INFLATION OR DEFLATION?

What is inflation and what causes it?
Written in 1974 by David Brandt Berg





IN THE GREAT ECONOMIC DEPRESSION OF THE LATE 20'S AND 30'S THE POST WORLD WAR I DEPRESSION, THEY HAD NO ECONOMIC GUARANTEES on wages, no price supports, nothing to keep wages and prices up. So when the economic crash came, the war boom burst immediately, because of the production slowdown caused by the end of the war. (See also "War, Boom, Bust!" No. H.) They weren't making any more guns and munitions, etc. The boom had been caused by the war and when they stopped making munitions for the war, this threw a lot of people out of work and so the war boom burst!

A LOT OF PEOPLE WERE OUT OF JOBS and there was no social security, no guarantees of wages, nothing for the poor man except starvation. They either cut his wages way down or threw him out of work entirely. When people didn't have jobs and had very little money, the prices also fell, because the people didn't have enough money to buy anything.


THEY COULDN'T EVEN BUY NECESSITIES, MUCH LESS LUXURIES. Many other industries virtually went out of business, not only the war businesses, but the appliance businesses, etc., went broke too! The auto business was one of the first places where people cut their spending, because it's a luxury to buy a new car, and if everybody does that, then the auto business can go broke the first year because nobody buys a new car. They keep the old car, the old refrigerators, and the old houses as well!

THEY JUST KEPT THE OLD ONES AND PATCHED THEM UP because they didn't have any money to buy new ones, which is what they should have been doing in the first place. If it happens now with so many people tied up with time and mortgage payments, they'll all go bankrupt. So the car industry nearly went broke, and some of them did, or at least went way down. I can tell you half a dozen to a dozen car manes that exist no longer because they went broke in the Great Depression. Only the big money boys survived, like General Motors, Ford, etc., and they bought up many other makes of cars.

THE MORE INDUSTRIES THAT WENT BROKE, THE MORE PEOPLE THERE WERE OUT OF WORK, and therefore, the more people there were that didn't have money to spend! It was a vicious cycle, a downward spiral that just couldn't stop, and industry kept cutting prices to where people could afford to still buy. This meant that both wages and prices spiraled downward, prices following wages so the people could buy something.--This was the deflation. Now when both wages and prices are lowered, then your money actually buys more, so its value is actually higher. Believe it or not, this is called deflation. In a deflation (or depression) the money's value grows because it buys more to pay more wages and pay more prices, etc. So the monetary system actually increases in value, not numerically but in buying power.

THE END OF THAT DOWNWARD SPIRAL WAS THAT ALL THE POOR WOUND UP WITH ALMOST NOTHING AND NEAR STARVATION, except for the public works programs that FDR put on where they were working for one dollar a day on a "make-work" project. He just declared or decreed that certain dams be built and certain places be reforested and bridges and roads built, all kinds of big "works project" where they sent thousands of people out to do these jobs. The government just took a lot of money and spent it! A lot of it was from borrowed securities and bonds. This was when one dollar a day could keep you alive, and it was called the WPA: Works Projects Administration.

THIS RESULTED IN THE POORMAN AND LITTLE BUSINESSMAN LOSING EVERYTHING. They were gobbled up by big business, the big corporations and big banks who had enough money to buy them up. Whatever cash they had was worth more now because they could buy them up at these low prices and pay low wages.

THE ONLY PEOPLE WHO BENEFITTED FROM THE DEPRESSION WERE THE ONES WHO HAD LOTS OF MONEY, cash. The depression really favoured big business--The guys who had lots of money to survive because their money was worth even more. This was not inflation, this was deflation which benefitted big business.

SO THE BIG POWERFUL LABOUR UNIONS, THE POLITICIANS, THE MIDDLE CLASS AND THE LITTLE BUSINESSMEN WHO HAD BEEN WIPED OUT DETERMINED THEY'D NEVER LET IT HAPPEN TO THE COMMON MAN AGAIN! He was never again going to be totally thrown out of work with no money and where his buying power would fall so low that the prices crashed along with the wage collapse. From that time on there were going to be guaranteed wages and guaranteed unemployment insurance with the government footing the bill, along with big business having to pay part of the bill. Big business then, of course, insisted that they also have guaranteed prices. So they put so many safeguards on the wages and prices that they'd never collapse again like they did in the Depression.

