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We are from Germany (that is to say, my parents are) - and my mother actually lived through the hyperinflation in Germany in the early 1920's (as a young child - but she remembers it).  My father, a little younger, only heard about it from family stories at the time.  But I heard plenty about it over the years. 

I have a somewhat different view of the modern situation - because I understand how the modern banking system works.  My degree is in engineering, and I have worked with computers for 35 years.  I also studied Keynesian economics at university, hoping I would learn something useful.  I did not learn about Austrian economics until I got out of university - and I then applied what I had learned to the banking system and came up with the following insights.  I might add, I had to learn about one more thing, the law against recessions, called Humphrey-Hawkins, which was passed by Congress in 1978 and first enforced in the wake of the stock market crash of 1987, to understand what is really going on.  I did not find out about the law until the summer of 2001 - and it had actually expired in 2000, was set to do so when the law was first passed, but the authorities who were in the system in 2000 decided that they liked the results of the enforcement of it until then (basically, up to the end of the 1990's) so much that they decided to continue to enforce it as if it had never expired, and that is what they have done.  That is why we are in the position that we are now in. 

As noted above, I have personal information about hyperinflation because of family history. 

But the modern system does not work the same way - and computers are the reason why.  Let me explain. 

It is my considered opinion that a hyperinflation can only happen when the entire money supply is cash, not electronic money - in other words, all of it comes from a printing press.  This was true in 1920's Germany - and that is why a classic wage-and-price spiral to, effectively, infinity developed there when the German government and central bank tried to compensate for the reparations payments that were being demanded by the victors of W.W.I. 

I am going to present you with a scenario, but before I do that, I want to bring a few other things up having to do with the money itself and the banking system.  The scenario is based on the law against recessions, which is the underlying basis for everything that is actually going on these days because the American mainstream economists, the Keynesians, believe an economy can be kept going forever - that is why the Fed decided to continue to enforce the law against recessions even after it expired in 2000.  Interestingly, that is also when the stock market topped out in the big picture - and that is why we are in the position that we are now in. 

I bring up the Kondratieff wave in the discussion immediately below.  I will show you, below, exactly how that fits in.  I will also present some comments at the bottom having to do with other issues. 

I know it is a common view that as the government pumps more and more money into the system, we will have more and more inflation.  If all of our money were actually printing-press money, which is the common analogy, I would agree. 

But all of our money is not printing-press money.  In fact, the vast majority of our modern money base is electronic money that is never going to turn into cash.  And that is not even the important part.  The important part is that it goes through the banks - to be lent out.

Here is the crux of the issue.  American mainstream economists assume that an economy can be kept going forever. 

And a modern, sophisticated society uses computers.  But a modern, sophisticated society also has banks - and they also use computers.  In such a situation, it is much more convenient to pump the new money through the banks - as electronic entries.  But banks don't give money away, they lend it out.  So almost all of the money that is being used to run the economy is borrowed money - in effect, the American money is debt-based. 

If the economy could go on forever, as the economists assume, that would not be a problem - and that is why the economists are comfortable with the new money going through the banks as borrowed money - but the economy can't go on forever, it slows down during the second half of the Kondratieff wave, which is what has been happening, and that eventually introduces the issue of loan defaults. 

When a loan defaults, it has to be written off by the bank.  If that loan has included part of the Fed's effort to increase the money supply (by doing it the easy way, pumping the new money through the banks), which is the case with most loans for quite some time already, then that is a decrease in the money supply.  In other words, the overall money supply will decrease with loan defaults, not increase - and if that happens, the price of everything priced in dollars, including energy and precious metals, will go down. 

So I am expecting a massive deflation, not an inflation (because I am expecting massive loan defaults as the economy goes down and more and more people are in no position to service their loans anymore). 

