Debt: Nature's way of saying "I'm with Stupid!"

The boys on the boards are restless…

They’ve lost money out the ass.

Now they’re questioning money itself.

HELLO! – I’m afraid I’m five, maybe even 30 years ahead of you, boys.  When the plane’s in trouble, you’re wasting your time shooting the pilot.  Scramble for one of the remaining parachutes and get ready to jump!

For defense contractors and investors therein it was a fabulous decade (70% -- compare the charts to anything else out there except gold) – but now it’s OVER!  Like Dean Vernon Wormer (Animal House) said, Fat, drunk and stupid is no way to go through life, son.

In short, Shedlock's article referenced indirectly herein is correct in characterizing current economic policy as a Don't Ask, Don't Sell policy -- trying to avoid marking bad assets to market (e.g. $0.30 on the $1.00).

It's like a LTBH market investor looking at 50% losses on his 401K statement and fantasizing about a comeback, eroticizing the fallacy of a failed belief system.  (Remember.  It takes a 100% gain to recover a 50% loss.)

The truth is that realizing losses is the only chance to restore needed balance to the fiat system.  In short, Piggy must pay!  Piggy must take HUGE losses.  Piggy was too stupid, greedy and irresponsible ever to be made whole in this debacle.  And if Piggy is somehow made whole in this debacle, the outcome will be even worse, making absolute collapse (Mad Max syndrome) more likely.

So here's the conundrum: not taking losses is deflationary and taking losses is deflationary.

Can the U.S. Government really force the American taxpayer to pick up Piggy's 70% losses – to make a corrupt system whole?  Frankly, I don’t see how.  Presumably, there would be riots in the streets.  That’s Mad Max syndrome.  And no one wants that, least of all Barrack Obama, Ben Bernanke and Tim Geitner.

Thus, deflation (depression) is inevitable as the value of credit and credit based assets - e.g. homes - collapses, as illustrated by Shedlock’s formula below. 

How does one profit from deflation? -- by not taking on new debt and by paying off any debt outstanding.  Suddenly, paying down debt (or not paying it at all – if you can get away with it) is the newest and only successful present form of investment.  (But actually it’s old.  Historically, the insanity of Reagan, trickle-down, voodoo, deficit, crony capitalism, like the Weimar Republic, is the real aberration.)

Fm = Fb + MV(Fc)

Where Fm = Fiat Money Total
Fb = Fiat Monetary Base
Fc = Fiat Credit, the amount of credit on the balances sheets of institutions in excess of Fb

MV(Fc) = the market value Fc (market value of credit)

Thus Inflation is an expansion of Fm
Deflation is a contraction of Fm

If only base money was lent out (no fractional reserve lending), MV(Fc) would equal zero. The MV(Fc) equation ensures we do not double count credit in Fm.

MV is a function of time preference and credit sentiment (i.e. Faith that lenders get paid back). As long as that belief is high, banks are willing to lend.

Because (at the moment) Fc (credit) dwarfs Fb (base money), the system can only hold together as long as there is belief [A K A pixie dust] credit can be paid back -- as long as there are not substantial and destabilizing defaults.  Needless to say, the perceived belief that Fc can be paid back is at increasing risk, both by rising defaults, and by falling consumer and lender sentiment.

That's why MV(Fc) – the real value of debt – is collapsing before our eyes.

In other words, [deflation is when] the mark-to-market value of credit is contracting faster than base money [supply] is rising.

Welcome to deflation!