Once inflated debt is secured and plausible credit exhausted, the Fed wants to make the dollar very rare (deflation), not very plentiful (inflation). In this scenario, the dollar rapidly increases it's buying power, destroying collateral prices (value doesn't change a bit), and generally strengthens creditor positions over debtor positions.
Apart from the central bank's intent, I would add two ancillary reasons to expect a deflationary outcome:
The reason the Fed intends to cause deflation is explained in a previous post, The Currency Scam. In my opinion, the central banks' intent is barely debatable, the same playbook has been in use for thousands of years. What is questionable is their ability to pull off an event of this magnitude.
- All U.S. depressions have been deflationary, not counting the American Revolution which was a hyperinflationary event due to British counterfeiting the pewter Continental . This is because the unholy alliance between established government and banks is purely profit driven, not altruistic.
- From a utilitarian perspective, it is hard to imagine a natural market outcome that so handsomely rewards debtors. Hyperinflation absolves all debts.
There are two outcomes, as I see it:
1. The Fed successfully starves the nation of currency, suffocating her in debt, and the largest transfer of wealth in human history is pulled off in semi-controlled fashion. This is not hard to do, economically, because commercial banks print the vast majority of all currency in circulation, and they won't print more unless it is profitable to do so. That is, if they can find genuinely creditworthy borrowers. But in a recession/depression, printing new bank cash can be a losing proposition. Not only do banks lose the interest on new cash when a high risk borrower defaults, they lose a chunk of the principle.
There is also a deflationary multiplier effect. First, both the bank and the borrower double-account for loan collateral as an asset on their respective balance sheets. That is a linear accounting model, and it doesn't work during a deflation. There is a basic, unrecognized assumption (which is why associated risks are also unrecognized) that the currency itself is of constant value. In fact, constant currency is almost never in play, but during more common inflationary periods this is a cost positive double-mistake of omission, so both parties erroneously chalk up resulting gains to business prowess. There is also unrecognized growth in the value of the debt-collateral differential. Even if a price gap is modeled linearly, the gap is actually accelerating in value, or buying power, as the currency strengthens.
Advantage-squared goes to the creditor of last resort, the Federal Reserve, because only they have no relevant costs associated with lending.
2. There is a possibility that the Fed creates such social havoc that the system fails. Given the magnitude of the crises central banks have created, I think this is more likely than most people want to believe. Closer, too.
How systemic failure unfolds is anybody's guess. The end game of disorganized markets is probably hyperinflation. Not $10,000/ounce gold hyperinflation, but perhaps infinity in an instant hyperinflation. At that point chaos rules the day. We might have no schools, no hospitals, no police, no fire protection, no utilities, no military, no insurance, no pensions, no savings, no anything recognizable. So I say good luck trading scenario #2.
Many ask about gold as a hedge. Would physically possessing some gold help? I don't know. If it did, you probably wouldn't need much at today's valuation. I am all for holding some physical gold and silver as a Hail Mary hyperinflation hedge. But as is the case with all hedges, the plan is to lose that money. If you are making money on your hedges while the mitigated scenario has not developed, then you have no true hedge in place.
That has been my thought process for trading #1 since early 2007, organized hyperdeflation or rapid strengthening of the dollar driving prices lower, much lower, even if #2 is a strong possibility or follows #1.