From Chris Martenson: Deflation

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LINK:
http://www.chrismartenson.com/files/...%2010-3-08.pdf

It’s Here And It’s Now

ChrisMartenson.com © 2006 - 2008 Page 1

Everything that I have been writing about, everything
that I have been lecturing about, and everything
that I made the Crash Course about is now in motion.
It is here, and it is happening right now.
The purpose of this Martenson Report is to nudge you
further and further toward taking any remaining actions
that can help shield you from what is coming. I want
you to understand that my advice and my voice are just
one of many, and that your job is to listen to everything
and make up your own mind.
Between now and “then,” with “then” being up to 10
years from now, most of the wealth of all overly-
indebted nations will be destroyed.
The debt-based fiat money system of our past is
drawing to a close. The extent to which your money is
locked within that system is the extent to which you risk
losing it all. Not (necessarily) because it will be stolen
with malicious intent by your leaders, but rather by
their benign ignorance.
There are simply too many claims on a future that is too
small. Those claims - debts and money - have to be
reduced. Whether that is accomplished by a process of
inflation or by one of deflation is the only question left
to resolve.
MEA CULPA
So far, my advice has been spotty. Certainly my advice
to steer clear of stocks was right, as was my advice to
avoid real estate. But I was very much expecting an
inflationary destructive process, and so far the data tells
us that deflation is the dominant mechanism. So, low
marks on that one.
By ‘deflation,’ I mean that money is being destroyed
faster than it is being created. The Fed has certainly
been shoveling new money into the system at historic,
never-before-seen rates. It has ‘expanded its balance
sheet,’ meaning it is taking in more and more debt and
putting out more and more money. In a world of
deflation, money gains value against assets and goods –
the opposite of inflation. During deflation, you want to
hold cash.
HERE’S THE DATA
• Stocks – The S&P 500 is down 30% from its high
hit almost exactly one year ago.
• Bonds – US Treasury bonds are at all-time lows.
Recently, the 3-month bond went so low in
yield that you would have lost money, after the
commission was taken, for the privilege of
holding one.
• The Dollar – The dollar is gaining value rapidly
against other currencies, a sure sign of stress
and a strong indicator that deflation is
underway. A rising dollar means that dollars
are becoming worth more, not less, and this
says “deflation.”
• Gold/Silver – These are falling in price almost
daily, which is a sure sign of deflation.
• Commodities – Crashing is the right word.
Down 30% since just July - there seems to be no
bottom here.
• Credit markets – Among the TED spread (and
other measures of interbank lending), the
Corporate Paper market, and the asset-back
paper markets, all are pointing to a seizure in
the credit machinery that is without parallel.
• Recession data – Everything from automobile
sales, to personal bankruptcies, to tax revenues
are all indicating that one of the sharpest
recessions in recent history is underway.
Every single one of the signs above is consistent with
deflation, not inflation.
WHAT DOES THIS MEAN TO YOU?
Okay, if a major deflationary impulse rockets through
our system, the amount of institutional destruction we
have seen will accelerate. Major banks will fail outright,
state and local governments will go bankrupt, pensions
will vanish, jobs will evaporate like water on red-hot
steel, imports will plummet, and China will no longer
buy our debt because they won’t have any extra money.
At the end of this, the US government will have to pare
back its expenditures by 50% or more.
E
It’s Here And It’s Now

