New Trend Underway: From Inflation to Deflation

The latest meeting of the G-20 concluded with the failure to reach consensus. Much to the chagrin of Tim Geithner who continues to push for massive sovereign spending, the European contingent basically said that stimulus is over and debt reduction will be the new game plan. In related news, Germany is having second thought about the bailout and may very well pull out. In China, the government has begun implementing measures to tighten credit in order to contract a huge housing bubble. All of these events taken together clearly point toward a large contraction of the global economy, credit, and money supply. The trend is about to change. Geithner, Bernanke, and the United States leadership remain on board the bandwagon of endless spending and stimulus, but if the threat of insolvency can force Europe to about face, it stands to reason that the United States will eventually follow suit. 

Later this summer, state governments from California to New York will bring their troubled budgets to Congress and the White House looking for billions of dollars which they need to maintain programs and services. With elections just months away, politicians will be hard pressed to deny aid. But with a calamitous oil spill, climbing number of foreclosures, downward pressure on housing prices and commercial real estate, a plunging stock market, and rating agencies downgrading everything in sight due to massive debt, its not a slam dunk that the government will come to the rescue this time; at least not to the extent that would have been possible in the past. 

Should equity markets plunge significantly, pension funds currently projecting insolvency toward the end of the decade would have to face such possibilities within just a few years. The feds simply don't have the money to plug all the holes; and if they create the money by creating more debt, the country risks the very real possibility of seeing the bond market attacked in the way that Greece is experiencing. For the time being, yields on 10-year treasuries are falling and will most likely continue to fall for several months. But if Bernanke and Geithner continue to call the shots, the additional spending will not only fail to ignite a recovery, it will eventually result in bond yields reversing and threaten the stability of the political structure of the United States of America. At some point, it is likely that Geithner and Bernanke will be terminated along with their expansionary policies and austerity will be forced on the country. It is going to be ugly. I hope the nation survives.