Deflation Now. Inflation Later.

Stocks down another 104 points yesterday…measured by the Dow.

What’s going on…? What’s going on?

That was a song by Marvin Gaye. It was also the question the interviewer asked. Followed by, what’s going to happen next?

But those are questions no one can answer. All we can do is guess…speculate…and wonder.

“Deflation now. Inflation later” is what we’ve been saying for the last 4 years.

The interviewer seemed happy with the answer. And the elaboration:

“Japan now…but don’t be surprised when we end up in Argentina.”

What do Japan…Argentina…and the US all have in common? They can print money. And when their backs are to the wall, that is what they will do.

But that’s later, remember. Right now, investors are lending money to governments at the lowest rates in history. They do not ask anything more than to get the money back. Eventually. And since the US and Japan can print, they are confident that they’ll paid.

But what about Argentina? Turns out, Argentina borrowed in dollars too…and pledges to repay, in dollars. So, you might think you’d get the same interest yield in an Argentine bond as an American one.

But what’s this? The yield on the ‘Boden,’ which is what they call Argentina’s dollar bonds, is over 17% — which is more than 10 times what you get from a 10-year US note. What gives? Simple. Argentina can print pesos. It can’t print dollars. So investors are afraid that when time comes for repayment, the Argentines won’t have enough dollars on hand.

No such problem in the US. And as long as this recession or ‘contained depression’ continues…investors will probably continue to treat US debt like a mattress. You put your money in. You can get it out when you want. You don’t make anything. But you don’t lose anything either.

But how long will this Japan-like slowdown continue, our interviewer wanted to know?

“Hard to say,” was the reply. In terms of private sector debt, the downturn is taking out an amount equal to about 10% of GDP every year. But there’s still the equivalent of 100% of GDP of excess debt left to go before we’re down to ’70s levels.

If that’s where it is going, we’ve got another 10 years of travel — at this rate.

Meanwhile, in the near term, it looks like the US economy is headed into another recession. That’s what usually happens when retail sales go down for 3 months in a row.

Seventy percent of the US economy is consumption. So, when the consumers stop buying, the economy goes down. Lakshman Achuthan, who runs Economic Cycle Research Institution, says he thinks a recession has already begun.

And when the economy goes down, generally, stocks go down. The little sell-off we’ve seen so far is nothing. The Dow hit 13,000 in 1999. It has gone nowhere since. And now, it should begin to sink.

As mentioned, retail sales are falling…
Corporate profit estimates are going down…
The Chinese growth rate has dropped 6 quarters in a row…
America’s corn and soybean crops have failed…
Family income is in decline; never before has it gone down over such a long period (12 years)…
US bond yields are at their lowest ever, with the 10-year at 1.39%.

Came the question: “Well, what should our viewers do?”

“Sell stocks,” was the answer.

Regards,

Bill Bonner
for The Daily Reckoning