ChrisMartenson.com © 2006 - 2008 Page 2

Because, as you know, our entire economic system is
built upon the exponential expansion of
money/credit/debt, and it simply does not operate well
in reverse.
It’s that simple. No expansion = collapse.
And this is why I am quite stunned that more aggressive
measures have not been taken to put us on the
inflationary path. I’m talking about things like $10,000
checks to every American, directly from the Federal
Reserve. I’m talking about an immediate doubling, and
then tripling, of the Federal Reserve balance sheet. I
am talking about trillions of dollars of new money being
put into play be the Fed.
Because that’s what this is going to take.
The “$700 billion” bailout bill is too little, too late, and
directed at the wrong spots. And it fails because it
punishes the wrong parties. My solution would have
been modeled after Sweden’s bank bailout in 1992 –
give the banks loans in exchange for bank stock. That is,
recapitalize the banks, but make them pay. And I would
have gone one step further and ousted the
management at each bank. After all, they have already
proven themselves to be incapable of properly
assessing risk and running a business. Next!
Given that banks are draconian (Darwinian?) in their
approach to their customers’ missteps, it only seems
fair that they should be treated similarly in response to
their own foibles. One set of rules for the well-
connected and another set for the “little people” equals
a recipe for social unrest. “Let them eat cake!” has
already proven itself to be a busted PR model, so I am
deeply puzzled as to why Congress felt obliged to give it
another whirl.
HERE ARE MY RECOMMENDATIONS
I remain convinced that “failure is not an option,” and
that the Federal Reserve and the Treasury Department
will do everything in their power to keep this whole
thing expanding. I trust that they will return us to the
inflationary path as soon as possible.
But if they don’t…
You need to be prepared for a long, multi-year slide into
the worst economic conditions of the last five
generations. Few remain who have any direct
knowledge of exactly what a true deflationary
depression really means. Fortunately, we can still learn
the lessons of the past if we choose.
1. SAVE YOUR MONEY! Pare all expenses, save as
much as you can, and keep your job.
2. DON’T HOLD DEBT Get out of debt as fast as
possible, and don’t take on any new debt. In a
deflation, debt is a stone-cold killer. Ask
anybody who went through the Great
Depression.
3. GET OUT OF STOCKS AND INTO CASH Do not hold
stocks. None of them are safe in a deflationary
period. Right now, stocks are still valued with
price-earnings ratios of 15 or more (on
average). At the bottom of a
depression/deflation, we might expect that
number to go to somewhere between 7 and 10.
This means that I would expect as much as
another 50% decline in stocks. Or 5,500 on the
Dow, or 500 on the S&P.
4. DO NOT HOLD LOWER GRADE BONDS This includes
municipal bonds and corporate issues. Only
Treasury bonds would be safe here.
5. BE PREPARED FOR SHORTAGES One thing that
would happen to an impoverished US would be
the loss of imports. What do we import that’s
essential or desired? Heck, what don’t we
import that’s essential or desired? Take a look
around your current life and ask yourself,
“What’s pretty cheap right now that I really like
to have?”…and if it’s imported, feel free to
stock up, as long as it does not materially
impact your savings and debt goals from
numbers 1 & 2, above.
WHAT TO WATCH OUT FOR
I am going to fall out of my chair if it turns out that a
serious attempt is not made to re-expand this whole
mess.
It’s Here And It’s Now

ChrisMartenson.com © 2006 - 2008 Page 3

The Fed is walking an incredibly fine knife-edge, here.
On the one side is a deflationary failure, and on the
other side is the inflationary destruction of their only
product, the dollar. This is the scariest balancing act for
any central banker, and I am very glad to not be in Mr.
Bernanke’s shoes.
Two things could rather suddenly upset the apple cart
here and make me rather dramatically change my
advice above.
1. THE DOLLAR DECLINES. If the dollar suddenly
begins a rapid descent, especially if
accompanied by a spike in interest rates, I will
send out an Alert to you that will re-direct the
above advice in a significant way.
2. THE FED BEGINS TO DIRECTLY MONETIZE DEBT. We
are very close to this, lacking only the official
pronouncement that it has started. For some
reason, probably related to the fact that they
are in as much trouble as the US, the foreign
central banks have allowed the current Fed
programs of exchanging good money for bad
assets to operate without a single peep of
protest. Most of these programs are still
referred to as “temporary,” meaning that the
bad assets are supposed to go back to the
originating banks at some point. But when it is
openly admitted that they are being “held to
maturity,” then this is the death knell for the
dollar. Inflation is on the way.
WHY I STILL RECOMMEND GOLD (& SILVER)
Whether the Fed errs on the side of deflation or
inflation, gold makes sense to me.
The primary reason is simply that it represents a liquid,
“money-like” asset that you can hold and that sits
outside of the banking system. In a deflationary
collapse, even as banks are folding up like cheap card
tables during a tornado, you won’t know which banks to
trust and which to fear. Nobody will. In this scenario,
holding cash is a good option, but I think gold offers one
other advantage. How we value dollars internally in this
country during such an event may be very different
from the way dollars are perceived and/or valued
outside of our country.
In Asia, India, and Europe, gold is perceived as “money”
to a much higher degree than it is in the US. In a time of
crisis, when nobody knows which institutions are “good
for their liabilities” and which are not, gold represents a
means of sidestepping that discussion altogether. It is
not too much to suggest that for this reason, the dollar,
representing the liability of the Federal Reserve, may
someday be less highly-valued outside of our borders,
where trillions of such liabilities already lie, than gold.
So I choose to hold gold in the face of a potential
deflationary collapse because I think that it represents a
more compelling source of value outside of the USA (my
country) than do Federal Reserve Notes (the dollar).
During a deflationary collapse, all of the exigent and
outstanding liabilities of the US may suddenly be
“redeemed,” meaning that foreigners will seek ways to
convert their (potentially) meaningless dollar balances
into something more tangible. Certainly, they could buy
assets inside the US, such as companies and real estate,
but what are their options if the goal is to “bring that
money home?”
Those options are somewhat limited, and I see gold as
one of them. Exchanging dollars for a native currency
will only work for a relatively small number of the
outstanding dollar holdings. Then what?
And, of course, I hold gold because of the possibility
that the Fed might inadvertently veer off into the
hyperinflationary ditch. Historically, this has a very high
chance of occurring.
Either way, inflation or deflation, I can make the case
for gold.
But right now? The data says that you need to begin
preparing for a nasty deflationary crunch.
Your faithful information scout,
Chris Martenson