Financial and risk bubbles don't pop in a vacuum–all the phantom collateral constructed with mal-invested free money for financiers will also implode.
If there's one absolute truism we hear again and again, it's that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generation the exact opposite: deflation.
I will leave the debate as to what constitutes deflation to my economic betters. My definition of deflation is simple: deflation is any increase in the purchasing power of nominal wages.
By nominal I mean unadjusted: $1 is simply $1. It is not seasonally adjusted or adjusted for inflation/deflation or anything else.
When your paycheck loses purchasing power–that is, it buys fewer goods and services– that's inflation. When your paycheck gains in purchasing power–it buys more goods and services, even though you didn't get a raise–that's deflation in my terminology.
I find that purchasing power cuts through a lot of economic jargon and data-clutter: how much does your paycheck buy today, compared to last month or last year?
Since the economy is dynamic, purchasing power is constantly increasing or decreasing on a variety of goods and services. This bedevils any attempt to discern systemic inflation/deflation.
The Federal Reserve and other central banks desperately want inflation, even though it destroys the purchasing power of paychecks and savings, for one reason:in a system based on phantom collateral supporting ever-increasing mountains of debt, the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
The only systemic way to make it easier to service existing debt is to inflate the nominal value of money by debasing the currency. The net result of inflated money is a debt of $100 stays $100, but the face value of newly issued money keeps rising.
If a person earns $10 an hour, it will take 10 hours to earn the money to pay off the $100 debt. But if central banks debase the money so that it takes $20/hour to buy the same goods and services that were once bought with $10/hour, then it only takes 5 hours to earn enough money to pay off the $100 debt.
