We need to talk about deflation and the coming impacts of a deflationary crisis. And in this video, we're going to react to the warning that Nick gave. Let's analyze that: the CEO of Walmart just issued a dire warning about the US economy, saying that we could see deflation in 2024, a situation that could cause prices across the US economy and housing market to decline, while also causing the unemployment rate to Surge. With the historical unemployment rate during periods of deflation routinely approaching 10% you could see in the 1890s deflation, we had over 10% unemployment.

In the early 1920s deflation, we had nearly 10% In the Great Depression we had 20% unemployment. And then of course in the 2008 2009 financial crisis, we also had 10% unemployment. That doesn't sound very good and I want to actually leave you guys here on an optimistic note, And that's that. deflation has a lot of negative connotations in the economic sphere.

We had some deflationary forces in 2008. It was really, really bad for the economy, but there have been situations historically in America where deflation has been good for the economy, most particularly back in the 1920s. That was one of the most prosperous decades for the US economy in history. However, during that decade, the prices of goods and services went down.

So you can see on this graph: Prices started going down in 1921, then there was big deflation in 19222, and then actually later in the decade there was price declines as well and total prices in the 1920s went down 11% It was an 11% deflation in the 1920s. Yet, our economy as a country did really, really well and I'm thinking maybe could something similar happen in the 2020s ahead? Could there be another Roaring 20s? Okay, this is a tough one. We're going to have a little bit of a chicken and egg problem here and I want to hear your opinion on this, but I can't necessarily say that just because we had deflation in the 1920s. That's why we had a roaring 20s.

First of all, the Roaring 20s was characterized as a time of like a broadening of social norms and values and and economic growth. But we're really talking about about 1923 to about 1927, that core period there, which hey, we're in 2023 today. So maybe we can get that optimism ahead of us. And I think that's quite possible.

But let's be real. Why did we have deflation at the beginning of the decade and the end of the decade? It's because we had two depressions. You might only remember the Great Depression but we actually had more deflation at the beginning of the decade and that was a nasty depression. The recession of 1920 started about 14 months after World War One Millions of war vets just entered the economy again.

Problem though, was we weren't really ready to go from a war economy to a normal economy. So all of a sudden you had a lot of people looking for work and not a lot of work. So prices fell 13 To 18% which is great. I Mean it's it's more of a price decline than you had since the Great Depression We like hearing that because we want prices to come down.

but here's what it took to get that: unemployment doubling automobile production dropping 60% industrial production dropping 30% productivity dropping 29.4% The Tulsa Race Massacre Most families live below the poverty line. Terrorists on Wall Street wounded 300 and killed 38. Yeah, Terrorists on Wall Street a Red Scare was underway. The President had a stroke.

The Federal Reserve was literally keeping rates High amplifying the pain of deflation and you couldn't even drink because prohibition just started. So let's just say I'm not entirely convinced that deflation is something that we should cheer for as much as I Want to see prices come down in certain areas like you know, where we're buying stuff. Okay, like we want to see prices go down. When prices go down broadly, it leads to unemployment.

Let me explain that and and even even in Nick's video here he says oh, unemployment, you know went up to 10 20% or whatever. We shouldn't cheer for that. Right now, we have 6.5 million people unemployed and roughly 4% unemployment. If that 5x is to 20% Which I Don't think it will.

that would be 32.5 million people unemployed. That would be a really tough time for the economy. People will be cheering about lower prices, but they wouldn't have money anyway because they'd have no job. It would be a terrible place to be.

So again, we have to be careful. If we cheer for deflation, you might actually be cheering for a cure that's worse than the disease that is. Deflation Could be worse than inflation. And in my opinion, deflation isn't something to cheer for.

It's actually something to be afraid of because deflation was caused by Massive pain in 1920 and 21. Keep in mind that was also right after the Spanish Flu ended. Kind of crazy. That's the last big pandemic we had in the last 105 years.

you know, obviously before Co then you had the Great Depression where you also had deflation but also an absolutely miserable time. Poverty, Massive poverty. This is not what you want to encourage. Now what do we know that's actually happening? Well, so I in a course member live stream just about two weeks ago broke down the earnings call and uh, I wrote here the deflationary snowball begins.

So we've been covering this for a couple weeks on the channel here and this is what I wrote I wrote I didn't even adjust this I Wrote this two weeks ago I wrote what does everyone forget about deflation? It's competitive. in a capitalistic economy. Providers of goods and services compete to offer lower prices. That's normal.

So why don't we always have deflation? Because deflation is, unfortunately, usually coupled with with unemployment and that's worse for the economy. So this is where the FED has to have this clever Balancing Act of a 2% inflation Target There's a reason why the FED doesn't want deflation a because it makes the government's money printer harder to pay off. So yes, there is there is that political rigging that is going on that is a reality. Yes, printing money actually supports our ability to keep printing money.

