This might end up being the worst of both worlds. All of you assets will deflate (go down in value), AND the gov’t will inflate the money supply to the point of significant devaluation (or dislocation globally) or an all out currency crisis.

At the end of the day, even before the Credit bubble popped, the US would have had to intentionally devalue it currency by aboyt 50% in abotu 15 years in order to afford it unfunded liablilities. If the US dollar stays at it’s current relative value, let alone rises, kiss Medicare, Social Security, and the Military goodbye, it is too expensive.

http://globaleconomicanalysis.blogspot.com/2009/10/janet-tavakoli-risk-of-deflationary.html

Collapse of the USD sounds like terrible inflation for people holding USD.

…Recognising the losses means dealing with corporate and individual speculators who have lost, not pretending they’re still winners by chaining others to debt now and in the future because they’ll have to pick up the loss instead….

He says that the free market will be to blame ….and rightfully so,due to deregulated markets.

He continues with Clinton and then Sec of Treasury Rubins Idea of a new issue of Special Drawing Rights SDRs an international reserve asset created by the IMF.

This is one method he suggests as a way to “Save capitalism from its self.”

It all seems to be coming to fruition sadly.

Below is the link to the article…enjoy.

http://www.foreignpolicy.com/Ning/archive/archive/113/capitalismslastchance.pdf

While valuing the U.S. government’s claimed gold reserves at today’s Comex closing price of around $1001 per ounce instead of the government antique bookkeeping entry of $42.22 per ounce would indeed vastly expand the government’s monetary assets, it might not be enough to offset the liabilities and guarantees the government lately has taken on.

But the job might be done by revaluing the gold to $5,000 or $10,000 per ounce, as the British economist Peter Millar speculated two years ago might be necessary to prevent debt deflation: yet this is admittedly speculation.

What did Gramley mean by “…the Fed’s leverage”? That would suggest that the Fed not only owns “gold certificates” but also future contracts and options on futures. They might be big benefactors in a gold squeeze.

That’s very gratifying, for ZeroHedge to recognise the contribution. And also for Janet to follow up.

Janet’s argument is very clear and rational, unlike most of the mystification of markets that’s presented as economics.

It reminds me of a lot of what Karl Denninger has argued since at least last autumn. And also what Steve Keen pointed out about the role of credit in collapsing demand, dwarfing that created by ‘stimulus’ measures.

All the best analysts essentially grasp what Marx explained about banking finance and derivatives in Chapter 29 of Capital Vol.3, and what he said in Chapter 30 about the collapse of fictitious capital values in any system of production based entirely on credit.

Like Janet, and Denninger (and Max), Marx pointed out this would be when massive fraud would come to light. Of course in a pre-fiat money era, Marx dismissed the notion of the state buying up all the derivatives at full value, to maintain the value of that fictitious capital.

Ch. 29: Component Parts of Bank Capital:
“With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands.[3] The greater portion of this “money-capital” is purely fictitious. ”

Ch. 30: Money-Capital and Real Capital. I

“In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production. [...]

It should be noted in regard to imports and exports, that, one after another, all countries become involved in a crisis and that it then becomes evident that all of them, with few exceptions, have exported and imported too much, so that they all have an unfavourable balance of payments. [...]

It follows from the above that commodity-capital, during crises and during periods of business depression in general, loses to a large extent its capacity to represent potential money-capital. The same is true of fictitious capital, interest-bearing paper, in so far as it circulates on the stock exchange as money-capital. Its price falls with rising interest. It falls, furthermore, as a result of the general shortage of credit, which compels its owners to dump it in large quantities on the market in order to secure money. It falls, finally, in the case of stocks, partly as a result of the decrease in revenues for which it constitutes drafts and partly as a result of the spurious character of the enterprises which it often enough represents. This fictitious money-capital is enormously reduced in times of crisis, and with it the ability of its owners to borrow money on it on the market. However, the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners.”
—————-

The solution, is what Janet calls ‘taking the deflationary hit’ — recognising the losses. I think of it as a Bonfire of the Vanities.

To cleanse the system of the surplus fictitious capital (i.e. debt) that it’s choking on. That means dealing with the consequences of bankrupt financial institutions (more Lehmans), and the political, social and economic shocks.

Recognising the losses means dealing with corporate and individual speculators who have lost, not pretending they’re still winners by chaining others to debt now and in the future because they’ll have to pick up the loss instead.