BUT WHAT THEY ACTUALLY DID WAS TO VIRTUALLY GUARANTEE PERPETUAL INFLATION, THAT WAGES AND PRICES WOULD CONTINUE TO RISE AND NEVER GO DOWN AGAIN! Every time big business hiked their prices, labor would hike its wages, and then business would say it had another excuse to hike its prices because wages went up. It became a vicious cycle, an inflationary spiral. It was impossible for prices and wages to decline because they were guaranteed by governments who never wanted to see another depression.

SO WHAT RESULTED WAS A PERMANENT INFLATIONARY SPIRAL of prices and wages, and a permanent constant continual inflation of money so that the money continues to buy less and less and less, and its value goes down and down and down. The higher the wages and prices go up, the less your money can buy. The higher the prices go, the higher the wages go, but the rich make sure the wages are never able to catch up with the prices. So they just keep going up and up and up and the money buys less and less, until finally the money is worth almost nothing compared to what its value used to be.

NOW THE PEOPLE WHO ARE HURTING ARE THE BIG MONEY BOYS, because now their money is inflating and exploding in an inflation explosion. Now it's the big investors, big business, big money and big governments whose money is dwindling down to nothing so it can't even buy much any more. In spite of the fact that industry is slowing down and therefore unemployment is increasing, there are so many safety guarantees to keep wages up and to give unemployment insurance and to keep prices up that there is still inflation in spite of a recession or depression right now this minute picking up speed!

THE STRANGE THING THAT'S HAPPENING IS THAT THE INFLATION IS PICKING UP SPEED RIGHT ALONG WITH THE DEPRESSION, just the opposite of what happened in the Great Depression. This time they're not only going to have a big depression, or economic collapse, which in days past benefitted the big money boys, but it is also going to bring about the collapse of big investors, governments, everybody! It's going to take the money down with it!--And Capitalism!

THAT'S WHAT THE LORD SHOWED US! We'll be paying three pounds or the old equivalent of seven dollars for a can of soup before long, and they won't even sell you a round trip ticket because the price of a ticket will increase faster than you can use it!

SO WHAT IS IT GOING TO DO TO THE SMALL LANDOWNER, small home owner, small business owner and the payments makers? Well, the actual value of the payments is declining so it'll actually make it easier for them to make their payments.--If they have anything to make them with! The people that own property are going to be better off than the people renting, because unless the governments control the rents, the rents are going to rise right along with the prices. Whereas, the people who are buying or leasing on a long term contract are actually going to be paying less and less for their property because of the decreasing value of the money.

THE BUYING PRICES OF PROPERTY WILL SKYROCKET, but the people who've already bought or who are already on contracts are going to benefit if they have any money at all to keep up the payments. For example: During the Depression we bought a house for 25 dollars down and 25 dollars a month. Well, that 25 dollars would be the equivalent of 250 dollars down and 250 dollars a month now, for as wages and prices go up the actual value of those 25 dollars a month payments has gone up. If the people are getting any money at all guaranteed by governments, they'll be able to meet the payments even more easily because of the inflation. It was always our policy before, because of the experience of the previous Depression when prices crashed along with the Depression and the value of everything went down, that it didn't pay to buy but rather it paid to rent, because rents were down in deflation.

BUT THIS TIME THE PRICES ARE NOT GOING TO CRASH BUT THEY'RE GOING TO EXPLODE AND CAUSE THE MONETARY SYSTEM TO CRASH INSTEAD. That's the difference between the inflation of today and the deflation of yesterday's Depression. The fellow who has bought or is buying on a contract is going to benefit because he'll already have it, and its value will skyrocket. If he has any income at all to keep up his payments, or especially if he's already got it paid for, then this is a totally different situation from the last Depression. This time they've guaranteed wages and prices are going to go up as the value of money goes down, just as the Lord has shown us.

