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The following is taken from a speech given by Harry Dent,
transcribed and reprinted in John Mauldin’s “Outside the Box” newsletter.
Harry Dent is certain we are facing a future of deflation. In
the introduction, Mauldin notes “[Dent] sees inevitable demography-caused
deflation in our future and makes some very intriguing arguments that deserve
pondering.” There is nothing in Dent’s “intriguing
arguments” that will survive a basic understanding of monetary history and the tools
available to a persistent central bank.
Let’s begin where Dent begins:
Most of you reading this expect inflation
in the years ahead, right? Well, I don't. In fact, I am firmly in the deflation
camp.
Just think about it. What has
happened after every major debt bubble in history? What happened after the
1873-74 bubble? Or after the 1929-32 bubble? Did prices inflate or deflate?
We got deflation in prices… every
time.
This time around, with the latest
bubble peaking in 2007/08, the outcome will be exactly the same. There is
deflation ahead. Expect it. Prepare for it.
Let’s consider…what has possibly changed in the years since
1874 or 1932? What could it be? What institution was established in, say,
1933 that might have a slight impact on the validity of this comparison made by
Dent? Does Dent offer even a clue?
For a hint, think about the roots of inflation / deflation
in a fractional reserve lending system backed by a cartelized central banking
system protected by a government enforced monopoly. What is a key feature in such a system that
will lie at the root of the monetary impact on prices based on leverage?
It is the banks. Most
specifically, it is the deposits in the banks.
Maintaining and increasing bank deposits begins the process of
fractional reserve lending. As long as
depositors are protected, the public does not concern itself with bank solvency
– therefore cash doesn’t get withdrawn from the system and stuffed in
mattresses.
Now with that in mind, what institution was established in
1933 that gave such assurance to the depositors? The Federal Deposit Insurance
Corporation. Since the inception of this
organization, no crisis has brought on banks runs that typified earlier banking
calamities. Even in this latest period,
with hundreds of bank closures, where are the stories of bank runs brought on
by customers pulling deposits? There aren’t
any. The insolvent bank closes on Friday,
opens on Monday under new ownership, and no customer deposits have been hurt in
the making of this film.
As long as customers feel deposits are safe, the reverse of
the fractional reserve multiplier will not take place. This is the key question to deal with when
discussing the possibility of deflation returning and pointing to pre-1933
periods to prove the case. Not even
addressing it poorly, Harry Dent doesn’t even mention this point.
