The inflation vs. deflation debate has heated up again. The debate looks far from being settled, even among professional investors. This may be the single most important debate in the investment world.
Jim Rogers, Peter Schiff, James Sinclair, Gerald Celente, Marc Faber and Congressman Ron Paul are on the inflation camp. The argument is simple: As the US government racks up trillion dollars of deficit spending, the money can come from neither raising tax, nor borrowing. So the only way out is print money out of thin air. In history, any time a government chooses to solve its fiscal problem through massive money printing, it always leads to hyper-inflation at the end. So that is going to happen. It might be postponed a bit but can not be avoided.
But I will not immediately dismiss the arguments from the deflation camp, either. Well known people on the deflation camp includes Mike Shedlock, Nouriel Roubini, and market ticker Karl Denninger. They present three strong arguments for deflation:
- Credits are destroyed in the ongoing de-leveraging process. Credits are circulated as money so the destruction of credit means less liquidity in the system.
- Although the government is massively printing money, most of the newly printed money is just hoarded away in the vaults of banks and do not enter circulation.
- Where is the inflation today? It's nowhere to be found!
Debunking the second argument is simple. Banks keep a high reserve because they are highly leveraged and they fear a bank run. If banks hoard cash instead of extend consumer credits, people will have to withdraw cash so they have the money to spend. Such a bank de-leveraging process could escalate into a bank run, resulting in the destruction of the banks and massive release of cash into the general circulation.
De-leveraging of the
