Well, the New Year got off to a rocky start across the world markets. Why it has taken so long for stocks to react to an obvious weakening global economic environment is beyond us. We write this, knowing that it may take even longer still for reality to catch up to the world’s financial markets.
Part of the reason for the delay, of course, is that the world’s central banks have been fighting off reality with a coordinated series of actions designed to prop up financial markets for as long as possible.
Will 2016 be the year they finally lose control of the “markets?” It seems increasingly likely.
Along with that loss of control should be a well-deserved loss of confidence in the ability and duty of the central planners to try and control both the direction and value of practically every market under the sun. We remain confident that in the end, people’s confidence in the Fed, et al., will prove to be among the most misplaced in all of history.
Why Deflation?
We’ve been tracking the deflationary wave for a while. For the past couple of years we’ve been watching and writing about the collapse in commodity prices and increasingly been noting the growing weakness in junk bonds and emerging market countries.
Deflation is what happens when money and credit are shrinking versus expanding. When money and credit shrink, a debt-based money system switches from expansion to collapse. There really isn’t any middle ground. Either all of the mountains of prior loans can be rolled over and serviced with new money being pumped into the system or those debts begin to go bad. First at the periphery, slowly, and with the weakest members first, such as emerging market countries, low-grade bonds, etc. Then the defaults happen faster and faster and closer and closer to the center until everything is called into question and you get another ”Lehman moment” — meaning the collapse of a major institution (or possibly a sovereign state next time) that causes everybody to suddenly reevaluate risk at the same time.
Will we get another Lehman moment? Undoubtedly.
So if you have a mountain of debt that is too big to be paid back out of future proceeds resulting from rapid economic expansion, what are the alternatives? There are only two: default or inflation.
by cmartenson 
