Deflation Manifests Globally

EG: It would appear that by the will of Central Banks and the Federal Reserve, such factors as quantitative easing and negative interest rates constitute the reasons for the bubble. Were they simply being shortsighted or was there something to gain for them in it?

Harry Dent: There was everything to gain for them in the near term. They were able to push an inevitable financial crisis down the road to the next Fed chairman or President. Who would want the next great depression to occur on your watch? We were seeing a massive debt and bubble deleveraging occurred in the early 1930s and they were able to flood the banking system and economy with free money and keep longer term interest rates lower than normally in such a crisis where defaults rise and raise such rates. That allowed an artificial rebound that no longer followed the rising demographic and technology trends of the 1983 – 2007 boom. This became about consumers getting much lower mortgage payments and car loans – a free lunch. Businesses could borrow cheap and buy back their stock and finance mergers and acquisitions that didn’t grow the pie or create new productive capacity.

EG: Printing money and increasing debt does not seem sustainable. Is there a strategy to prevent a similar crisis from happening again in the future, or is the crisis simply a necessary part of this
financial system that is bound to happen over and over?

HD: There is no way to prevent this crisis after a third and larger debt and financial asset bubble has stretched so far for 8 years now. Consumers and businesses are still at peak debt or worse now. Government debt is much higher. There is only more debt and bubbles to deleverage and “detox” (debt and bubbles are like a drug – they make you feel high and better than normal – and why they are so addictive). Hence, the crisis around the corner will only be worse than 2008 – 2009, and more like 1929 – 1933. Glass-Steagall was created in the 1930s to prevent another collusion of the banks to create such bubbles, but Bill Clinton repealed it just in time for the tech bubble and many more to follow. Massive debt and bubbles have to be purged from our economy or we will stay addicted until we die. And we need a stronger version of Glass-Steagall/Dodd-Frank.

EG: The stimulative measures of Central Banks, their attempts to restart the economy by addressing symptoms rather than long-term causes, are hinting at the terminal flaws of these institutions. Would it make sense to do away with an institution like the Federal Reserve and its interventionist policies, or is there perhaps still a way to make it work despite its previous shortcomings? 

HD: Absolutely. The Fed should be a part-time institution that does not try to manage the economy (and kill the golden goose of free market capitalism and democracy), but simply provide temporary only emergency liquidity in crises like 1930 – 1933 and 2008 – 2009 to keep the banking system from totally breaking down. But it shouldn’t prevent the natural rebalancing of debt, over-expansion, bubbles, inefficiency and bad investment that come with any boom. It also should not stimulate during the boom which only makes such bubbles worse. And the Fed has done just that since the first 1987 crash. 

EG: For all the signs pointing towards a brutal burst, the average stock broker is likely to deny the full extent of the upcoming collapse and claim that diversification will protect us from the fall. Why is the mainstream denial of the ultimate collapse such a widespread view?

HD: Major bubbles like this come only once in a lifetime and when they burst there is no diversification strategy to protect you as almost everything goes into bubbles and crashes – as in 2008 – 2009. Stock brokers don’t make money when you move into cash. They, like politicians and economists don’t want you to panic and sell. They have made unprecedented profits from this bubble as have their companies. This is not the time to listen to them – or Warren Buffet for that matter!