I have been reflecting on the metaphor I’ve been using for several years for the massive worldwide credit bubble and its debt-deflationary collapse—still in progress—and the ultimate final flaring of inflation that Bill Gross and I and many others expect. Because what other way do inept governments have of getting out of having too much debt when their financial sector owners won’t charge bad debts off, to protect their investors?
Inflation, maybe a global hyperinflation.
In the physical version of a (Type I) supernova, a great star undergoes gravitational collapse in upon itself when its energy level falls below a certain point. The analogue of this is the debt deflation, where credit creation equals nuclear fusion. However, the release of gravitational potential energy can cause the collapsed star to heat up and expel its outer layers into the cosmos, sometimes leaving a black hole in the center. The financial analogue of this process would be hyperinflation (stellar supernovas often create a burst of radiation that outshines an entire galaxy), as money is expelled from the financial center, a central bank and its minions, into the larger economy, losing value at every step.
My unapologetically intuitive read of the current situation is that we are still in the gravitational collapse phase.
The bright white light of accelerating inflation—and many would say, war, though I hope and pray we avoid war—lies on the other side of the last stages of debt deflation.
The black hole or dwarf star left in the center corresponds to the dying ember of the former world economy held by the superrich, as they watch the receding supernova remnant, the refuse swept up by the supernova’s shock wave, flying off into the cold outer reaches of space. That would be the rest of us.
But seriously, if every over-indebted nation’s central bank decides at the same time that the easiest and best thing to do about its debt is to inflate it away, the result will be something new under the sun, a kind of history none of us has ever lived through (to my knowledge): total monetary instability.