Can't the Fed just pump more money into the banks to compensate for the loan defaults?  Yes - and it has been doing so.  But that money is not making it into the economy because of the credit crunch.  To get the money out into society, the bank loan officers have to cooperate - and they are not doing so since 2007.  Why do we have a credit crunch?  Because America is a majority-homeowner country and the country created a gigantic bubble-boom during the mid-2000's during which it was attempted to get many more people into their own home, many of whom weren't qualified for that.  In a majority-homeowner country, by far the biggest chunk of loans on a dollar basis (as opposed to percentage basis) will be in mortgages (the biggest consumer loans, by far, are mortgages) - so if the housing market falls apart, which it did because of the massive mid-2000's push, the banks suddenly don't have enough collateral anymore, so they can't lend (at least not nearly as much as they used to).  Why can't the housing market be fixed?  Because way too many homes were built during the boom, way too many people who bought homes had their credit ratings trashed when they were foreclosed upon (so they can't buy a home anytime soon again), and the economy is way too slow this time (I predicted that, but the mainstream economists did not) for immigration to help make up the difference this time, like it has after past recessions.  So the housing market is going to remain in the dumps and the credit crunch will continue. 

What about going back to the printing press for all of our money?  That is way too impractical in a country the size of modern America in terms of its sheer physical size, especially combined with the current size of the population.  We have over 300 million people now - spread all over the country (the majority of them on the coasts - but many of them in the middle).  All countries that have had a hyperinflation were either much smaller in size (like Germany) or at least had the population concentrated in a much smaller area than America has, making it much, much easier to distribute the money.  I know Bernanke talked about throwing money out of helicopters when he was a Fed governor - as a way to counteract deflation - but the simple reality is that he has not done it, I think he was just trying to leave a mental impression with people, and he is not going to do it because it is just plain impractical.  The reality is that we did have a deflation scare so far, but it did not happen until 2003 because of all the pushing by the Fed, and we got out of it when the markets went back up and the economy picked up, but we can't avoid it forever and, in fact, by the Fed's own admission, inflation in the last couple of years has been lower, again, than the Fed wanted it to be.  Please hear me out, I know food and gas prices have been going up.  It is only a matter of time before overall deflation will happen on a long-term basis for real. 

We are headed for deflation overall (see below for why) - mostly epitomized so far by falling house prices - and all the talk of Fed money-printing is not going to make any difference because that is not actually how most money makes it into the system these days, it gets pumped into the banks electronically by the Fed to be lent out, which is not actually happening these days because of the credit crunch, which will not go away because the housing price problem will not go away.  And with regard to the lending that has already happened and is still happening, more and more people and businesses are defaulting on their loans, which will continue as the economy gets weaker and weaker, overall.  When that happens, it is usually a decrease in the money supply, since the Fed pumps new money through the banks - which means the value of each remaining dollar will go up, not down, as money disappears from the economy due to loan defaults.  That means that the price of things priced in dollars, including energy and precious metals, will eventually go down, eventually way down once the process is far enough along. 

But many people usually don't think in those terms because the development that I am talking about here is too recent, it did not even really begin to get going until the decade of the 1960's when mainframe computers became widely available, and so many people still talk, and think, mostly in terms of "money-printing," which does still apply to a very small percentage of the money out there, the cash that some people still use in their daily transactions (most people actually use a debit card these days), but does NOT apply to the vast majority of money in the economy these days, which because of how it gets distributed, is, moreover, borrowed money.   When the defaults happen, that money will go away, it will be a deflation, not an inflation - and so the "printing press" analogy is simply completely incorrect and anyone who invests according to it will lose a lot of money. 

What is happening is very consistent with what the Kondratieff wave calls for in the end - we are in the lead-up to a deflationary depression.  But it is on steroids this time because of the successful enforcement of the law against recessions for so long. 

Now for my scenario. 

My scenario is based on the law against recessions, which I found out about in the summer of 2001, combined with everything else that I had learned before then already about alternative theories - and it is playing itself out beautifully (from an analysis point of view - no one is going to like what is coming). 

