A massive battle between inflation and deflation is enveloping the globe. And for now at least, deflation is winning.
On the side of inflation are those who want to perpetuate the status quo — more government spending, more money printing, more debt, bigger bailouts.
And on the side of deflation is government austerity, cutbacks and a sinking global economy.
The fight is raging in central banks, parliaments and now — for the first time in recent history — even on the streets.
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Look how it has spread just in the past few days:
On Wall Street and other U.S. cities, thousands of protesters are converging to demonstrate against a wide range of grievances — corporate greed, social inequality, bank bailouts and more.
The New York police arrested 700 of the protesters on the Brooklyn Bridge Saturday. But if the recent mass protest movements of Western Europe are any indication, rather than squashing the movement, the arrests are bound to merely spur more jobless Americans to join the rebellion.
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In Lisbon and Porto, as many as 180,000 rallied against the government’s austerity measures, while labor unions call for a slew of strikes on October 20 and 27.
All over Spain, labor unions have just called a general strike to protest against government austerity measures.
Two-thirds of all flights to and from Spanish airports were disrupted this weekend … while teachers also began a two-day strike last week, closing schools for hundreds of thousands of high school students.
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In Athens, civil servants have stormed government buildings and taken over the ministries of finance, interior, justice, health, environment and regional development, while metro, tram and suburban rail workers went on strike.
Even Greek police held their own protests.
But so far, virtually ALL these protesters are losing their battle.
Reason: Governments in the U.S. and Europe are simply ignoring the protesters’ complaints and plowing ahead with all their planned cutbacks anyway.
Echoing the words of New Jersey Governor Chris Christie, the response of government officials to the masses is simple and unanimous:
The government is broke!
We don’t have the money!
We have no choice. Period.
We don’t have the money!
We have no choice. Period.
Result: All over the Western world, governments are laying off public workers, slashing salaries, gutting pensions, selling off public assets and seeking to jack up taxes.
And all over the world, the shouts of protesters are falling on deaf ears …
United States: Although the incipient protest movement on Wall Street may grow, massive federal cutbacks are already written into law. By November 23, Congress’ Joint Select Committee on Deficit Reduction will recommend $1.5 trillion in additional cuts to the federal budget.
What if Congress fails to approve them? Then a trigger mechanism will automatically enact $1.2 trillion in across-the-board cuts.
Greece: Despite the riots all around them, Greek leaders are approving the country’s 2012 austerity budget along with a controversial plan to cut thousands of jobs from the public sector.
They have no other option. If they don’t approve the cuts, they won’t get another euro in bailout funds … they’ll default on their debts … they’ll run out of money instantly … and they won’t even be able to collect their own salaries.
Spain: Regardless of the massive strikes shutting down the country in the past few days, Madrid insists there’s no turning back on its austerity plan. Worse, the European Commission says that even the cutbacks Spain has already enacted will still not be enough!
Portugal: The protests have done nothing to stop President José Sócrates from forging ahead with a 5% cut in public wages … a 2% hike in the value added tax (to a whopping 23%) … and cutbacks in social payments of up to 25%.
Moreover, this phenomenon is not limited to the U.S. and Europe.
In Japan, the government has virtually exhausted the population’s ability to fund lavish spending with domestic savings and will run out of money to support an aging population.
In China, the central bank is vowing to keep money tight to rein in inflation.
And with few exceptions, every economy on the planet is cooling off, shrinking or on the verge of collapse.
This is why I say that, for now at least, the forces of deflation are winning.
Skeptical?
Then listen to the co-founder of the Economic Cycle Research Institute, who said last week that …
“We use a dozen leading indexes for the United States. And what we look for is wildfire — like a contagion — among the leading indicators. If that starts to happen, then that’s it! The vicious cycle is starting where lower sales, lower production, lower employment, lower income and back to lower sales.“Once that cycle starts to rev up [as it has now], even if something good could happen today or tomorrow, it doesn’t affect that feedback loop. It’s already started.”
Or consider the words of U.S. Treasury Secretary Geithner, who one week ago warned delegates to the IMF/World Bank meeting in Washington, D.C. of …
“Cascading default,” “bank runs” and “catastrophic risk” — all deflationary forces.
Or take another look at the sinking U.S. economy — consumer confidence plummeting, home sales slammed again, new construction cratering.
Will inflationary forces fight back?
Of course! The mass protests could reach critical mass and transform the political climate. The Fed could soon come out swinging with another round of mass money printing. And we could be off to the races again on another wild consumer and government spending binge.
But until then, brace yourself for more declines in most financial markets.
What to Do?
If you’re overloaded with stocks, cut back.
If you’ve been betting heavily on rising commodity prices, balance that risk with side bets on deflation — such as inverse ETFs that are designed to rise when stocks or other assets fall.
Plus, no matter what, get your cash to a safe haven, such as short-term Treasury bills and some gold.
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