Because if you have deflation, people get really pissed and it's even worse than inflation, you just want stability. That's why the Fed's Mandate is not lower prices. it's stable prices. There's a very clear rationale for that, because the times we've had deflation, it's been a disaster.

So here Walmart talks about more roll backs. They also talk about being more focused on a deflationary environment. Understand what they're in implying here. They're implying that in a inflationary environment, we have to be more productive with our quote cost structure, which means firing people and trying to be more efficient with the people you have left.

That's why I wrote how much unemployment pain happens between now and the FED Cuts That's a big warning. Deflation is something to fear. It is not something to cheer. I'm not a big fan of cheering for deflation now.

Unfortunately, that's not going to be the most popular thing to say. It is much more popular to say hey, I Just want to make these YouTube videos to try to make everything more affordable for you. The cost of goods and services in the economy is likely to get cheaper, which is something that consumers need right now because the inflation of the last 3 years has left Americans really struggling to get bought. But I don't want to do that and say Hey You know that computer you want to buy That's you know the Nvidia 490 you want to buy that's $3,700 I Want to help you get that for $2,000 As much as I want to do that I don't want to lie to your face and say I want to help you get that computer for $2,000 but you're also going to get evicted, you're going to lose your job and you're absolutely going to be depressed I Don't want to do that.

Deflation historically and this is a historical evidence, is not what we should be cheering for. Yes, deflation did happen in the Great Recession and we might knocking on the door of deflation as well. Now now it's really interesting is you'll actually notice that when we started hitting deflation, you were basically at the end of the recession for the Great Recession. So if you look specifically at 2008, I'm like wait a minute.

but if we look at 2008, as soon as we hit deflation, the pain was over. which is actually potentially bullish for the economy because what happens soon as you hit deflation, the F turns the Federal Reserve turns the money printer on again. Now, unfortunately, if the money printer gets turned on, the opposite of what Nick is looking for ends up happening to the economy, That's the challenging thing, and this is where obviously paths would will diverge. But if you turn the money printer back on, your dollars are going to lose value.

You are actually going to purposefully go from potentially deflation back to having a little bit of inflation again, hopefully not too much. You're trying to calibrate that inflation. And so if you calibrate that inflation up again, what's your hedge assets? Stocks in real estate? Those become your hedge to inflation. Because the FED knows that deflation leads to Rapid and rampant unemployment, which Nick himself said.

We know the FED is unlikely to allow deflation to occur, and I'm not convinced we want deflation to occur because of the pain it causes. But again, as soon as we start seeing signs of deflation, there's more evidence looking at the CPI charts that you're actually at the bottom of a crash than you are at the beginning of a crash. So let's be clear here: let's let's write this out so we can make it uh, clear and align this because I know there's a lot going on. So let's write this out.

So what we're going to do is we're going to write Nick's arguments on the left and we're going to compare and contrast and I want to hear what your thoughts are? So Nick's argument is: deflation was good and home prices are going to collapse. Deflation is an inherent good. Things becoming cheaper is an inherent good. But he's suggesting that economic deflation like the entire economy deflating is good for you because it led to the Roaring 20s, but it only got there through massive depression like we explained for the depression of the 192021 period and the end of the 1920s.

So Kevin's going to argue that the start of deflation is a sign to print and that is actually what equals a good. But unfortunately for Nick's argument, when you start seeing the signs of deflation and you want to avoid the joblessness which he himself mentions that unemployment will go up I shorten that as unemployment insurance from the Co days. UI But anyway, I argue that when you start printing, you actually keep unemployment stable and that's what the FED wants. So as soon as you start seeing the signs of deflation, my argument is that's a good sign.

The FED prints money. Unemployment stabilizes, and what does that do for asset prices? Asset prices usually go up, not down. Nick is arguing deflation is good because things are cheaper for you and homes will finally be affordable again. Both of those are a popular thing to say, but they mask the reality that to get that, you need massive unemployment and that could mean you losing your job.

In addition to that, we have history on our side to suggest that history says once we start getting deflation, the Fed Prince which which ends up being good, so history is on our side, not on Nick's side that home prices collapsing with deflation is somehow a good that we should be cheering for. I Don't think Nick wins on that argument now I'm I Want to be very clear here: I'm just here to add perspective and to see what you all think about this debate. Of course it would be nice to say prices are going to come down, everything's going to be more affordable, but I'm actually concerned of the opposite that the Fed's basically going to have to turn the money printer on pretty quickly and things are actually going to get even more unaffordable, which I'm not saying is good I Don't want that to happen, right? It's tough. But I think that's what's going to happen I Think the Fed's going to turn the money printer on to stabilize jobs, home prices will become more unaffordable, stock prices will become more unaffordable.

and guess what happens? the gap between the rich and the poor will actually widen apartment List: Reporting that 68 of the 100 largest US cities have registered negative rent growth year-over-year through November 2023. So that's over 2third of cities experiencing declining apartment rents. This is true, we are seeing rental softness in fact, On the ground, we are regularly seeing areas that were very popular during the pandemic to move to that also support a lot of new construction, especially in apartment buildings. We're sing rents collapse.