SO IF YOU'RE GOING TO BUY ANYTHING, THE TIME IS NOW and the sooner the better. That's one reason there is a boom of land and property buying right now. Smart investors know that's where they can put their money and it'll be fairly safe and they'll have something to show for it. Whereas, the value of everything else which has a monetary price on it, like stocks, bonds, cash, etc. will actually decline, just like they're going down now. Their real value is shrinking because of the inflationary explosion.

THE "GREEN PAPER PIG" (Writing by Berg on the dollar) IS EXPANDING just like when you blow up a balloon. There's actually no more balloon there than when you started. It's just getting thinner and thinner and filled with more and more hot air and stretching further and further till it bursts. This is what the Lord showed us about the "Paper Pig", until finally it can't stretch any further and it explodes! That's why the Lord showed us even as far back as several years ago to buy gold then. The same is true of real estate or houses, buildings and lands.

IF YOU'RE ACTUALLY GOING TO USE THE LAND FOR SOMETHING TO LIVE IN OR ON, ITS VALUE IS GOING TO INCREASE along with its price. So it is better to buy now because both prices and rents are going to go up. The only safe thing to do is have it already bought. At the end of our present contracts what are they going to be worth? If you're a farmer and know how to grow food, then a farm is the best place to buy so you have food along with your place to live. That's even better than gold because you can't eat gold!

THAT'S WHY THE BIG INVESTORS ARE NOW BUYING FOOD COMMODITIES ALONG WITH GOLD. They're now not only buying this year's crops, which haven't even been harvested yet, but they're also buying next year's crops and crops as far as four years ahead because they want to make sure they're going to get them at this year's prices. But that's probably going to cause a collapse too because by that time, or maybe even before, the growers won't even be able to afford to grow them. The price that was paid one, two, three, four years ago won't even pay for the cost of the crop, so they'll collapse--if it even lasts that long! But, of course, along with the collapse of big business, big money and big banks will come the collapse of big governments.

HOWEVER, BEFORE THE GOVERNMENTS WILL COLLAPSE OR ALLOW THEIR BIG BANKS OR BIG BUSINESS OR BIG MONEY BOYS TO COLLAPSE, THEY'LL START A WAR. They're going to blame it all on the oil, like they're doing right now, that the inflation is all because of the oil prices.--Which isn't true! But at least it's a good excuse to take the people's minds off their domestic problems…
BUY PROPERTIES ON LONG TERMS with low payments, and I believe they'll be protected for the next year or two because I think rents will skyrocket along with all other costs and prices and wages. Of course, many things are going to become scarce and almost impossible to buy soon, so the same is true of any other major purchases. If you can afford to buy it outright right now, or better yet on very long term payments so you don't have to put out all that cash right now, then I'd advise you to buy it now.




D.B. Berg

SUB-PRIME MORTGAGE CRISIS



Part 1

What’s the story on the Sub-prime Mortgage Crisis?
People want to know what happened... "What caused sub-prime mortgage mess and how did it spread to the point of impacting the worlds markets and how and how will this affect me?"

This economic Tsunami began early in 2006 and by 2007 was affecting the entire US economic system and its waves causing upheavals in nations around the world. Now in 2008 eyes are still widening with the evidence of ongoing economic repercussions not likely to fade away in the near future.
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(Compiled from Family International publications)

Mortgages

World Book encyclopedia describes mortgages as follows:
A mortgage is a loan agreement that enables a person to borrow money to buy a house or other property. The property is used as security for the loan. The lender may take possession of the property if the loan is not repaid on time. A person can obtain a mortgage from a bank, insurance company, mortgage company, savings and loan association, or other financial institutions. Most mortgage agreements require the mortgager to repay the loan in monthly installments over a period of 20 years or more. Part of each payment goes toward the unpaid balance of the loan, called the principal, and part toward the interest. If the borrower misses a number of payments, the lender may foreclose the mortgage. Foreclosure is a legal procedure by which the lender takes over the mortgaged property. The lender then may sell the property, keep the amount owed, and give the borrower the rest [if any]. [Editor: Or, to put it very simply, a mortgage is when someone lends you money to buy a house, with the understanding that if you can't repay the loan, they'll repossess the house.]

