Source: Wikimedia

Dear Diary,

A faint breeze blew through the US stock exchanges yesterday. A few leaves fluttered.

But Diary readers want to know: When is the next hurricane coming?

Alas, we get the newspaper no earlier than anyone else. It always has yesterday's news… not tomorrow's. That leaves us wondering and guessing and trying to figure out what comes next.

The storm that raged in 2008 was fundamentally deflationary. It was so predictable that we didn't need tomorrow's headlines; the weather forecast was obvious.

After decades of taking on debt, Americans started to stagger under the weight of their debt-service costs. When house prices fell, their knees buckled and their backs broke.

Households cut spending and reduced borrowing. But they are still heavily in debt. In 1971 – before the big credit bubble began inflating under the new fiat currency regime – American households had $5 of income for every $4 of debt.

Now, for every $5 of household income they have $12 of debt.

That's down from the “peak debt” of 2007 – at $13 for every $5 of disposable income – but still much more than the historic average.

Mr. Government vs. Mr. Market

The feds' response to Americans' prudence was also predictable. After so many years of backstopping the stock market… and luring consumers and businesses deeper into debt… the feds weren't about to quit.

Besides, their theories told them this was when their help was needed most.

This put Mr. Government and Mr. Market on opposing sides of the big blow. The feds whip the winds up from the South. Mr. Market sends them blowing down from the North.

The feds want inflation; Mr. Market wants deflation. The feds want more credit; Mr. Market wants debt paid down. The feds send down torrents of liquidity; Mr. Market mops them up.

This leaves the economy in the eye of the storm – where all is quiet.