Pondering Orlov's Five Stages of Collapse

Dmitry Orlov blogged an interesting piece entitled The Five Stages of Collapse. It's well worth a read if you can tolerate doomer porn. The best part is the five-stage model itself. His notion is that social collapse follows five progressive steps, and that although collapse may be arrested at any one of the stages, each stage leads to the next one - a progressive breakdown, if you will.

Happily for us civilised folks, collapse usually is arrested before it progresses very far. In wealthy, developed countries even if this Depression turns out to be a doozey, and the first of many more to come, odds are it won't take us very far down the path of social disintegration. We would like to justify this optimistic opinion using Mr. Orlov's own model.

Orlov's first stage is Financial Collapse: "Financial institutions become insolvent; savings are wiped out, and access to capital is lost." This is what most of the world (China excepted, perhaps having a reprieve for the moment due to its many bubbles) is experiencing at present.

We agree with Orlov that governmental policy is not favourable to arresting this stage, and what will come next is what he terms Commercial Collapse: "Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm."

If hyperinflation takes hold because unsupportable debts are monetised, then this scenario may very well play itself out as Orlov describes it.

On the other hand, if the USA and other rich economies maintain non-hyperinflating currencies, the combined result of unsupportable debts and misguided government policies will be catastrophic loss of household income. Goods may not become scarce, but the means to purchase them will.

In either case, whatever government may decide to do or not do about the situation, the people themselves can arrest Commercial Collapse by any number of actions to ensure the continuing flow of goods and services. The so-called informal economy of legal goods and services delivered 'under-the-table' already provides one template for a popular, self-organising market. Many civic organisations such as churches, clubs, co-ops and farmer's markets can operate as clearinghouses. Barter banks and scrip systems of 'bona fide' money can spring up where they do not already exist. Thus the solution to arresting Commercial Collapse absent highly-unlikely, successful government intervention, is for people to set themselves up very much in community, and to become a lot more creative than they are used to.

We suspect that enough people can rise to the occasion. Only a tiny vanguard of creative types is needed to successfully establish functional patterns of mostly-local commerce.

It should be noted that under this scenario, Commercial Collapse would be arrested at a level of affluence that is only a fraction of what most inhabitants of the World's developed countries are used to. It won't be an easy adjustment by any means. Two classes of persons are most vulnerable: the poorest members of society who lack work and social skills; and affluent members who derive their livelihoods from access to those institutions which are not likely to survive the Commercial Collapse.

More Evidence USA Entered Recession in 1999

Some months back we posted evidence that the last 10 years have been a period of recession in the USA, at least for the majority of the population. Today we present more.

In this Clusterstock Chart of the Day, one can see the amount of income that comes from Government Transfer Payments has risen from about 12% of all income to 18% over the last 10 years. This is a 50% increase.

We also offer John Williams' Shadow Government Statistics showing a GDP essentially in recession from 2000 onwards.

As we said before, the US economy is in worse shape than is generally recognised. It would appear the 'recovery' from the last official recession was chimerical. The debt-fueled consumption bubble only set the stage for a stronger crash.

The Clusterstock commentary helpfully points out, "thus the process of household debt becoming government debt takes place." In the debt-bubble, households borrowed money and instead of investing it, spent it as if it were income. Now those debts must be repaid or defaulted upon. In order to prevent a contraction of credit and debt-deflation, the US Government is borrowing enough to keep all debts in the aggregates rising. Among other ways of spending this borrowed money, it is handing out a larger dole - replacing, at least in part, spending money households can no longer borrow from home equity loans and credit cards.

At some point in the future not to distant, we expect the Government's ability to create new credit effectively cut off. At that point the inevitable debt-deflation will come - though we anticipate the debt will not be paid off, but rather destroyed by hyperinflation.

Caution versus Confidence

Sometimes caution is a virtue. When things are going from bad to worse, one does not want to embark on boondoggles. Resources need to be conserved for redeployment in better times.

One of the functions of money historically is its use as a store of value. When prices are low enough that the desire for a good deal overcomes the fear of loss, money is pulled out of hoarding. In 1933, US President Roosevelt signed an Executive Order "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." Evidently, Mr. Roosevelt decided that by forcing money out of hoarding, the same happy result would occur as if the money had come out of hoarding voluntarily.

