April 3rd, 2009

Around the beginning of the new millenium the world suffered huge losses in stock markets, mostly attributable to the speculative boom of the IT-sector. There are a lot of people around today who are still mentally scarred over the incredible losses that they suffered there. We all know of the response to this contraction - a strong lowering of interest rates that created a housing bubble in most of the west.

The losses suffered from the housing bubble are much greater and at the same time we've had huge bank-losses from derivatives and bad loans along with a very broad stock market crash. Now jobs are starting to disappear and people who are deep in debt stop spending money - furthering the fall in demand. This outlook is indeed grim - but the responses this time have been much more dramatic.

Just the other day the G-20 promised to throw another tsunami of money at this thing and with zero interest-rates and yet more money being thrown around - how can we not 'recuperate'? I know that I've said that things are bad - and they are - but by the looks of it, the crazy spenders in the governments and central banks could yet prolong this from being a total crash by another couple of years.

Very often during the last year there have been comparisons made with the great depression, where some have claimed that the actions taken back then were no good, since they didn't put a stop to the depression. Well, the situation is very different - back then the interest rates were never at zero, only briefly did they touch 2% and then stayed around 3-4% most of the time. Governments did not throw money around like today - one big reason for that would be the basis of money in gold.

Pretty much all governments of the world have vowed to spend money until this thing is over with. And why doubt them? They really have no restraints - except for the belief in the value of paper money. And this is where inflation comes in. As people become more and more aware that the boom is created falsely out of the printing presses, then as confidence in the money wanes, inflation will begin hitting us hard.

As paper money becomes more worthless everyone will finally be even more broke than they would have been if the governments would not have started throwing money around. But by then the problems will be so huge that the world would have to somehow start over - monetarily speaking.

Can anything stop the inflating depression from happening? Well, as I mentioned - the politicians might notice the danger in loss of confidence in the paper money; so the thing to worry about would really be if they actually start to show restraint - as paradoxical as that is! Because then they'll be doing what they did during the great depression, that is, just prolonging the agony. If we want to get this thing over with somewhat quickly it is either through severe inflation or severe deflation - not something in between. The politicians have taken the inflation road already, and although its certainly not good - it would be better if they would stick with it.

So, unless they show restraint - which I doubt - we will see an artificial boom in all assets in the coming years that will be followed by severe inflation and finally a complete break down of the system. I guess one important signal to watch closely would be if the auto industry will be bailed out - if not, then bunker down for a great depression deja vu!