Deflation Is the Threat, Not Inflation

There has been a raging debate for the last 1 year: Inflation or deflation?

Inflation means borrow dollars and buy assets like real estate, commodities companies etc. Deflation means hang on to your dollars. After all, assets will be cheaper tomorrow.

Let's lay down some events of the recent few months, the reasons and the impact:

Events, Reason Perception, Impact

Event	Reason	So What?
US$ weakness	Fed printing $	Inflation, Commodities pricier
US/China Stimulus	Govts. preventing Recession/Depression	Artificial spending creates higher commodity, stock prices
High Unemployment	no innovation	No economic growth, No spending creates Deflation
High US Debt	Imports higher than exports; lack of demand for US goods; US govt. spending	Government debasing Dollar to reduce debt; higher commodity prices

These four areas stand out as the most critical, event shaping events of the last few years. The big question on everyone's mind is: Is it inflation or deflation?

To answer that question lies in answering another question: Which of the reasons in the table above are the root causes and which ones are the effects?

The root causes for Weak US dollar (inflation) are: 1) High Imports, and 2) High Govt. spending. The root cause for high unemployment (deflation) is no innovation.

It is really that simple. The media will talk about no bank lending being the root cause of poor economic activity, but that is not correct. For example, why would the banks lend if there were no compelling ideas behind the businesses? There are enough businesses flipping each others hamburgers. Those do not create permanent jobs, the kinds that will increase exports and reduce the US debt.

Why should banks lend money for another housing bubble if the people cannot afford the houses? and so on. However the administration is creating a fund for small business loans and they have already created a fund for first time home buyers. All this will make the problems worse, i.e. debt will rise, the dollar will be under pressure and unemployment will stay high.

Gold is rising higher primarily because of lack of confidence in not just dollar but all currencies. It is not rising so much due to threat of inflation, at least not yet. The 30 year bond closed today at 4.29%. That is historically still a low interest rate not indicative of inflation. That is because people's spending rate has gone down while their savings rates have gone up. Inflation is not going to return any time soon. Therefore safety should be a priority and CD's and bonds would still be good investment instruments. These fixed income instruments need to be back by precious metals like gold and platinum in the portfolio. The precious metals will protect against the dollar debasing, currently in progress.

Disclosure: Own CD's, bonds and precious metals

Comments

[Balderdash:]

You can't separate dollar debasement from the inflation (which is really a rising prices argument). Other nations sell imports to us because it is profitable to do so. As the dollar falls, it becomes less profitable. They can lower their prices to keep up with falling demand and clear inventory, but eventually after adjusting for currency values the profit will vanish. Then, the prices will be sufficiently low in the native currency to spur domestic demand, and other nations will begin to out compete our bids for products and exportable services. Then, despite reduced demand, you'll see rising prices just when we are least able to afford it, i.e. stagflation.

Modern economists seem to have forgotten the 70's.

Oct 25 08:13 AM

[The Geoffster:]

That giant sucking sound you hear is the debt implosion.
Credit is being wiped out faster than it can be created. That's deflationary.

Oct 25 10:01 AM

[opinionated:]

The other giant sucking sound comes from a parasitic federal bureaucracy, piling onto the crushing tax load shouldered by productive Americans.

Oct 25 11:31 AM

[auto44:]

You can't print huge amounts of fiat money and cause deflation. that's like saying I can over produce the demand for corn and make the price go up.

Oct 25 12:04 PM

[sabre_jenn:]

The geniuses of Wall Street -- you know the ones who told us subprimes were AAA and failed to forsee the collapse of their own employers -- have been wailing away about deflation now for two years.

Meanwhile, the cost of living keeps going up and the dollar keeps going down. Bank losses on bad debt (that a smarter group would not have lent in the first place) are not deflation, anymore than the absurd "profits" (aka accounting fraud) of 1990-2007 were inflationary.

Get a clue Wall Street -- no one will ever trust you with their money again. Losses stemming from your incompetence are not the same thing as deflation, and your shameless efforts to get the Fed to print money to pass your losses to the public is the reason why people HATE Wall Street now.

Man up and admit your mistakes. Write them off, and move on. Don't try to mislabel your losses as deflation

Oct 25 04:08 PM

[untrusting ...:]

Inflation in what? Deflation in what? They both can be happening at the same time and they are. One has to specify what assets or prices they are referring to because some are inflating and others are deflating. For example if you think CRE prices are inflating, you must be looking at something in China not the US. Alternatively if you are talking US healthcare costs or college costs, then clearly they are going up.

Oct 25 05:59 PM

[sabre_jenn:]

Geoffster -- if credit being wiped out faster than it can be created is "deflationary" (according to you anyway), that would mean the reverse would also be true: massive credit creation (faster than it is being paid off) would be inflationary.

Please point us to a single Wall Street strategist who stated during the credit boom that massive credit creation was inflationary. Credit was exploding 15-20% per year, every year. Show us the quote from Bernanke (or Greenspan) saying this was inflationary, and Fed Funds should be bumped up to 15%. Find us any quote, even one, to support this idea.

But now, the con-artists on Wall Street want to claim that THEIR LOSSES are somehow the equivalent of deflation.

The dollar is going down. Cost of living is going up. And Wall Street isn't fooling anyone outside of the Fed.

Man up and admit you are wrong


On Oct 25 10:01 AM The Geoffster wrote:

> That giant sucking sound you hear is the debt implosion.
> Credit is being wiped out faster than it can be created. That's deflationary.

Oct 25 11:56 PM

[trueshebear:]

This writer is clueless. When the US dollar is repudiated around the world and all these fiat dollars come crashing down on American shores, how does that translate into deflation? We no longer export anythign worthwhile but import just about everything. guess what price of commodities and products will go-WAy up!.

Oct 26 11:23 PM