My scenario is as follows.  Contrary to the assumption of the mainstream economists, it is not possible to keep the economy going forever.  I predicted the downturn of 2008 in 2001 already, both the timing and the severity of it, and I did it using what I am about to tell you.  The mainstream economists do not believe in the Kondratieff wave (among those who have even ever heard of it) - and their reason for not believing in it lies in part in the Great Moderation, which was the moderating of recessions from the early 1980's onward, until 2008.  On the other hand, I predicted the downturn of 2008, both the approximate timing (I predicted sometime in 2007-2010) and the severity of it, in the summer of 2001 already, when I found out about the law against recessions.  I did so by turning the situation on its head, taking the Keynesian law-against-recessions manipulations into account relative to the Kondratieff wave. 

But I actually made the following overall prediction.  I predicted that the only way such a large downturn could happen in a law-against-recessions environment was if the Fed would lose control - and so I predicted that exactly that would happen.  I claim, based on the evidence that is in in the meantime, all of the evidence, the totality of it, that that is exactly what happened.  I predicted that once the Fed lost control, the stock market and economy would revert back to going the way they normally do historically during a big downturn, namely, down, up, down.  In other words, there would be an intermediate recovery coming out of that downturn, followed by another major downturn. 

I further made the following prediction because I knew the continued enforcement of a law against recessions was involved - and this, by the way, is also why the authorities rammed the stock market so high in the late 1990's, and that also plays right into this.  The authorities would keep the economy going as long as possible, and keep the stock market going as long as possible in the process, and end up ramming the stock market as high as it could possibly go in the process - before all of it would come back down again. 

Here's why.  The Kondratieff wave is a natural cycle in capitalistic societies that cannot be overcome - but overcoming it (the later part of it, the big downturn part) is exactly what the mainstream economists of modern times are trying to do (i.e., the law against recessions).  So they have postponed the downturn (hoping and thinking that they were eliminating it) by ramming the stock market way up and then keeping it that way for years afterward (when it refused to go up a lot more).  I explain all of this, and more, on this website, but I will give you the essence, the gist, of it here, below. 

Precisely because the stock market has been rammed so high, it has a long way to go down when the time comes. 

The Kondratieff wave has four phases - growth, stagnation, plateau, and depression.  It takes decades to run its course.  For us, the stagnation phase was in the 1970's - and the plateau phase started in the early 1980's.  One of the features of the plateau phase is that the stock market goes up more in percentage terms during the plateau phase than it does during the growth phase (it does not do so during the stagnation phase - which should be obvious from the name of that phase if one knows what drives the stock market).  Another feature of the plateau phase is that real economic growth slows down after the initial burst up following the stagnation phase, and never gets as high as during the growth phase (at least, not for any length of time) anyway.  One aspect of this is that because the stock market is going up more, people don't notice that the real economic growth is going down again.  That is why the depression phase catches them so thoroughly by surprise.  The depression phase normally kicks in when the economic growth gets low and the stock market has gone as high as it can go in normal circumstances (it normally does not go exponential, as it did this last time) and comes back down again. 

I think the plateau phase of our current Kondratieff wave should have ended with the stock market crash of 1987 - the stock market merely came down more quickly because of modern high-speed trading methods.  But this time, probably for the first time in history, the stock market was supported at that point in the cycle ("We will provide all the necessary liquidity") and the stock market came back up again and the plateau phase continued. 

Another feature of the plateau phase, this time compared to the stagnation phase, is that during the stagnation phase, new money coming into the system tends to go into consumer prices - which is part of what makes that phase the stagnation phase - whereas new money coming into the system during the plateau phase tends to go into the stock market.  The plateau phase is disinflationary in consumer price terms, a disinflation which eventually goes low enough to morph into an outright deflation - in other words, one ends up with a deflationary depression at the end.  I explained above that the modern banking system also supports a deflationary depression - so it all fits together.   

The authorities in our case kept pumping new money into the system after 1987 to support the economy - which caused the stock market to go eventually higher and higher at a faster and faster rate.  It went exponential - as high as it can go at all, the absolute maximum, and sustain itself along the way - in the late 1990's/early 2000. 