A form of mortgage that's much in the news lately is what's called a subprime mortgage—a housing loan to those with poor or shaky credit. Author Bill Bonner describes one such case in his book Empire of Debt (John Wiley & Sons, Inc. 2006):
"My daughter is only twenty-five," wrote a friend, "but she just bought a house in Northern Virginia. Of course, she mortgaged most of it. But can you believe that they lent her $275,000? Is that crazy, or what? She works as a bartender, part time. She's very responsible, but I can't believe they would lend her that much money. How do they think she will pay it back?"

Cause and effect
Why would banks encourage people to buy homes they can't afford, taking out loans they can't repay? And why would this sort of behavior have international repercussions? Journalist David Leonhardt explains in a New York Times article:
How is it that a mess concentrated in one part of the mortgage business—subprime loans—has frozen the credit markets, sent stock markets gyrating, caused the collapse of [the fifth largest investment bank] Bear Stearns, left the economy on the brink of the worst recession in a generation, and forced the Federal Reserve to take its boldest action since the Depression?

Let's go back to the beginning. It really started in 1998, when large numbers of people decided that real estate had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one to a global one, in which investors from almost anywhere could pool money to lend.

Those same global investors demanded good returns. Wall Street had an answer: subprime mortgages.

Because these loans go to people stretching to afford a house, they come with higher interest rates—even if they're disguised by low initial rates—and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or CDOs. Once bundled, different types of mortgages could be sold to different groups of investors.
Investors then increased their returns through leverage. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money.

(Wikipidia- In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity.)
Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody's Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a recession after the technology bust of 2000, and then keeping them low for several years.

All these investments, of course, were highly risky. Higher returns on investments almost always come with greater risk. But people—by "people," I'm referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners—decided that the usual rules didn't apply because home prices nationwide had never fallen before.

The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets [by banks and other investors] were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.

"If anything goes awry, these dominoes fall very fast," said Charles R. Morris, a former banker who tells the story of the crisis in a new book, The Trillion Dollar Meltdown.

This toxic combination of bad investments and their potential to mushroom has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio [set of investments], regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it's affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Street's fears.

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns.

How could subprime mortgage loans take out the whole global financial system? That's how. ("Can't grasp credit crisis? Join the club," David Leonhardt, NY Times, March 19, 2008.)

Sub- Prime Mortgage Crisis
Part 2

Flipping, and later flopping

The problem wasn't confined to the subprime mortgage market, either. Housing prices went up so rapidly that many people, even those with good credit and decent incomes, decided that investing in it was a sure thing. Empire of Debt describes the process of flipping which was mentioned earlier—buying a house on credit and holding on to it for a little while, as its value inflated, and then selling it for a profit:

The cost of housing, in many areas of the country, was not just inflating—it was blowing up like a front-seat air bag. … Buyers were not looking for a place to live; they were speculating—betting that [they'd make] enough money to make them rich.

One genius buys a condo before it is built. He flips it to another investor, who holds it until it is completed, making a bundle when he sells it to a professional couple who intend to stay for two years and then sell (at a huge profit) to other buyers. All of them are making the smart moves—buying with little money down and making minimum monthly payments on adjustable rate mortgages. And all of them are getting richer—or so they believe—as long as prices continue to rise.

The problem, of course, was that housing prices didn't continue to rise. An AP article describes the downward spiral that resulted:
When [housing prices] began to crumble, so did financial stability.
The same people who made a financial stretch to buy their homes are now defaulting on the loans at alarming rates. Many are "upside down" on their loans, meaning they owe more on their mortgages than their homes are worth.

[Editor: For example, perhaps someone took out a $250,000 mortgage on a new house, figuring that they'd sell it when its value reached $300,000 and make a tidy profit. They could put a few thousand dollars down, get a mortgage that had low interest rates for the first year, and make a $50,000 profit in no time. But suddenly housing prices fell and no one was interested in buying their house for $300,000, or $250,000, for that matter. The value of their house had been inflated in the first place, and they're having trouble selling it for any amount of money now. But they have a $250,000 mortgage loan they owe, and suddenly interest rates are rising inexorably. Flipping has turned into floundering, and flopping.]
Nearly 9 million households now have upside-down mortgages, and for the first time ever, mortgage debt is bigger than the total value of homeowner equity [cash invested]—bigger by $836 billion, according to research by Merrill Lynch.

