Column #471       September 6, 2024Red Circle with Cross

Americans do not know much about deflation. They are aware of inflation which they assume is rising prices. Yet rising prices are only symptoms of inflation, not the cause. What can be said about inflation is the opposite of deflation.

Since our monetary system is a debt-backed system, the money supply is determined by debt. As consumptive debt expands faster than the growth of available goods and services—prices increase. When debts shrink faster than the supply of available goods and services—prices fall.

Inflation requires deliberate decisions to increase debts. Other than businesses struggling to stay alive, the taking on of debt is not forced. Deliberate decisions to borrow by a majority of entities is required for total debt to increase. It’s usually gradual unless the government steps in and borrows and spends like drunken sailors like we’ve seen since 2020.

Deflation is different. Deflation can be caused by a majority of entities reducing their debts. But our world’s modern “woke” economies are only “healthy” when consumers and businesses are borrowing more than they earn to consume more goods than they could normally. So if the debt structure starts to decline, business conditions will deteriorate. Incomes will shrink making debt service more onerous. This is when deflation really comes alive and becomes an uncontrollable independent driver that implodes in upon itself.

During a recession borrowing stops, debts are not renewed, debts are called in, people and businesses declare bankruptcy, and the debt structure unwinds on its own. The last time our country experienced a full fledged, imploding deflation was from late 1929 until the middle of 1933. Unlike today, that deflation followed 11 years of relative price stability. Yet even though the consumer price index (CPI) had been relatively stable, the CPI dropped from 17.1 in 1929 to 12.6 in 1933—a 26.3% decline that rolled prices back down to what they were in 1917.1

A deflation nearly happened again in 2008. But the Fed’s excessive printing and the government’s prolific borrowing was able to postpone it. So it has been 90 years of borrowing and spending since the last unwinding of debt. Of course, today’s debt ratios are more extreme across the board compared to what they were in 1929 which increases the odds of another deflation. Trees don’t grow to the sky.

I bring up the deflation/depression argument because today’s financial/monetary risks are real. The stock and real estate markets are priced at historically all-time high extremes. Market peaks do not come with billboards with big red circles with crosses on them. They occur with great enthusiasm and expectations of better days ahead. This is where we are now. People are wildly enthusiastic about spending and investing.

One of the riskiest times of year for stock prices is from early September through October. Markets are spongy right now and could possibly crash as Trump’s margins over Harris improve. That’s because Trump is expected to create huge change from the status quo in many ways.

The closer Trump comes to winning the election with John F. Kennedy Jr. on his team, the more the deep state’s titans of industry will be terrified. That’s because any changes in the business tactics of the pharmaceuticals, healthcare, and food industries that keep people addicted and sick will be highly disruptive. Everything the deep state has in place is a delicate balance of powers that can collapse with even minor changes. Keep in mind that the elitists, combined with their deep state actors, control everything: the banking system, the stock markets, real estate, the Fed, MSM, universities, foreign policies, search engines, and the courts. Their wealth depends on the status quo—their status quo.

With their power being threatened by a populist Trump with a Kennedy as an advisor, the deep state will try to stop Trump no matter what. But if the ground swell of middle and lower class voters have their way, the chicanery of the past 50 years will end. Then as the deep state is eliminated the elites will fight each other for survival.

The stock market is flying in thin air supported only by dreams of selling to greater fools rather than relying on strong fundamentals of sales, earnings, low debt, and stability. Today’s sales and earnings are bloated by consumptive debt. Today’s massive debt loads, burdened with high interest rates, create an unstable environment. This is the breeding ground of deflation.

How much downside risk is there in the major stock indexes? It’s not unrealistic to expect a 50% crash over a few weeks. A drop of that magnitude in the average S&P 500 index price-to-earnings ratio is nothing. It was as low as 6.8 in 1980 and is 28.38 today. With today’s lofty valuations, a 50% crash would only be one of several bear market legs. Over a period of a couple years, the entire drop could amount to 76% (28.38 down to 6.8) which is comparable to previous bear markets in the past.2

Being prudent calls for defensive tactics. This is a time to build cash and buy three- and six-month U.S. Treasury Bills. Then get some popcorn and watch from the sidelines.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

For additional reading:

1. Consumer Price Index for All Urban Consumers (CPI-U) from 1913 to 2024 from US Inflation Calculator

2. S&P 500 PE Ratio from multpl.com