David Cameron's new Government in Britain announced Tuesday that it will introduce austerity measures to begin paying down the estimated one trillion (U.S. value) in debts held by the British Government. Lets let that sink in for a moment, for it is a stunning announcement. Now repeat it: Britain will introduce austerity measures in order to eliminate the deficit and begin paying down the national debt. And that being said, we have just received the signal to an end to global stimulus measures — one that puts a nail in the coffin of the debate on whether or not Britain would "print" her way out of the debt crisis. That would have virtually guaranteed an eventual hyperinflation that would have spread to all Western nations, destroying the U.S. dollar as the world's reserve currency in the process and ending several hundred years of Western economic dominance. … This is actually a celebratory moment although it will not feel like it for most. – UK Telegraph

Dominant Social Theme: Fiat money deflation is good … for the powers-that-be, not for you and me!

Free-Market Analysis: We wrote an article about inflation and price inflation recently and came down on the side of inflation (both price and monetary) – in the long term anyway. This article on Rick Ackerman's blog seems to be getting a lot of attention and comes to the opposite conclusion. The West is headed toward a deflationary depression and the British government is making the right decision – or so the consensus seems to be, even in the alternative press.

We were initially clued into the article from Lila Rajiva's blog. Rajiva provides fine feedback to the Bell from time to time, often from a free-market-oriented perspective. From what we can tell, she seems generally supportive of the deflationary argument, as many are, even (as noted above) within the alternative press. Interestingly, Rick Ackerman himself does not seem to have written the article that he bylines as his lead story on June 9. In the feedback section beneath the article, in response to a reader who questions the deflationary scenario, he offers the following:

I didn't write that essay, Larry, but it is my policy to publish essays that I do not necessarily agree with. In this instance, I share your doubts that politicians will be able to stay the course, paying off debts the old-fashioned way. In fact, the debts are so large that even if they wanted to pay them off, they/we taxpayers could not not. However, given that borrowers are incapable of growing debt at the moment, deflation will out. All the blather about how Bernanke et al. "won't let it happen" is just that — blather. It is dumbfounding that some people still believe that the Fed is in control of an imploding debt juggernaut that aggregates into the hundreds of trillion of dollars.

Like many (even we here at the Bell), Ackerman seems a bit ambivalent about inflation – and we don't see a careful distinction between price and monetary issues. In the above response he observes that politicians will not be able to maintain austerity programs yet predicts substantial deflation anyway (presumably he is referring to price-deflation). We've read many articles in the recent past that seem to waver a bit. To us, and we think to those who read the alternative press, the inflation-deflation argument (both price-wise and monetary) is a core one that affects everything from one's personal economic and political philosophy to one's pocketbook and, ultimately, how one invests.

Believe in significant price-deflation, long-term, and you may not wish to put your cash into current high performing assets such as gold and silver. You may come to the conclusion that politicians, chastened and disciplined, will stick to austerity programs and that therefore cash is king. Believe in a coming wave of inflation or hyperinflation, and you'll probably lean toward gold or silver, or at least tangible assets. Maybe fixed income as well and derivative securities such as annuities.

But there is a significant political angle to all of this. Many of those who believe in uncontrollable monetary inflation are either implying or stating that inflation is monetary phenomenon created by central banking policies. Those who focus on deflation and argue for its increased presence often seem to argue that the spending came in large part from the electorate that insisted on public spending "We have met the enemy and he is us." (Pogo) Here's some more from the article:

So deflation it is. It will come to Canada eventually, too, so let's start having a real debate about what that will look like and get familiar with the idea. We have already experienced stark restraint in this country in a program that was masterfully crafted by Jean Chretien and Paul Martin in the 1990's. Sanity was restored after three hard years of belt tightening. But this next phase will be a much more bitter pill to swallow. We need to look to our leadership to guide us through the crisis as it unfolds. The inflationist camp can now leave the room because none of us can stand to hear their anguished cries, angry foot-stomping and teary, selfish objections. How pathetic!

What to Expect:

Here is a very short list of what can be expected — and trust me, this is a much more palatable list than the ones I have analyzed involving an unthinkable and devastating hyperinflation. So put away the placards and protest signs. We all need to get on board with paying down debt like any responsible citizen debtor would do. We owe big-time, and this is but a taste of how it may cost us:

• Major employment reductions in the public-service sector

• Rationing of health care services, fewer nurses, health practitioners and support staff

• Larger class-size in schools, and large reductions in the number of teachers

• Reduced public pensions and benefits, including social service payments

• Interest rates that will gradually rise and eventually settle at around six percent

• Strikes, labor unrest and supply chain breakdowns

• Widespread unemployment affecting virtually every sector of the economy. No one will be spared

• An expansion of public works programs and green initiatives

• Civil disobedience, arrests, targeting of threatening movements by security agencies and government

• Increasing taxation, particularly on the wealthy and buoyant businesses

• Shortages of all kinds and the loss of variety on store shelves

• An erosion in the standard of living for most, but particularly for those who are in debt

• Cutbacks in military spending, defense, coastal patrols and overseas engagements

• Cherished programs that governments usually support will be eliminated

• Larger police forces, prison expansions and a judiciary that is strained to the breaking point

• Cities, states and counties will be denied bailouts, forcing them into bankruptcy

• Services that protect the environment, animal rights and special interests will be reduced

• Universities will close

The list could stretch on and on, but you get the picture. It will be a very difficult and long-lasting correction that will purge waste and inefficiency from the system. Few will be happy, but the alternative is just too distressing to consider. The only thing that will give you true immunity in the mean time is a fat blanket of cash. Be sure to have some. Be liquid. Pay off debts. Rejoice in your good decisions. And live free.

