is self-employment, since as usual, it is the wage earners who will get nailed. The longshoremen have solid economists on their side of the table. They see where this is going. I can't wait to see if the agreement gets passed, and what it says. it no doubt anticipates this.
So now what two generations thought is true, the opposite is in play. Pay cash, even for a house, because even at zero interest rate, you are losing. Housing prices will drift down as they drifted up. Dump the credit (and debit) cards. There will be more to reflect upon, but that is it for now.
I think the next forty is going to be much better for small business than the last forty. The pendulum is swinging back.
Feel free to forward this by email to three of your friends.
0 comments:
Post a Comment