Debt Deflation And Deleveraging Will Continue Into 2011, Itz Lazy Boy Says

Alan Lopez, writing as Itz Lazy Boy, relates that debt deflation and deleveraging will continue into 2011.

I agree, global competitive devaluation commended on November 5, 2010 at the hand of the currency traders.  Cumulative currency value losses between November 5, 2010 and November 19, 2010, are as follows
FXS -3.6%
FXF -3.0%
ICN -2.9%
SZR -2.7%
FXA -2.7%
FXY -2.6%
FXE -2.5%
BNZ -2.1%
XRU -2.0%
BZF -1.9%
FXC -1.8%
CEW -1.7%
FXB -1.2%
CYB -0.5%
FXM -0.5%

November 5, 2010 was an inflection point, that is a tipping point, in world economic and political history.

On November 5, 2010, the world passed from an age of investment liquidity provided by the world central banks lowering of interest rates and by quantitative easing and by Bank of Japan ZIRP yen carry trade lending and pivoted into the age of deleveraging and the age of debt deflation.

Beginning on November 5, 2010, the bond traders seized control of both long-term interest rates, such as the Interest Rate on The US 30 Year Government Bond, $TYX, and short term rates that were formerly under the control of the world central bankers. Municipal bonds experienced severe deflation as Mike Mish Shedlock reported Full Year Of Muni Gains Wiped Out In 2 Weeks. Bond vigilantes will continually be taking interest rates higher as the US Federal Reserve’s Quantative Easing constitutes monetization of debt and European Sovereign debt and other sovereign debt issues remain substantially unaddressed.  World Corporate Bonds, PICB, fell 1.4% and World Government Bonds, BWX, fell 1.5, the week ending November 19, 2010. Peak bond wealth, BND, was achieved on November 4, 2010 at 82.96. Bond deflation is definitely underway.

There is a trigger for all things economic. It was the Leaders’ Announcement of a Debt Default Mechanism – a crisis mechanism which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.  

The currency traders have established themselves as the world’s sovereign governing power; their rule over the world’s governments began on November 5, 2010 when the Interest rate on the US Government Bond, $TYX, sustained above 4%, and as they sold the major currencies, DBV, and emerging market currencies, CEW, which has been called the US Dollar, $USD higher, rising from its low of 75.88 to close at 78.50.

Competitive currency deflation, that is competitive currency devaluation coming at the hand of the currency traders, has terminated liquidity trade, dollar carry trade and yen carry trade investing.

The chart of the small cap value shares relative to the small cap growth shares, RZV:RZG Daily, shows a November 19, 2010 close at 0.788, down from November 4, 2010 high of  0.8047, provides evidence that debt deflationary is underway. Other evidence that debt deflation is underway is the rise in the S&P Mid Term Futures Volatility, VXZ, and the fall in Junk Bonds, JNK.

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

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