Wednesday, February 4, 2015

The Deflationary Thesis

Contrary to popular belief, extreme deflation doesn't mean lower prices at Best Buy
In reality, it does of course imply lower prices at Best Buy, however not under circumstances that are ideal for mass consumption.

The premise of a deflationary collapse, is a collapse in the dollar money supply which consists overwhelmingly of non-collateralized debt. Being uncollateralized, that collapse will create a massive reach for dollar liquidity, measured in the tens of trillions, which unfortunately does not exist. This is where I depart from EWI, in that I believe that the reach for liquidity will entail a reach for Treasuries/T-bills as a proxy for dollars because dollars cannot be stored in electronic form i.e. Every dollar held by every entity is a debt instrument EXCEPT physical cash held by banks which constitutes a miniscule portion of the money supply.

Nevertheless, having lost 98% of its value since 1913, the founding of the Federal Reserve, the dollar is arguably the most "shorted" instrument on the planet whether directly via carry trades or indirectly via mortgages and other forms of debt which entail dollar liability. When all of that unwinds, access to dollar-based liquidity will be paramount to forestall default.

The dollar bottomed seven years ago
A back-test of this downtrend line is possible, after that...


When the global bank run begins, the dollar will go parabolic. At that point, everything at Best Buy will be a lot cheaper, including Best Buy.