We believe this was a critical error of judgment, and a factor which prevented the cure of some critical failings in the US (and indeed world) economic systems which caused the 1929-1939 Depression. We agree with the Austrian school of economics theory that excessive credit expansions are the primary cause of depressions. The excesses of these expansions are worked out primarily by a dissolving of the banking system and a subsequent reboot, so to speak. The policies of the Hoover, Roosevelt, Bush II, and now Obama administrations (and their international counterparts) did not allow the liquidation of the banking system. On the contrary, the popular solution to the depressionary stress is rescue of the failed banking system and further expansion of credit.

Classically, metallic money has acted as a brake upon credit expansion. In the Great Depression of 1929-1939 this brake became an inconvenience and was discarded. Since then, the world economy has been riding a runaway train of credit expansion. Sooner or later (and we vote for sooner), it will come off the tracks when spurious 'investments' do not produce intended yields.

Is the 2007 Depression then 'the big one'? It will be if world leaders decide to void the world's paper money supply of what little store-of-value-ness it has left. Zero percent interest rates and debt monetisation (both in progress) are a good start in that direction. Seeing their money become nothing other than something to spend, the world's citizens will dutifully spend away and the greatest crack-up boom ever will ensue, followed by the inevitable hyperinflationary catastrophe.

We would like to hope some other scenario is possible, but it seems less likely by the day.

Tragedy, or Farce?

With the latest joke rolling out of the Zimbabwe Central Bank, we wonder why such ridiculousness is able to thrive so long. In all honest, we feel that a $100 trillion note is probably Farce, but we really cannot be certain.

The history of Zimbabwe is most definitely one of Tragedy: a nation in continual economic collapse, aided and abetted by non-stop embargoes brought on by the United Kingdom and the United Nations, among others. The fine, upstanding governments of the world really know how to dole out "change," don't they?

It seems in history that every Tragedy has a correlating, and larger, Farce. In this case, the Farce is the embargoers -- the United States, the United Kingdom, the European Union -- following in the footsteps of the Tragedy they helped create. Many policies, such as price controls and rapid expansion of national money supply, have been well-tested by Zimbabwe's central bank.

In the flaming tailspin of the 2007 Depression, this collection of nations are flirting with the very same financial policies that Gideon Gono used to make Zimbabwe's hyperinflation-from-Hell. As the Wikipedia article notes, perhaps ironically, Mr. Gono is a "proved deflation-fighter." Mr. Bernanke, of the Federal Reserve, M. Trichet of the European Central Bank, and the Rt. Hon. Mr. Darling of the Bank of England are all working to fight deflation, as well.

They might not have noticed, but they're following in the footsteps of a failed nation.

Don't Buy a New World Map Anytime Soon

Due to circumstances beyond our control (i.e. we screwed up), we regrettably did not post yesterday. Rest assured that those responsible for this travesty have had their dessert privileges revoked.

With the increasing potency of the 2007 Depression shaking the starch out of the world economy, a surprising amount of dirt is presenting itself. Take Bernard Madoff, whose nimble fingers seems to have found every pie. But in this game of musical chairs, it won't be just individuals and organisations which end up with no chair beneath their tush. With the global implications of this depression, we expect some nations will be among those looking stupid when the music stops.

Take the obvious, our favourite whipping-boy for all things hyperinflationary: Zimbabwe. With several name-changes behind it in the recent past, this much-embargoed country may be due for another. There are also the faux nations of Somalia and Yemen, where the 'official' government draws lines on a map of where they'd like their sphere of influence to be.

However, the bigger threats, at least according to the United States military, are Pakistan and Mexico. Neither nations are the paragons of stability, as both are wraked with violent resistance against the central government: Pakistan is fighting 'The Terrorist'; Mexico has lost chunks of Chiapas to the Zapatistas. Mexico is also facing the collapse of their Cantarell oil field (which suffered a 36% drop in 2008 production alone), upon which the government is heavily dependent for its budget.