The housing problem set off the dominoes: Surging defaults meant the mortgage-backed securities plunged in value. Bear Stearns found itself in the cross hairs. Rumors began to swirl [as people wondered] whether it had ample reserves to cover potential losses. Clients and investors began to demand their money back.

"I think the current financial crisis looks to me like the worst one since we got into the Depression," says Richard Sylla, who teaches the history of financial institutions at New York University's Stern School of Business.

Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart—determining how deep the wounds from the mortgage mess really are—also makes it impossible to map the path of the downturn. ("US Ponders: How Deep Is Economic Abyss?" Rachel Beck and Erin McClam, Associated Press, March 23, 2008.)

"They didn't really know…"
The mortgages which were sold to banks, pension funds, and investors around the world were packaged in such a complex way that they practically defied understanding. As a result, many financial firms aren't even sure how much money they've lost yet—or how much the remainder of their mortgage-backed assets are worth.

Bill Bonner, writing in his Daily Reckoning newsletter, reports on his conversation with a source who is very close to the Bear Stearns situation:

"What went wrong?" we wanted to know. "How could this group of very smart accountants, lawyers, and investment pros have been so wrong about what they had in their own portfolios?"

"Well, they didn't really know. And they still don't really know," said our source. "They have no reliable way of knowing what their 'assets' are worth. They're … marked to whatever fantasy they have in their heads at the moment. When the fantasy was positive, the assets were worth something. When the fantasy turned into a nightmare, they panicked and wanted to get rid of them in the worst possible way.

"And the really scary thing is that the other financial institutions are in much the same situation. They don't really know what they have … or what it is worth. There are almost certainly some more horror stories that will be coming out." (The Daily Reckoning, March 20, 2008.)

Banks, financial firms and companies around the world are apprehensive about what will happen next, as are economists.
"It's going to go from bad to worse. … This is certainly the worst financial crisis in the last 50 or 60 years," says Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard.

Today's financial problems could likely be seen as "the most wrenching since the end of the second world war," Former Federal Reserve chairman Alan Greenspan wrote in the Financial Times (March 17, 2008).

The root of the problem
(Jesus:) The root of the problem is the same as it has been for centuries: credit, which leads to debt that spirals into ever greater debt. Then those who are lenders gamble that they can make even more money by devising new and more lucrative ways for people to go more deeply into debt, while the people themselves gamble on what they consider a sure thing, just what they need to pay off their debts, or set themselves up for retirement, or finance their lifestyles, etc.

Credit has become the drug of choice of the modern world, far more widespread than any other. Individuals, companies and governments must have their fix of it, for they are addicted to it, and the withdrawal symptoms are too painful to endure. Life without credit means no future debt is possible, and often their present debt is so large and overwhelming that they cannot go on without another credit fix.

Like many drug users, however, they do not see that they have a problem. They're surrounded by other users who are in similar situations. "Credit and debt are just the way of the world, a necessity, and nothing to worry about. Everyone does it and no one's especially concerned about it. Besides, it feels good and helps make life more enjoyable. I need it. I've got to have it."

Occasionally the "users," the debtors, feel the pain of their addiction and regret what they've gotten themselves into; but a fresh infusion of credit brings relief and temporary surcease from the pain. (End of message.)

(C.A.C.) What is the economic condition in the US? Everyone’s in debt. They’re in debt on a personal level, corporate and government level. Everyone is spending dollars they don’t have, living above their means. And how can they get so much money to buy big fancy cars and TVs and furniture and whatnot? How can they afford it?—well they can’t—It’s all bought on credit.
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(David Brandt Berg) Rich people have borrowed themselves into debts that they can never repay! Poor people the same. Middle class people the same. So if the slightest little thing gets out of balance or goes off in any way, the whole thing crashes like a bunch of dominoes! And who do you suppose can jerk the rug out and make it happen so that everybody loses everything, including the government, and can't pay? Everybody loses but the ones who loaned the money and now own everything! They loaned the money on the house, now they own the house. They loaned the money on the car, now they own the car. They loaned the money on the property, now they own the property! They loaned the money on the business, now they own the business. They loaned the money on the industry, now they own the industry! Those are the facts; that's how it works!

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