Deflation - a possible scenario for the death of the "evergreen"

Index
    Гиперинфляция доллара 2020
    Hyperinflation of the dollar 2020

    Ray Dalio, Robert Kiyosaki and even Warren Buffett criticize the US Federal Reserve for printing new dollars. They indicate that the American currency is rapidly depreciating, and if this continues further, we may well be in a situation of collapse of the dollar and default of the United States.

    In this article, we will examine whether a public debt will really destroy America, and whether dollar hyperinflation can occur. And also we will tell the scenario that will cancel the dominance of the dollar in the global economy. It was launched back in the 70s of the last century, and now the time has come for the next step.

     

    Government debt

    Государственный долг США
    US government debt

    The main reason for the collapse of the dollar that is being talked about - this is uncontrolled printing of new money. Therefore, Ray Dalio and Robert Kiyosaki advise buying real assets, such as gold, and the whole crypto community with bated breath expects people to change their minds and pay attention to bitcoin .

    As a result of the collapse, a graph of the US government debt is given and, as mathematicians would say, it is growing exponentially:

    Размер госдолга США
    Size US public debt

    And in 2020, thanks to a new quantitative easing, it seems that the public debt schedule flies upward perpendicularly.

    The current value of the US public debt is already almost $ 25 trillion, and it seems that the bubble should burst just about, but in fact this is a unique case in the market when there is no real limit.

    So it was in 2011, when the public debt reached its highest possible level in terms of US laws and the country had to declare a technical default. But instead, Congress voted, and Barack Obama signed into law, which increased the maximum allowable limit. The current president, Donald Trump, has similar experience in increasing the US government debt limit.

    And as you know, he can repeat. This hackneyed phrase has already become familiar in a completely different context, but just this is what Donald Trump can really repeat, and nothing will be done to him or the USA.

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    The important point is that now, due to the reduction in the base rate, the yield on ten-year government bonds has fallen to almost zero — it is now less than 1%, which reduces the debt burden and allows US save on debt repayment.

    And here it is also worth understanding, but to whom, in fact, is this duty? Take Ukraine, for example: the country's authorities consider it an achievement that they were able to fulfill the conditions of the International Monetary Fund and now they will be given a new loan, most of which will be used to pay off previous debts. Simply put, Ukraine has been refinanced, but Argentina has failed to do so, and now the country has the ninth default.

    And who can ask for debt from the USA? The largest holders of public debt are China and Japan, and then on the list almost all countries of the world that have at least some free funds and want to make money on it. They buy government bonds and get the return on them, and this is a unique case when not the creditor, but the borrower dictates its own rules.

    Because if something happens to the US economy and they cannot pay, it will ricochet all over the world. So in theory, there is a hypothetical scenario where China makes a knight's move and abruptly dumps its assets in a public debt. But in reality it’s a shot in the foot, because the Fed is able to quickly redeem everything, but the blow to the Chinese economy due to lost profits will be dealt a very strong one.

    It turns out that in theory the public debt can grow to at least $ 100 trillion, but the US will still feel better than anyone. This does not mean that the dollar will not die, everything in this life will ever end and such a scenario exists.

    Inflation

    Инфляция фиатых валют
    Inflation of fiat currencies

    As we know, inflation is a direct consequence of the increase in the money supply, because of which prices for goods and services are rising, and money are constantly depreciating. We are sure that your grandmothers and grandfathers more than once remembered how earlier bread was 10 kopecks, and for three rubles it was possible to arrange a good sabantuy.

    Or an example closer to each of us: remember how a conditional banknote of 5,000 rubles five or six years ago was a significant amount. And today, this money somehow ended just like that, it is not even clear where it went. But do not rush to shout that they say they brought the country. Inflation is everywhere and the story with the dollar is similar, once it cost a lot, a lot.

    All fiat currencies are subject to inflation, without exception, but the US dollar at the same time feels better than the rest, and do not care that their printing press is now working 24/7. Today, Washington is not afraid of repeating the story in Zimbabwe or Venezuela, when money costs less than the paper on which it is printed.

    On the contrary, Trump is now trying to stimulate inflation, because in a controlled way it allows to accelerate the economy, as it generates demand. The simplest explanation is that a person buys today, because tomorrow will be more expensive.

    And while inflation has not moved to the galloping stage, when prices rise by more than 10% per year or into hyperinflation with a rise in price by only 50% per year or more. This allows the business to grow, increasing production. This is how the current model of the economy works, it exists because money is becoming cheaper, and there are more and more goods on the market.

    The United States is now not afraid of inflation; on the contrary, they are fighting to maintain it. Because the US economy is now No. 1, and Trump is not just attacking China - he is fighting to keep America world-leading. This will allow them not to worry about printing dollars, because then their currency will depreciate more slowly than the rest. And if Washington is afraid of anything, it’s deflation, which has already begun, and here we get to the climax.

    Deflation

    Дефляция на рынке 
    Market deflation

    In April, US retail sales collapsed by 16%. How is it that there is more money and inflation shows negative values? The answer to this question is on the surface: just printing new money is not enough, people still have to spend it. And if nobody buys, if money is stored under a pillow, then prices go down.

    Deflation is a nightmare for the economy of any country. This ordinary person can rejoice that something has fallen in price in the store. Hooray, an attraction of unprecedented generosity, etc. And the entrepreneur who manufactures products is always horrified at the price drop. After all, he will receive less revenue, but think about why an ordinary conditional guy Vasily should worry about the owner of the plant and that he will earn less? But if the enterprise loses profit, it is forced to first stop development, and then proceed to curtail production, and our hero Vasily runs the risk of being on the street without work, because his work will no longer be necessary.

    Deflation is also frightening because it pushes buyers to deferred demand. The scheme is as follows: due to low demand, the store reduces the price. Seeing this, the buyer thinks why I will buy today, if tomorrow it will become cheaper even more. Then these actions are repeated, and while someone is sitting on a suitcase with money and waiting for the next drop in prices, a tow truck is taking away Vasily’s car under his windows, because it was bought on credit, and he cannot pay it off without work.

    Japan has been fighting deflation since the nineties of the last century, and so far has been losing this war. Now the fall in prices, followed by a recession in the economy, has reached the United States. These processes intensified as a result of the pandemic, when the worldview of many people changed, and they realized that you can’t live without savings, then you will have to rely only on the support of the state.

    And even though "helicopter money" is being handed out in America, they do not fulfill their main function - they do not stimulate demand, and prices begin to fall. If the United States, like Japan, does not find a solution to the deflation problem, then the current economic model will have to be changed.

    Is the US Default Possible?
     

    This means that if after the Second World War we switched from the gold standard to the dollar standard, making American money the main world currency, in the 70s the dollar lost some of its rights after the Jamaican the currency system established the regulation of exchange rates on the open market and added new reserve currencies, such as the Japanese yen, Swiss franc and others. Unofficial reserve currencies, which are the Chinese yuan, also appeared.

    As you can see, part of his power over the world has already been bitten off the dollar, and the current crisis may be an occasion to repeat this action. Previously, the United States always with honor came out of financial crises and even pulled ahead, but now more than ever the chances are great for their mistake. And then, if the dollar is not killed, then patted to the maximum.

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