A facet of world events we've been missing for a while is the novelty of a brand-new world map. Our only wall-sized map, for instance, still has the U.S.S.R. on it. And just when we were beginning to think about getting a new one, the whole world goes into a depression. Thank heavens, we say: now we have an excuse to not get a new map!

Dark Clouds over the Eurozone

In a wee little article, Bloomberg released the news that the United Kingdom will not be allowed to join the euro. As a friend of ours noted, the shorter the article, the worse the news. In this case, it means that the European Union is going to let the pound sterling hang in the wind, as it were. This will not be good for the pound, of course. One of the big hopes for the pound was the possibility for exchanging them in for new, shiny euros.

British Parliament, figuring they have nothing to lose, is deliberating on whether or not to loose the dogs of war: quantitative easing. By allowing the Bank of England to delay its reporting of the amount of money it's pumping into the U.K. economy by a month or so. It's not like the Bank knows what it's doing anyway, but this move ensures the pound sterling will die a screaming, hyperinflationary death.

As if to rub salt in and rub sandpaper over the festering wound is this charming piece from the London Times. The action of taxing savings accounts will amount to nothing more but confiscation, a rape of savers in order to 'restore prosperity.' We suppose the mindset is, 'if you won't spend it, we will!'

Although this problem is presently only the United Kingdom's, it is not isolated from the rest of the Eurozone. If it appears that the Bank of England's efforts are working, the rest of the European Union will not be far behind in implementing similar policy. As central bankers are a reactive lot, and not anticipatory, the Eurozone will not see the doom of the pound sterling -- and indeed the euro itself -- until hyperinflation has already murdered the currencies.

Pay Now or Forever Hold Your Peace

In previous posts, we and our co-writer have argued that housing values will make a serious face-plant on the road ahead (see this article, and this one as well). Put concisely, just about any mortgaged house in the United States, and indeed the world, will end up 'under water' in the near term (i.e. the mortgage is for more than the house is 'worth').

We turn at this point to the Washington Post, which has an article about Ms. Elizabeth Small. Although the article does not make it clear, she's probably worth around $1.5 million or so... until recently, that is. Now, she has lost $1 million since 2000, including $200,000 since April 2008. She can no longer afford to pay her mortgage payments and living expenses off of her investment income, and Social Security -- surprise! -- doesn't provide all that much security, after all.

To defend her dwindling capital base, she reported she was looking into certificates of deposit, or bonds. Last we checked, both those 'investments' were paying 0%... Her course of action -- which quoted professional money managers didn't even think to recommend -- should be to either pay off her mortgage, or walk away from her house. Ms. Small, we think, is in a situation similar to other people: she's not taking the best step of all, which is to pay off debt, or default.

We suspect the monetary powers-that-be will attempt to rescue people like Ms. Small with hyperinflation. Hyperinflation will reduce the value of the mortgage payments (or perhaps even the mortgage itself) to meaninglessness; say, a caramel macchiato, with an extra shot of espresso. However, the benefits of the debauch of the currency will only accrue to those who can maintain their income, and have it go up roughly in lockstep with the rate of inflation. Needless to say, it would be a Pyrrhic victory to those few who pull it off. We regret to inform Ms. Small that she will not be one of them.

We Scared Ourselves

Yesterday's post about dealing with hyperinflation got us scared. So we will tell you about two action steps we are beginning to implement immediately.

The first step is to lay in a one year supply of non-perishable food and basic consumable items. We will maintain this inventory and rotate the stock. Our inventory consists of things like 100 pounds of rice, 100 pounds of flour, 100 pounds of oats, and so forth.

We imagine several benefits from this programme. First, is that it is probably one of the best uses of cash. If stuff explodes in price, we will regret hanging on to our little dollars. Second, it provides an emergency ration we could use to keep being reasonably well fed if shortages should develop. Third, it will lay in a stock of useful 'trade' items such as food, soap, razor blades, etc. More than once a neighbor has knocked on the door asking for a roll of toilet paper. Next time we'll ask for a jar of herring, or whatever, in return.

