Bill Gates Predicts Deflation

Reuters reports:

"No doubt, we've got three or four years here that are going to be very tough," Gates told the eclectic gathering of industry executives and business leaders [at TED]. "We're going through a period ... where a 50-year credit expansion has moved to contraction. You're going to have a number of years where aggregate demand is low," he said.

Nystrom's comment: Deflation is properly defined as a decrease in the money supply. But we don't live in a money-based society, we live in a credit-based society. Hardly anyone - from the Federal government right on down to individuals - don't have enough money to satisfy all of their appetites. Thus we nearly all turn to credit to satisfy those wants. Over the years, credit has become so pervasive that we simply take it for granted. Heck, these days even a dollar is just a credit, no longer backed by "lawful money." Early FRN's were redeemable in gold (see this 1928 $10 note) but by 1934 said only that they were redeemable in "lawful money." Check out this picture and read the fine print. All mention of gold has been completely scrubbed. What is lawful money if not the bill itself? Now compare it to an FRN in your pocket. These days it is the dollar itself that has become "legal tender" by fiat (i.e. government decree). It is not money in the true sense. It too is simply a credit.

Say someone wants to buy a new PC. Hardly anyone pays cash anymore. Instead, they throw it on a credit card, and each month they pay about 1.5% of the bill, which is about all they can afford. They don't pay cash because they don't have any after servicing all their other credit debts: car payment (credit), mortgage (credit), student loans (credit), and other credit card bills (credit).

You can see that it is not money that makes the world go round, it is credit. And as Bill Gates says, the 50-year credit expansion cycle is going into reverse. That means falling demand for things like: computers, cars, houses, and education. The big difference is not that people can't afford these things anymore. They couldn't afford them in the first place! The difference now is 1) They can't afford them and, 2) They can't get the credit. Furthermore 3) Saving up takes time, and 4) Most of the junk people buy on credit isn't worth saving up for, anyway!

So unless the banks suddenly find religion and open the spigots on the zero-percent balance transfers and the liar's loans again, credit will continue to contract, as this article in Forbes confirms: Banks Promise Loans But Hoard Cash.

The article states that banks have $793 billion in excess reserves. That is potentially explosively, hyper inflationary, except for one thing: Who are they going to loan it to? Not you, not me, not GM, not Chrylser, not the State of California. The only way that credit can work its way out of the banks and into the economy to those who need it is through bank loans. But the banks ain't loaning.

Like during the Great Depression, it is the banksters that are in control. As long as they continue to say no, credit will continue to contract, demand will continue to fall, and prices will continue to slide.