Revisiting the Inflation / Deflation Debate

by: Gary Tanashian

You know, it is very pleasing to me that the readers of my site are not just concerned about trading, about market direction or perish the thought, stock picks. I myself have less and less patience for people who only care about the trade, as if the system that the trade relies upon is going to be there forever. A lot of readers of my site care deeply about the macro fundamentals that serve as the canvas upon which all the other stuff is painted. There is no more important macro fundamental than the dynamics at play between inflation and deflation. This from a blog reader:

"...Inflation after all, is what is happening now. Never mind general prices. They will follow one day after the trade is well in progress. [--Gary]
Principally you may be right. But as Prof. Fekete says, when it takes more credit dollars to produce one dollar of GDP, an economy is devouring itself. We have long passed that point, and I don't think the system is fixable with today's tools. A complete overhaul is required. That inflation is baked into the cake is a given with today's printing orgy. Problem is real deflation can be much faster and more vicious than inflation, because it is a natural reaction over which the banksters have little control. So while inflation is certainly programmed and on the way, deflation might kill the economy first, before inflation ever has a chance to manifest itself in a serious way.

Could you address that question also?
Thanks, Peter"

I am not an economist. I am a business person and a stock trader. Oh, and I happen to be honest about what I see and have seen for many years going wrong in the macro global economy. And I am talking decades, going back to the mid 80's. As the owner of a US manufacturing business; I have watched the global economy stacking itself against me little by little and through various means over the entirety of this time. This constant pressure has forced progress upon me and my company and this progress has been a really good thing.

But I have also carried forward the issue of what the hollowing out of the United States, a great industrial superpower, will do to the country as a whole. The idea that we can consume our way to prosperity has been a constant slap in the face to members of the US manufacturing sector. My company, with its focus on technology and its niche in the vast 'service' industry, health care, has survived. But many less scalable and adaptable companies and industries, have gone the way of the Dodo Bird. That is fine I suppose, in the name of progress, in and of itself. But to think that productivity can be replaced with consumerism has been a recurring slap in the face to people who lost productive jobs in service to this utter, failed mess we now find ourselves with.

I agree with Peter, that we are long past the point of devouring ourselves. We have long since eaten our seed corn in a pathetic attempt to keep up the illusion. I will leave the inflation/deflation mental masturbation to the intellectuals and academics because we really are in uncharted waters, and there is a gaping hole ripped in the hull. Nothing is going to work and the only question is which poison will win out. Deflation is and has been trying to happen for many years. Inflation has been promoted by policy for many years. That is all we really need to know and it is why, dialing back down to the micro, I am a gold stock trader. As long as the system remains intact and lurches forward, they stand to be the big winner for all the reasons I have put forth and continue to put forth in my newsletter.

Meanwhile, here is something I wrote on deflation back in 2004. Again, it is written by a business person, not an economist. I don't see any reason to change my thinking now. I have said all along, that the next real deflation will be the last deflation and the end of the current system. I am not prepared to definitively state whether I believe there is one more inflationary kick save in the making or not. But the system is going to end, sooner or later. Meanwhile, I for one move forward with that depressing fact in mind, as I have for decades. From the article:

The well-spring of productivity has been drained by ever larger government and spending. Not only has productive value been drained, but the spending has continued right off the balance sheet and into mind boggling debt. Thus, a deflationary spiral could only be painful now. The same entities that have told us they will defend us against it are the ones who made it malignant to begin with. I can't help thinking of the Jungian "shadow"; the longer it is denied, the more fierce it will ultimately be in exacting revenge for that denial.

I have read respected analysts who believe deflation is on the doorstep, others who believe it has virtually no chance of occurring while the Fed is on the watch, and yet others who see inflation leading to deflation or visa-versa. I regret to say that what I see, as a member of the real productive economy, is a blow-up of some kind either way as a virtuous continuum of productivity has been destroyed. Furthermore, with the debt levels off the charts and an electorate more concerned about George Bush's IQ or John Kerry's backbone, we are in no position to deal with it either.

To think, it didn't have to be this way.

I hope this at least partially answered your question Peter. Also for reference, regarding deflation being 'much faster and more vicious than inflation', subscriber 'J' addresses Bernanke's predicament nicely. I added his thoughts at the end of a previous post.

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