from Peak Prosperity:
The signs of deflation are now flashing all over the globe. In our estimation, the possibility of an associated financial crisis is now dangerously high over the next few months.
As we’ve been saying for a while, our preferred model for how things are going to unfold follows the Ka-Poom! Theory as put out by Erik Janszen of iTulip.com.
That theory states that this epic debt bubble will ultimately burst first by deflation (the “Ka!”) before then exploding (the “Poom!”) in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison.
First an inwards collapse, then an outwards explosion. Ka-Poom!
We’ve been tracking the deflationary impulse for a while, and declared deflation the winner back in July of this year.
A Failed Strategy
What exactly do we mean by deflation? Back in 2008 the central banks of the developed world, as well as China, had a choice:
- admit that prior policies geared towards encouraging borrowing at a faster rate than income growth were a horrible idea, or
- double down and push those failed policies even harder
As we all know, they chose option #2. And so here we are, just 8 years later, with nearly $60 trillion in new debt piled on top of the prior mountain — while GDP grew by only $12 trillion over the same time period:
[Note: Global nominal GDP is projected to be $68.6 trillion in 2015, virtually unchanged from 2013]
In other words, instead of saying to ourselves: Hmmm…. it was probably a terrible idea to pile up debt at 2x the rate of income growth, what the world did instead was to double down on that terrible idea and pile on more debt at 5x the rate(!) of nominal GDP growth.
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