The second step is to keep an eye out for things that are 'too cheap'. There is much liquidation going on as many businesses fold. This makes for a plethora of odds and ends that get sold below cost at places like Big Lots (and even Wal-Mart from time to time). Additionally, more good, cheap stuff is pouring out into our neighbour's lawns during rummage sales. It's an art to know when to pounce and 'buy it all', and when to avoid buying something one won't use and probably can't parlay into something one will.

We suspect the coming hyperinflation is going to turn a lot of people into peddlers. It's a tried and true survival strategy in hard times. It's also a way people can work together - swapping an extra candle for a chocolate in order to maintain a modicum of creature comfort in a dark hour.

The Trauma of Making Money in Hyperinflation

As we were working today, eking out our honest dollar, a thought occurred to us: how will we get that dollar when hyperinflation hits? Sure, we'll be making something, but as the people in Zimbabwe have discovered, that something might not be worth a whole lot by the time one gets to the store.

Let's look at a simplistic business model: buy inventory at price X, sell at price Y, lock in profit at a comfy 7%. What happens when the inflation rate in the time between the purchase and sale is 7%, or -- especially -- 14%? Not being able to replace the inventory for less than it sold for, one loses on every sale (but makes up for it in volume, we suppose).

A similar thing will occur in wages; one may indeed make $25 an hour, but by the time the paycheque is cut and the tasty eats (extra fries, hold the mayo) from McBurger Kong costs $25, the apparently higher pay is pointless.

We like our eats, and our apartment, 'n stuff, and we cheerfully work to keep all that going. Right now, with inflation relatively 'stable,' it's easy to budget our expenses as a percentage of our income. It'll be a different story, when inflation is burning through cash faster than Bernard Madoff. Contracts, rent, interest, profit margin... all these things will become very, very different in the coming year. And we are very, very worried about that.

You should be too, dear Reader.

What is Deflation?

There is, at present, a raging debate in the blogosphere and elsewhere as to whether the economy has entered a period of inflation or deflation. The conflict is not helped by the fact that there are no generally accepted definitions of these two concepts. We will attempt to create a definition that will provide a framework for analysis of various viewpoints.

First of all, the most useful definition of inflation and deflation would explain them as two sides of the same proverbial coin. A naive definition would call inflation, rising prices; and deflation, falling prices. Unfortunately in the real world, the prices for all sorts of things rise and fall continuously for a wide variety of reasons. Many analysts attempt to reduce their definitions to narrow, easily observed phenomena, i.e. official defined money supplies, or indices of consumer prices. Much of the contention arises over what is being observed.

Inflation and deflation could be said to be something that is hard to define but, like pornography, we know it when we see it. In that spirit, we define deflation as pervasive, structural falling of costs as measured by the currency across a broad range of economic activity; and inflation as its inverse.

By pervasive, we mean costs therefore do not just refer to retail prices, but also asset prices, wholesale prices, producer prices, and most critically wages and rents (including profits and interest). By structural, we mean that economic activity is inherently complex. Making money has many costs embedded within it, and what one pays out axiomatically ends up as many multiple others' income. This aggregation of costs, wages, interest, and so forth we call the structure.

Is deflation happening in the 2007 Depression? What costs have fallen so far? Obviously, the cost of many securities, houses, and commodities. Not so obviously, the cost of interest on national debts (with some notable exceptions, such as Iceland), and corporate profits. What about costs that are rising? The U.S. minimum wage went up in 2008 by 12 percent, and in 2009 will be going up a further 11 per cent; U.S. Postal first class stamps; and, as a personal example, our water and sewer utility service.

The picture is once again, conflicting trends. Over time, one of these trends will emerge the 'winner'. In the mean time, falling prices of certain things might be called 'deflationary', but that is very conjectural. For example, if the price of a commodity falls so much that it is unprofitable to produce it, the fall will simply be what is known as a price spike down. The price will then have to rise again, if people want to continue using the item. This is hardly deflationary.

Likewise, incomes will likely soon be shown to be falling, and some may call that evidence of deflation, but it might just be people becoming poorer. If what people want to buy does not also become more affordable, then there is no deflation.

