The Crash Course - Chris Martenson [43]
How It Unfolds
But what happens when the debt markets finally figure out that the future cannot grow to infinity? What then? Well, broadly speaking, when that day comes to pass, there can only be one outcome, although it could arrive in either of two different forms. The outcome is simply that a lot of what we think of as wealth simply must vanish, because the claims are too numerous and potential future growth is too little. This destruction of wealth can come about in one of two very opposite ways. The first is by deflation, manifested as a process of debt defaults, and the second is by inflation.
Defaults are easy to explain—the debts don’t get repaid and the holders of that debt don’t get their money back. Boom—over and done. The claims are diminished. Thus, if the future isn’t large enough to pay back the claims, then defaults are simply a way of squaring up past claims with current reality. This path is easy to understand. Perhaps a pension fund holds a billion dollars of General Motors debt, GM goes out of business, GM debt goes into default and becomes worthless, and pensioners in the future have a billion fewer dollars distributed to them, dragging down their standards of living.
However, the inflation route can be confusing. Think of it this way: Imagine that you sold your house to someone, and, to keep it simple, you provided them with a mortgage for $500,000. The terms call for the mortgage to be repaid all at once in 10 years as a single payment of $650,000, providing you with a nice kicker of $150,000, which amounts to something above the prevailing rate of interest. So far, so good. Well, 10 years passes, and, as stipulated, you are paid your $650,000 right on time. But now, due to inflation, that $650,000 will only buy a house half as nice as the one you sold. Yes, you got paid, but your claim on the future was vastly diminished by inflation. In this example, $650,000 in the future buys half as much as $500,000 today.
In the default scenario, your money is still worth something, but you don’t get it back, which also diminishes your claim on the future. In the inflation scenario, you do get your money back, but it hardly buys anything, which also diminishes your claim on the future. In both cases you have less wealth in the future, so the impacts are very nearly the same, but the mechanisms by which you lose out are remarkably different.
To make investing simple, the questions you need to ponder for yourself are these:
Have too many claims been made on the future?
If so, will we face inflation or defaults as the means of squaring things up?
You’ll arrive at wildly different life decisions depending on whether you answer yes or no to the first question and “inflation” or “defaults” for the second question. I strongly recommend that you spend some time pondering these questions and revisiting them as circumstances shift.1
1 This is a complicated subject and one that requires constant vigilance, as its ultimate outcome is not mathematically defined, but is the product of unknowable decisions by fiscal and monetary authorities. At www.ChrisMartenson.com, this is one of the most vigorous areas of debate, and our assessment of which outcome is most likely varies considerably. In short: If you expect inflation, you will seek to get rid of your money as fast as possible by spending it on things that have value to you today and which you suspect will cost you even more tomorrow. If you expect deflation,