The above list of corrective issues is expansive of course, but we would make the case that it is political as well – especially the point about "an expansion of public works programs and green initiatives." The author seems in general to believe that such a laundry list of "austerity" programs (an inevitable result of deflation) are "palatable" and much to be preferred to aggressive inflation (certainly hyperinflation). The overall point: "We all need to get on board with paying down debt like any responsible citizen debtor would."

Is this so? We don't happen to believe the average citizen is responsible for this mess. Just as we disagree with the idea that democracy gets the leadership it deserves. In America, certainly, the political system has been actively manipulated by the power elite since the end of the Civil War. The electoral system has been transformed to emphasize direct democracy and various laws have been passed to help ensure that America (indeed the West) ends up with the most wretched kind of evolutionary regulatory democracy – one that emphasizes high taxes, endless laws and mercantilist, abusive central banking and its endless debasement.

The current economic crisis, in fact, seems the deliberate result of obscenely manipulative fiscal and monetary policies. We believe that suggesting the individual citizen now has a moral calling to live in penury and starvation because of the planned irresponsibility of central banking policies is absurd. We believe it is a kind of dominant social theme, as follows: "Nations have been living beyond their means for decades and it cannot go on without social chaos. Austerity measures will be implemented by the authorities for everyone's good." This meme certainly shoves the blame for the current situation directly onto citizens living in the West's profligate nation states.

We believe, indeed, as we stated above, that the idea that citizens of Western nations must now submit to this sort of austerity so that money center banks can maintain solvency is verging on the immoral. Central banks have deliberately inflated for decades to ensure that people would accept the system and support it. But now that the system is literally disintegrating – as fiat money systems always do – the same powers-that-be are marshalling their allies and the mainstream media to declare the immanence of deflation and the beginning of long term "austerity."

We are not so sure as some that the Great Depression saw across-the-board deflation. Certainly gold stocks went up during the Depression and we think in certain areas at certain times prices may have been rising as well. What seems more certain is that central banks may have tightened, instead of loosening, during the Depression, following the logic that the money supply should contract along with economic activity. This may have aggravated deflationary trends.

From a (fiat) monetary standpoint, we have a hard time figure out where the money goes when assets collapse. In fact, the main argument of deflationists seems to be that the money "goes away" during bankruptcies, etc. But in fact, banks that are damaged by recessionary ruin will almost always receive further monetization by the West's mercantilist central banks – as we have just seen these past two years. Thus, it doesn't seem to us that there may be any huge depreciation of the money stock itself.

Certainly, it may be the money will not CIRCULATE, and this is what has happened already during this latest crisis. But there is a difference between monetary deflation and price deflation. Most popular articles deal with price deflation as if it were general deflation. But there is a dramatic difference. In fact, we are very worried about these deflationary arguments. We have seen how the mainstream media distorts financial information. There is no doubt from our point of view that power elite memes can extend to shaping the perception of the public when it comes to financial affairs. Just as the elite can virtually halve the number of unemployed in America and then declare a recovery in motion, so we think the same sorts of games can be played as regards deflation and especially price deflation.

By declaring the imminence of a Western deflationary depression, the powers that be can take control of the larger economic argument to campaign for across-the-board austerity policies. After all, what are governments to do if there is no inflation to ease the economic blow-off? The solution must be to cut, and cut again. The ultimate outcome, of course, will not only be a terrible austerity but, sooner or later, a campaign to realign the monetary environment. We have already suggested one solution – a gold-backed IMF SDR. We are not sure this is the solution that will ultimately be presented. But … out of chaos, order.

What is in store for the West going forward? In a money-metals environment, an asset blow-off of any size would probably be followed by a brief bout of deflation that would readjust prices fairly quickly. In this context, deflation can be seen as an economic good, lowering prices at a time when people are experiencing financial stress. In a fiat money economy, however, deflation (whatever there is of it) can become a more ambivalent creature – mostly because fiat money itself is such a distortive monetary environment.

Here at the Bell, we do see some continued significant price deflation in certain areas and regions, mixed with price inflation as well. Eventually, we see significant inflation, however, as we do not believe the money supply will ever be much reduced – and inflation itself, in terms of money printed, is already built into the system. We think eventually, somehow, someday, some of this money (too much of it) will circulate.

One might eventually call this state of affairs stagflation, ultimately, especially as it will not be accompanied by much hiring. However, we think it may well be reported, generically, as "deflation." The austerity measures to be put into place as a result will be at least partially designed to generate compliance with a new and more global monetary system – one that could be floated when the pain generally becomes intolerable. Seen from this perspective, deflation, whether or not it exists in reality, could simply serve as another bogeyman (meme) to stampede the West and eventually the rest of the world toward global governance.