It is our opinion that the 2007 Depression will probably not be deflationary. Two significant factors are at work to ensure that outcome. First, it is the stated objective of monetary authorities everywhere to prevent deflation. Second, many costs (such as minimum wages or social security benefits) are fixed by law, and even more costs, contractually over long periods of time.

It is also our opinion that the 2007 Depression will probably be, overall, strongly inflationary, if not even hyperinflationary. We believe that the overhang of money, and money-like securities (bonds, CDs, money market funds, etc.) from the bubble years combined with central bank efforts to prevent deflation will create a surplus of currency chasing a quantity of goods and services which is declining due to contracting production. In other words, when more money chases fewer goods, the outcome is inflation, not deflation.

Avoiding Conceptual Traps

A depression is a confusing thing. Many things which were apparently normal one's whole life aren't happening any more. Economic growth and 'progress' seemed like orderly, lasting processes. Disorder and breakdown now abound. There is a tremendous temptation to renormalise observed events into patterns that just aren't there. Patterns create a sense of place and order; lack of them causes anxiety.

We would like to take a look at a few conceptual traps that will ensnare the unwary. These traps are created in one's mind in a desperate effort to carry on as usual in the face of circumstances that require a change of strategy. Change is difficult - the 'same old' is easy.

The Value Trap is claiming many victims even as we write. The Value Trap happens when the prices of an asset falls to a level which seems like a good deal. Buyers who may have sensibly avoided 'bubble' pricing, now buy what appear to be bargains. Unfortunately, prices keep falling. Buyers of houses with mortgages find themselves soon 'under water', with their downpayment wiped out. It is imperative to adjust one's frame of reference as to the value of a prospective investment, and if something seems like a good deal - beware.

Institutional Security is misplaced confidence in employers, pension funds, governments, and so forth. Many of these institutions are in really terrible shape financially, and will not be able to deliver on their promises (the State of California comes to mind). There, a lot of people have been banking on long-term employment, contracts, and pensions that will not last. Do not assume even that U. S. government, or any other national government, will fulfill its obligations. It is critical under the present circumstances to develop self-reliance. Could you support yourself if left to your own devices? If presently self-employed, do you have a broad base of customers and suppliers?

The Sound Dollar Trap results from putting one's faith in the U.S. Dollar (or any other currency). Dollars steadily lose purchasing power (for a discussion, see this article and pay special attention to Figure 1). Currencies are themselves institutions (in a broader sense) that are unquestioned, background 'realities'. Keeping some currency is a necessity for most transactions, but it is not a vehicle for any kind of long-term savings or investment. Just because it may have done less badly recently than other assets, does not make it in any way 'good'.

Bailout Rebound is our term for the notion that "happy days are here again" due to some new government program, or bailout. This manifests itself in investment markets as Bear Market Rallies - upward price movements on some 'good news' in spite of the pervasive trend downwards. One wants to believe that the 'bottom is in', that markets are recovering and it's time to invest, or buy that bigger house one has been wanting. One wants to latch on to any sign of an emerging trend towards recovery. In the 2007 Depression there will be many bailout rebounds, false dawns followed by greater darkness.

A variant of the 'rebound' is Dodging Bullets. This is a type of wishful thinking that results from surviving incremental adversity. Just because you survived the first round of layoffs doesn't mean you'll make it through the next. If a mortgage has been renegotiated, the borrower will still likely default (see this article). While maintaining a positive attitude is always beneficial, do not delude yourself with survival bias. Remember that we tend to hear stories of survival only because non-survivors are not able to tell their stories! Things look bad all around, and they are probably going to get worse. The 2007 Depression is going to mark a major shift in everyone's modus operandi. Vigilance and caution are the watchwords of the hour.

Finally, we would advise bewaring the possibility of a Crack-Up Boom. A crack-up boom happens when the people lose faith in their currency due to accelerating inflation. When severe inflation is universally acknowledged, people will buy things - anything - to get money out of their hands and into something that won't lose as much value as the money does. This repudiation of currency creates an enormous demand for goods, and the consequent increase in production looks like a return to prosperity. But don't be fooled if this event comes to pass. It would be but a phase of the 2007 Depression as it morphs into a hyperinflationary depression.

