Why It's Different This Time

Here’s the crucial difference between 2009 and 2007: While the government is still spending with reckless abandon, the consumer is rapidly deleveraging. Consumer credit fell for the fifth consecutive month in June, the Fed announced Friday. Credit outstanding fell by $10.3 billion in the month, to a total of $2.5 trillion. That’s more than double what the Street expected. Revolving credit, namely credit cards, fell by $5.2 billion — a record 10th month in a row of decline.

Now in a state of contraction since February, the average American is embarking on the longest credit pullback since 1991.

“We are clearly in an economywide deleveraging process that will last for years,” writes Strategic Short Report’s Dan Amoss. “We are not in a typical inventory-led recession. Sure, the next few years will not mirror the 1930s, because the government and central bank are debasing the currency to prevent a dreaded debt deflation spiral. We probably won’t have 1930s-style bank runs (although the FDIC is running dangerously close to needing to tap its line of credit with the Treasury to replenish its Deposit Insurance Fund).

“But make no mistake: We will pay for the inflationary bailouts at some point down the road with a currency crisis. Central banks cannot keep abusing savers and the bond market to this extent without eventually provoking a collapse in demand for paper money.

“A collapse in demand for paper money, not a decline in the ‘output gap,’ will eventually bring about inflation. We’ll see signs of it as real Treasury bond investors keep balking at these low rates at Treasury auctions, leaving the Fed to step in and monetize the debt. Eventually, there’s a risk that the Fed will lose the tiny bit of independence it has left and the printing press could come under the control of Congress, which would accelerate the endgame for the U.S. dollar. The market for gold-related assets will look ahead to this possibility.”