And then it came back down again.  That was the end of the plateau phase and the beginning of the depression phase of the current Kondratieff wave.  Notice that the stock market has not gone higher than that for any significant length of time since.  It won't - because it can't. 

As noted, the law against recessions was actually set to expire in 2000 when it was passed by Congress in 1978 - and it did so, but the authorities in the system in 2000 decided that they liked the results of the enforcement of it until then (basically, up until the end of the 1990's) so much that they decided to continue to enforce it as if it had never expired, and that is what they have done. 

So the authorities have continued to push and push and push and push in the time since - using ever-greater government resources (typically ever-greater annual record government deficits) along the way because they were pushing against ever-greater pressure from the depression phase of the Kondratieff wave along the way.  And they kept the stock market high in the process after the downturn of the early 2000's (which happened immediately after the stock market exponential), even pushing the stock market temporarily to slight new highs in 2007 (which did not last because those highs couldn't last - see above) - until the system just could not hold up anymore and the whole thing crashed in 2008.  As noted above, I predicted this in 2001. 

But I predicted that there would be a downturn, followed by an upturn, followed by another downturn.  I think we have had the upturn - it started in March 2009 - and I think we are into the very beginning of the new downturn as of spring 2011 and especially as of June 22, 2011, the day after Bernanke's second news conference.  I knew the traders would be disappointed by what Bernanke said - because there simply is not enough positive to talk about to keep them happy anymore - and so I am not at all surprised that the market sold off sharply afterward, in fact I predicted it would in the website updates for those couple of days. 

So I think what is happening is analogous to what happened at the time of the Mississippi and South Sea bubbles of the 1720's - which were analogous in size to the stock market bubble being blown by the enforcement of the law against recessions and were larger than the bubble of the late 1920's. 

As noted, what is going on runs contrary to the assumption of the mainstream economists in this country.  That is why they keep being disappointed with the results that they are getting and that is why they just can't seem to get ahead of what is going on - because, in fact, they can't, it is simply impossible to do what they are trying to do at this stage of the Kondratieff wave, and that is why we are getting the results that we are getting instead of the results that the American economists want. 

The basic problem is that American mainstream economics is based on British mainstream economics - probably both because America is the successor to Britain in the world in terms of influence in the world and because most English-speaking people in the world are not known for their ability to speak other languages, so they only pay attention to subjects that are (easily) available to them in the English language.  The problem is that the underlying assumption of mainstream English-language economics is that the economy can be kept going forever.  Economic theory developments outside of the English-speaking world proved that that is not the case - and part of the problem may be that Kondratieff in Russia was doing his thing about the same time, in the 1930's, that Keynes was doing his thing in England.  As far as I know, Kondratieff's theory did not become fairly well known in the West until much later than that.  And Austrian economics, which is compatible with the Kondratieff wave, would also not have become well-known in the English-speaking world early-on simply because it originated in German (the language of Austria), although parts of it have been available in English for a long time already. 

Austrian economics and the Kondratieff wave accurately describe what is going on - but conventional American economics does not.  That is why I can keep making accurate predictions, but the mainstream American economists do not. 

I picked up on the Kondratieff wave and Austrian economics probably for two reasons.  One is that the recession of the early 1980's caught me totally by surprise - and forced me to completely change my plans - but I found out when I found out about the Kondratieff wave in the mid-1980's that if I had known about it before the recession, I could have seen the recession coming because the Kondratieff wave predicted it.  And I picked up on Austrian economics because it is compatible with the Kondratieff wave (Keynesianism is not, it are entirely focused on just avoiding recessions) and also probably, in combination with that, because my background is from Germany and I still have lots of connections there and am fluent in the language (which is German, just a somewhat different version of it than is spoken in Austria). 

The problem for the American mainstream economists is that since their theory does not match up with reality, they make very complex models in an attempt to model reality according to their theories.  For a time, that can work - because their theory is not totally wrong at all times and in all circumstances - but eventually it falls apart.  Since they are especially wrong about what happens at this late stage of the Kondratieff wave, their models have now completely fallen apart, having completely failed to see the downturn of 2008 coming at all. 