That's a good thing. On the rent side, that's fantastic. It's not so great. Great for people who are speculating on long-term rents or that's how they want to make their money.

A Lot of property managers right now. What they're doing is they're giving movein concessions so they're like, yeah, the rent's 2400 but we'll give you one month free. Well then technically your Market rent is actually 2200 since you just discounted at $200 per month $2,400 on a year term. So this is a good that is occurring and that is actually going to be reflected in CPI Unfortunately, you have about an 18mon lag in that showing up in CPI which means the FED might actually be behind the eightball in terms of making sure we don't go into too much rapid deflation And that's a risk.

That's where I'm like I Really don't want the FED to drive us into deflation because it means they destroy the economy. It means they've overtightened massive unemployment. and then you have a real crisis and we're just not going to have money to do anything in that kind of real crisis because we want have jobs 2008. Anybody who's lived through 2008 looks back and says oh, I wish I bought real estate in 2010 Everybody says that, but people didn't have freaking money in 2010 cuz they lost their jobs and they had to get back up on their feet and their credit got destroyed and their ability to get loans was destroyed.

Lending was super tight, didn't loosen for years, so it's very challenging. Fortunately, a decline in rents is happening and I think the fan is aware of it. The hope is will they start turning the printer on sooner before it's too late. Money supply contraction and this is a pretty big money supply contraction 3% It might not sound like a lot, but that's the biggest that we've seen since the Great Depression In fact, excluding the Great Depression it's the biggest that we've seen all time in terms of money being taken out of the system.

And so this is a a warning to you guys out there because if we, no, that's not entirely a fair representation of what's going on. And Nick Come on man, you know this. We've touched on this before. the M2 money supply is still up substantially from where we were before the pandemic.

It's right here. we're at 15 .4 trillion of printed money. Now we're sitting at 20.7 Yes, when you use your year-over-year charts, it's going to look volatile. I Could make that chart happen very easily too.

I Just go to edit change to change from a year ago. Let's go percent because it'll be the most extreme. Oh my gosh Wow. it went negative duh because the number went really, really big really, fast and then it slowly started shrinking.

That's how you get negative year-over-year numbers. So looking at year-over-year numbers out of the context of what you're actually studying is a very big mistake and a very easy way to delude yourself into understanding it or thinking you're understanding a chart when you're not seeing the full picture because somebody's not presenting the full picture. So we we want to remember: yes, money is being vacuumed up out of the economy right now. Yes, that is true, but there's still substantially more money in the economy than there has been previously.

That's not to say there are not problems in the economy, and there's not to say that this does not cause pain there. Just to say that comparing to the 1930s Depression where the money supply went negative isn't necessarily a fair comparison. When we just printed trillions of dollars like8 trillion dollar for Covid Relief money and now we're not anymore. and now we're trying to mop up some of that money.

and I Want to be careful to say that interest rates are historically normal at these high levels. Interest rates don't work that way. Interest rates are set based on what the present stable or stabilized level of inflation is. If inflation is 1% then maybe rates should be 2% and that would be normal.

The spread is what you should be measuring. You shouldn't say. Well, interest rates were 15% back in the 70s and then they came down below 10% in the 80s. Yay! We were able to cheer single- digigit mortgages or whatever.

it's all about the spread. What was? inflation was slowly declining over time. So that spread is what matters. That's why we had the great or the the first depression in the 1920s.

Not because rates were, you know, historically abnormal, It's because the spread became ridiculous. You had 6 and a halfish per Fed funds rate, but you had deflation. So you actually potentially during a depression. If you had negative, say, 6% per year inflation, you actually during a depression, had somewhere around 12 % interest rates.

The spread matters. Not well. you know, interest rates seem like they've just been abnormally low recently and uh, you know this is just normalizing the spread matters. Uh, but again, it's that.

Nuance My goal is just to provide that perspective. Uh, you know, hopefully we can revise some of this and and get some of this talked about in Nick's videos. I'd Love to hear his perspective I think he's got some good content, but I'd like to add this uh, and uh. Hopefully that perspective helps.

If you like this kind of information, consider subscribing and we'll see you in the next one. Why not advertise these things that you told us here? I Feel like nobody else knows about this? We'll We'll try a little advertising and see how it goes. Congratulations man, you have done so much People love you people look up to you Kevin PA there financial analyst and YouTuber meet Kevin Always great to get your take.