Investing in a Depression

Income loss is the one fixture of every depression in recorded history, and so too will the 2007 Depression severely lower income. Whether through inflation or deflation, it is bound to occur. Income from investments is just as threatened by the 2007 Depression as income from employment. One only needs to look at: the drop in corporate earnings; the falling stock market; the minuscule yield on bonds, including government bonds; the increasing possibility of default of bonds, including government bonds; meaninglessly low interest rates on bank deposits.

In deflationary depressions, like the 1929 Depression, cash is king because its purchasing power increases. This can happen through several ways: its market value increases (as in a hard money system); the velocity of money drops (i.e. the speed at which people spend money for stuff); supply physically decreases (as theoretically possible in a paper money system, maybe); some combination of all the above.

Although it is possible that in the 2007 Depression "cash is king," we are of the opinion that cash will be trash in the very near future. Because the Federal Reserve is putting its considerable might into preventing deflation at all costs, we feel that inflation is the name of the game. This will happen through several ways: physical supply of money will expand at an accelerated rate; the velocity of money increases; or a combination of the two.

As all but one historical paper money experiments have ended with a hyperinflationary depression, investing will take on a new face. It will not necessarily be to increase wealth; rather, it will be to lose as little as possible, or hopefully preserve it. Gone are the days of making investments which will increase steadily in value. As one individual of our acquaintance put it, when the water goes out before a tsunami hits, don't go onto the sea bottom and fight over the fish. Head for higher ground instead.

We feel very strongly that the tsunami will come in after the synthetic CDOs we wrote about in yesterday's post start unwinding. Between then and now, however, 'higher ground' may be a difficult thing to find. Investment markets of all varieties are in disarray, and supposed safe havens (bonds, precious metals, and select foreign currencies) don't look so good. One could take cynical risks, and throw one's lot in with one of the biggest swindlers in human history: JP Morgan. When their synthetic CDOs start paying out, they might be the biggest winner... or they might not be. Time will tell.

How Likely is Hyperinflation in the USA?

Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.

Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?

Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.

Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.

The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.

We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.

Preventing Deflation Won't Stop the Depression

The world's monetary authorities are, at present, desperately trying to stop "deflation." Deflation is a complex and controversial topic, but suffice it to say deflation is the perception of falling prices. The theory behind central bank actions is that when prices are perceived to be falling, one becomes reluctant to invest or even spend on consumables, when just waiting will get one a better deal.

Obviously, stock and commodity prices have fallen dramatically in the last few months. Most real estate has been falling for a couple years now. Consumer prices are beginning to fall as well. Can this process be stopped? Actually, yes. Central banks can ensure that the money supply rises fast enough to devalue the money in one's pocket, making assets, goods and services again an attractive use of that money.

Can arresting deflation stop the 2008 Depression? No, it cannot. Depressions are a self-reinforcing process of declining income. Wages have been falling in purchasing power for decades. Households responded at first by sending more of the population into the workforce to support the household. Families with a single 'breadwinner' are now quite rare. Lately, workers have taken to eliminating savings, borrowing against the value of their homes, as well as taking on increasing amounts of consumer credit in an attempt to fund their spending. This is, of course, not sustainable. In fact, defaulting consumer debt will be a serious drag on the world economy for quite some time. A further drag is rising unemployment, and over all personal income in decline.

At this point, the economy will not recover until several things happen: the losses from bad investments are recognised; failing undertakings have been liquidated; savings rates return to healthy levels; employment and the purchasing power of wages begins to rise. Current government policies are not promoting any of these conditions. If anything, the policies are working against the first two conditions.

It is possible that we are witnessing an effort to 're-inflate the bubble.' Perhaps if the public sees that their houses and investments have stopped falling in value, they will pull out their metaphorical charge cards and dig themselves even deeper into debt. Leaving that central banker fantasy aside, we believe that conventional economic theory is incorrect. The current decline in prices is a symptom of economic contraction, a destruction of purchasing power. Alleviating the symptom will not cure the disease. Denominating prices in a debased currency will do nothing to help the current situation, and even risks igniting an economy-destroying hyperinflation.