My model is more accurate than ever - but it is not a mathematical model, I do not believe that economics can be totally successfully modeled on a computer - and my model is actually far simpler than that of the mainstream American economists, it would take probably no more than a book to accurately describe all elements of it in detail (I do not describe all elements of it at once on this website in order not to overwhelm my readers by hitting them with virtually all of it at once - that is part of why I do my updates, so I can provide the detail information in real-time).  So one does not need a degree in American economics to understand what is going on - and in fact having such a degree (especially a Ph.D.) is probably a hindrance. 

The American economists are trying to change their models to take what has happened in recent years into account - and are talking about making things much more complex because they think some major chunk must be missing.  Actually, that is not the problem at all - the big problem is that their model is improperly conceptualized in the first place, it does not totally accurately model reality to begin with, even at the most basic level.  Their most basic assumption is incorrect.  What they need to do is greatly simplify their model and take it in a totally different direction, not make it more complex. 

My model is much simpler than theirs - and is summarized at the My model link on this website.  But my model assumes that recessions are part of the process - as does Austrian economics - and includes them as an integral part of the process. 

But the law against recessions complicates things - and because it existed and continues to be enforced, one can't accurately describe what is going on these days unless one takes that into account.  The combination of the Kondratieff wave and the law against recessions accurately describes everything - but I also use Elliott waves because the Kondratieff wave cannot be used for short-term analysis, it is designed for looking at the big picture.  Elliott waves are also accurate, even for the big picture, but one has to take the law into recessions into account for the big picture (which Robert Prechter, the primary proponent of Elliott waves, does not do) to use it fully accurately if a law against recessions is being enforced, and fitting the law against recessions into the picture is far easier to do at the technical level using the Kondratieff wave anyway, rather than Elliott waves (which is probably one reason why Robert Prechter does not do it, aside from his fundamental philosophical bias against doing such a thing, since he is of the opinion that all markets are entirely self-generating), since the Kondratieff wave provides direct hooks for integrating the law against recessions in at the detail level, and that is why I do it that way.  But I started with the Kondratieff wave anyway - I learned it first. 

If one takes the law against recessions into account relative to what I learned before, one ends up at where we are at. That is what this website talks about - along with a lot of other related and peripheral issues.  And, as indicated above, I do frequent updates - I can do frequent updates and not be blindsided (quite the opposite, in fact). 

And that brings us to today, June 24, 2011 - and the big market drop yesterday and this morning, which actually started the day before after Bernanke's news conference comments. 

As noted above, I predicted that the market would drop after Bernanke spoke - and it sure did.  There is simply not enough positive stuff going on anymore for Bernanke to be able to talk sufficiently positively if the people who follow him closely are going to believe him.  In other words, he is between a rock and a hard place.  I predicted this a long time ago already, just did not know exactly when it would happen.  We are there. 

What happened for hours after the initial big drop was an absolutely classic small (intra-day) bear market bounce - and then, later in the day, the market started dropping again.  It got close to the early-day lows, and then as has happened so many times in recent times, the traders panicked when things got too low for their taste at the time and rammed the market back up.  They got it back up to close to 12,000 and then to 12,000 - and then just tried to hang on for the rest of the day.  The market did drop one more time, but they got it back up and it closed at 12,050. 

Probably the ram-up was a reaction to the announcement that oil is going to be released from the strategic reserves in an effort to bring the oil price back down.  My contention is that the amount of oil being released will not bring the oil price down enough. 

Today, the market came right back down again first thing this morning after the late-day bounce yesterday.  After the market came back down this morning, the traders spent the rest of the day just trying to prevent the market from going any lower, i.e., toward yesterday's intra-day low, and a couple of times tried to ram it back up in an effort to end the week on a high note for the day, but never got past the trading range in the process (in other words, they barely got started each time).  Late in the day, it started drifting even lower, making it as low as 11,926 very late in the day, before bouncing up a bit to close at 11,935, down 115 points. 

