Finding the Price Floor

The mighty US consumer is maxed out on credit. Everyone is in debt to up over their heads. The credit fueled expansion of the past eight years has come to its end. So much is known, but how will things go from here? Will there be price deflation on everything, or will there be stagflation?

To answer this, we can start from the premise that things tend towards their price floors in periods of economic contraction.

For commodities, the price floor lies somewhere below the production cost, and for real estate, the same is true. For shares, the price floor depends on the profitability of companies. Companies that make a profit have price floors somewhere below the value of their assets. Companies that make no profit will go to zero.

Debt and derivatives have price floors determined by their underlying assets. If the lender is bankrupt, the debt and derivatives are worthless.

This suggests that price deflation is what we will see. However, price deflation presumes that fiat currency is somehow disconnected from the same mechanism that governs the price of everything else. That's wrong. Fiat currency is a derivative of debt, so there is a price floor for fiat currency, just like there is a price floor for derivatives in general.

Fiat currency will tend towards its price floor, which is determined by the solvency of the debtors. These are the state and the consumer, both insolvent due to excessive debt.

What we will see is that everything, including fiat currency will move towards its price floor. Things that have far to fall, will fall in price relative to fiat currencies, while things that are already close to their price floors will rise in price.

Food and other essentials will become more expensive relative to fiat. Real estate, shares and bonds will fall in price relative to fiat. Industrial commodities will become marginally more expensive despite being overproduced. Monetary metals like gold and silver on the other hand will see prices skyrocketing.

The reason monetary metals will go up in price is that they are the least bad alternative among financial assets. When real estate, shares and bonds all fall faster than gold and silver, fiat currency will start pouring into these metals. When essentials like food, soap and toilet paper starts going up in price relative to everything else, people will start hoarding domestic essentials. However, there is a limit to how much of this stuff can be hoarded, and that's when the hoarders shift their attention to precious metals.

Gold and silver will outperform the price inflation of essentials, and this will not stop before there is a reset of the whole financial system.