While many believe the U.S. is on the verge of hyperinflation (due to massive government borrowing and overspending), evidence continues to show the opposite. For the first time in history, the European Central Bank has introduced a negative interest rate of 0.1% (i.e., they will pay banks to borrow money in an attempt to induce more lending). When you increase lending you increase the money supply and decrease the value of each dollar in circulation (thus inflation). The only reason they would undertake such a desperate measure is to stop deflation. Why is deflation so dangerous to the banking system? The entire lending business depends on price stability or inflation to avoid widespread loan defaults. If prices drop across the board, which is what occurs during deflation, all loan contracts become more difficult to pay and, therefore, less likely to be honored. For example, lets assume you obtained a home loan for $100,000. Soon after purchase, the price of your home dropped in half (due to massive deflation). In that example, your home would now be worth $50,000 but the loan would still be for $100,000. Your loan would be twice as difficult to pay off. Many owners would decide there is no incentive to keep the home or pay the loan; so, they walk away. For that reason, any strong deflationary period would devastate the banking industry (thats why they fight so hard to avoid it). Unfortunately, the longer deflation is postponed, the faster and more severe it can occur when it strikes. This recent news reinforces my multi-year position that the U.S. began a deflationary period 1-2 years ago and that it will accelerate over the next 1-2-3 years. You can read more about the European Central Banks recent decision in BBC news at the below link... bbc/news/business-27717594 Glenn Neely NEoWave, Inc.
Posted on: Mon, 16 Jun 2014 08:06:05 +0000
Trending Topics
Recently Viewed Topics
© 2015