Today's drop more than made up for yesterday's late-day bounce. 

The trend is still definitely down (and has been for several weeks already). 

I suspect this is the beginning of the next major downturn, the second one that I have been predicting for a very long time already.  If it is, the economy is about to take a big dive downward, real estate values will go down much more in the process, which will further undermine the collateral of the banks, which will intensify the credit crunch, which will suck the economy even more dry of money (because most of the money in the economy is borrowed, which will lead to more defaults), which will intensify the economic downturn even more in a self-reinforcing spiral.  It will be highly deflationary - not inflationary - because most of America's monetary base is borrowed money. 

I have, in fact, been predicting in recent days in my website updates that there is the distinct potential of a stock market crash soon. 

Now some additional comments. 

Given that we continue to have a law against recessions being enforced (which I did not even find out about until after it had expired, myself), it is no surprise that what is going on these days is going on. 

But I think America is at the end of its good-times days - I think the end is very near.  Preparing for that in various ways is what this website is all about. 

Now on to some more specific comments. 

The reason why the people who have been most wrong about the economy are the ones featured in the  media are as follows.  First, the English-speaking world thinks it has all the answers - that started with the British during their empire, and continues with the Americans (mainstream ones).  Second, native English speakers are not known for knowing other languages - so they concentrate on ideas from the English-speaking world.  Third, people tend to have short memories - so they do not even remember anymore that the pundits were wrong the last time.  Fourth, if someone has a fancy degree or a fancy pedigree, he must be right - I found out the hard way that this is not always the case.  There are probably more things I could mention here, but you get the idea. 

Since mainstream economists believe that an economy can be kept going forever and believe in the law against recessions and believe in the Great Moderation (most of them still do), which was the observation that recessions after the early 1980's one were ever-more-mild, thus convincing them that they were on track, about to eliminate them completely from the system, no wonder they were completely surprised when a big one came along in the second half of 2008.  I will add that I have a link on this website "Why the law against recessions was passed" which will give you an idea of how the baby boomers tie in and why the whole thing was therefore as completely inevitable as it was.  And because the mainstream economists just do not want to believe what happened in 2008 - they regard it as an anomaly - and no one else wants to believe it, either, because they still hope the law against recessions works and they don't know who else to turn to besides the experts they knew already (and probably would not even want to believe the prediction from someone like me anyway even if they would know about someone like me), they continue to pay attention to the "experts" they know. 

The people who were right about the economy in the last decade are ignored because the mainstream media wants to keep the people in the dark and because most people want things to keep going and because the baby boomers in particular never want to experience something, again, like what they experienced in the 1970's during that downturn (they spent their formative years thinking that they have a birthright to plenty and riches). 

But there is another reason why the mainstream media so thoroughly celebrates the Keynesian economists - and I talk about that on this website, too.  It is that Keynesian economics is what is taught in nearly every economics department at American universities.  I did not even know myself that there is a different kind until after I got out of college and found out about Austrian economics by way of newsletters - which most people would not have found out about, anyway, because the salutations at the top were always "Dear Professional" (I was an engineer).  They found me because of my degree.  There is simply no way most Americans are going to realize how misguided the ideas of the mainstream American economists are short of having the whole system blow up to show just how wrong the Keynesians are - but I do not think that time is far off anymore and I say right on this website, also in another part of it, that when the time comes, the Keynesian economists are going to look just as much like complete idiots as the professors of Marxism in the Eastern Bloc did when their entire system fell apart in 1991. 

It is true that for the time being yet, the mainstream prognosticators continue to get the airtime and are able to sound credible, in part because people have short memories. 

But, as noted, I do think the game of the mainstream prognosticators looking like they have any credibility yet at all will soon be up - I think we just entered into the very beginning of the next major downturn. 

It does all fit together - if one knows the really big picture.  The problem is that most Americans know almost nothing about the big picture - and they are about to pay a big price for that.