The current financial crisis is supersized, inexorably linked to the rest of the world, ruled by chaos and precariously perched atop a mountain of debt, says Oilver Garret, CEO of Casey Research. And “a rapidly growing money supply at the same time the biggest credit bubble in 25 years bursts makes for a less than desirable scenario.” We could be facing a period of “depflation” says Oliver — an inflationary depression.

This from Oilver Garrett at Casey Research:

Doug Casey coined the term “Greater Depression” in his best-selling book Crisis Investing, published in 1979. Today, it resounds throughout the land; even CNN’s Glenn Beck recently used it in an op-ed piece. And the signs are increasing that a depression may indeed be what we are moving towards.

On September 30, 2008 (end fiscal 2008), the Congressional Budget Office reported a record federal budget deficit for the year of $455 billion, up $293 billion (or 181%) from fiscal 2007.

And that does not yet include the Fed’s bailout package for failing banks, Fannie Mae and Freddie Mac and various other “economic stimuli.”

The chart below shows that the $700 billion agreed to by Congress may have been a very optimistic estimate.

On October 3, President Bush signed into law the Emergency Economic Stabilization Act of 2008. With this Act, Congress and the president have ensured a runaway government deficit next year…one sure to exceed $1 trillion.

Along with total federal debt outstanding already around $10.3 trillion, unfunded liabilities of at least $50 trillion, and many new programs and tax rebates promised by both presidential candidates, this does not bode well for the global economic outlook.

As if that was not enough, during the past few weeks, the Fed increased the country’s monetary base by as much as 20% to shore up the financial systems.

Federal budget deficits facilitate “loose” (expansionist) monetary policies, and these policies set in motion the business cycle. As the economy enters the cycle’s “bust” phase, massive federal deficits have left the government with only one option — to try to inflate itself out of the current crisis, regardless of the impact on the value of the dollar.

A rapidly growing money supply at the same time the biggest credit bubble in 25 years bursts makes for a less than desirable scenario –- one that could make the stagflation of the ‘70s look like a walk in the park.

In March 1975, industrial production fell by nearly 13% while the yearly rate of CPI growth jumped to around 12%. It took another seven years and a second recession before the US was able to break from the stagflation cycle.

What we are likely in for now is an unprecedented period of price inflation, economic depression, and high unemployment, i.e., not just stagflation but depflation (inflationary depression).

Depflation will affect the entire population, and its effects on people’s personal finances will manifest in multiple ways.

• Purchasing power declines as prices for consumer goods increase faster than wages.
• Taxes levied on businesses and individuals increase when nominal incomes rise.
• Late recipients of new money incur cost of additional hidden tax.
• Cost of money (interest rates) increases, hurts investments in capital goods, stocks and bonds.
• Once expectation sets in, it becomes a self-feeding phenomenon, taking years and a severe recession to work itself out.

Just like a shot of adrenalin administered to a sick patient generates an apparent revival, only to have the patient collapse as soon as the injection wears off, the artificial monetary injections by the Fed will do the same.

Paraphrasing former Fed chairman Paul Volcker, “Once you have a little [monetary] inflation, you need a little more”. As with any medicine, its effects wear off and become less potent the more “injections” are received.

At this stage, your primary goal should be asset protection. Once that is in place, you will be in a better position to hunt for the opportunistic profits one can only find in times of crisis.

Source: US in Crisis Mode — What’s Next?