Time is limited at the moment because I am involved in making a feature film based on the book A Global Vision, written by yours truly and published in 2008. However, in response to questions from some readers, I will try to briefly offer here a few remarks on the current financial and economic situation and where we might be headed.
One thing to bear in mind is that the largest credit and derivative bubble in history formed and reached its top around the middle of 2007. That it was by far the largest overall bubble in human history is not a trivial matter.
How extreme was this bubble? Adding up the subsidiary bubbles of various kinds of credit and derivatives from around the world, we could say that The Great Global Financial Bubble reached a height at its peak of approximately one quadrillion dollars (that is, about a thousand trillion). A more-or-less inconceivable number.
That is not only easily the largest-ever bubble in absolute terms, but also in percentage terms, particularly when we remember that it's the only one to ever take place on a global scale.
For example, if we measure The Great Global Financial Bubble against total global production, it's about 20 times larger. And though it is deleveraging now, what many may not realize yet is that this process is still in a relatively early stage.
For comparative purposes, look at this comprehensive global bubble in relation to the one that existed recently in Iceland. The financial bubble in Iceland was about nine times the size of the Islandic economy, (less than half the 20x of the global bubble to the global economy), yet when the Icelandic bubble imploded it more-or-less collapsed Iceland's economy.
So if the leverage of the global financial bubble is more than twice as large, in relative terms, why has the global economy not completely collapsed the way Iceland's has?
The answer to that question, it seems to me, is that the global economy is simply a bit behind Iceland in terms of time. But it is most likely going to the same place.
In my opinion, it is extremely unlikely that the deleveraging of The Great Global Financial Bubble can be stopped. For example, The Great Global Financial Bubble is approximately sixty times the size of the seemingly-enormous cumulative bailouts and "financial rescues" by governments and central banks across the globe to date. As huge as those government and central bank efforts are, this deleveraging global bubble simply dwarfs them.
What does that mean? It means that, short of a miracle, it is almost impossible to stop the deleveraging of this inconceivable global bubble; it is just too large. Government and central bank efforts to stop the deleveraging are thus a bit like throwing a teaspoon of water on a bonfire; interesting perhaps, but not effective. Given its current size and momentum, then, this deleveraging process is very likely to continue its downward course to the bottom, though of course in zigzag fashion.
What that means, in turn, is that the world will very likely, over the next several years, enter into a Mammoth Depression that will probably be an order of magnitude greater than the Great Depression of the 1930s.
However, that the deleveraging process of The Great Global Financial Bubble cannot be stopped doesn't mean that the various governments and central banks around the world won't make prodigious efforts to do so. They will indeed, and will inject increasing amounts of artificially-created money into the global financial veins, the end-result of which will almost certainly be, alongside the Mammoth Depression but with a certain time lag, a global Mammoth Inflation as well.
Thus, in my opinion, the answer to the question of whether we're going to suffer a deflation or an inflation is: Both. Mammoth deflation first (already well along in asset prices), followed by mammoth inflation a bit later.
Students of history who would like to see where we're headed can look to Venezuela today for the iikely early stages of this process, to Iceland today for the middle stages of it, and to the classic hyperinflations of history for the end stages.
Of course, it almost goes without saying that all hyperinflations are also and simultaneously the most severe of depressions, since the currency itself is being destroyed. A phenomenon that, down the road a few years, we're now likely to see on a global scale for the first time.
It's unfortunate that my financial and economic analysis must be so sobering, since i would much rather issue a cheery forecast, but I have to call it as I see it. It's also true that there will be some silver linings in this process, but a discussion of that will have to wait for another time.
—jim sloman, 1.4.09
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