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By: Dickson Buchanan and Robert William Allen

With the Lord of Finance Ben Bernanke making his semi-annual, "state of the economic union" congressional address, much is being made of his remarks. One of Bernanke´s stated concerns is avoiding deflation. He frequently references Japan on this point. On the other hand, Peter Schiff says that it is inflation, not deflation, that we should be afraid of. What gives?

The confusion surrounding the inflation vs. deflation debate can be dispelled if we take a closer look at these terms. As with many things today, language is becoming ever more politicized. The language of economics is no exception. Let's take a look at what this means for the inflation/deflation debate.

What is inflation?

· Inflation is a political policy enacted to increase the total stock of money. It is NOT a general rise in prices (as popularly reported). A typical symptom of inflation is a rise in prices, but only as it reflects the corresponding decrease in the purchasing power of the currency. Saying otherwise confuses the symptom with the disease.

· Inflation is best understood as a tax on the citizenry. It diverts wealth from individuals to the state. However, unlike other taxes, inflation is indiscriminate. Regardless of your income level or where you live, if you hold and use dollars, you bear the tax of inflation.

What is deflation?

· The popular definition of deflation goes something like "a general decline in the price of goods and services due to a reduction in the supply of money or credit."

· However, deflation is not always solely the result of a contraction of the money supply.

The first thing to remember is that there is nothing inherently wrong with a general decline in prices. In fact, a general decline in prices is desirable if it coincides with an increase in purchasing power. Deflation in prices is often the mark of a healthy and prosperous economy because free-market competition, accumulation of capital and economies of scale cause prices to come down over time. Deflation in the tech sector, for example, means that today you can buy a smartphone with more computing power than NASA's Mars Rover for just a fraction of the price.

Now, when Bernanke uses the term deflation, he is not referring to the above example. According to the official story, Bernanke fears a decline in prices in the housing or stock markets, like what was experienced back in 2008. Mr. Bernanke says that the only way to avoid a repeat of 2008 is to continue to try to stimulate demand via QE, which he assures us will continue until our economy is "ready" (whatever that means). Bernanke confuses the symptom with the disease. What he fails to recognize is that the financial crisis in 2008 was the result of the same policies he continues to pursue. In 2008, we saw a correction which started to realign prices to where they otherwise would have been had the market not been distorted by easy money and credit from our central bank.

Where does Bernanke go from here?

Politicians today use the fear of deflation as an excuse for debasing the US dollar. However, we are far from this deflationary boogie-man because the Federal Reserve will continue to purchase toxic debt both in the public and private sectors. Bernanke has no other choice because the economy will collapse under the weight of even a modest increase in interest rates. If you look past the Fed propaganda it is fairly obvious that Bernanke's agenda is political. His real job has little to do with economic growth and everything to do with funding the US government debt and deficit. As long as the United States continues to spend $1 trillion-plus every year beyond revenue, the Fed will stand ready to buy up Treasury debt. It really is that simple.

Take action

As you can see, the Federal Reserve has painted itself into a corner. With no alternative, continued debasement of the US Dollar is guaranteed. With that in mind, we recommend that savvy investors move their savings out of an ever weakening US Dollar and into hard assets. We prefer physical precious metals over ETFs or other such "paper" forms of gold and silver. With Bernanke managing dollars, we say sell.

Source: Inflation Or Deflation: Which Should We Fear?