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Inflation or Deflation, Just Ask Warren

So where are we headed? Inflation versus deflation seems to be the most hotly contested battle on Wall Street since that ‘B’ word that rhymes with “failout”. This is such an important topic because of its implications. For all intensive purposes, deflation is seen as bad, bad for equities, business, and probably most importantly for you because it makes getting those green pieces of paper oh so hard to come by. The large majority tend to agree that inflation is ‘better’— I mean, can the Fed can’t be wrong—a little inflation makes your wallet heavier, tends to boost equities, and helps businesses raise prices. So which one are we headed down, I’ll give you a hint, it depends on Warren Buffet.

When I was in high school I listened to a rap group named Nappy Roots. That seems off topic, but its not! In one of there songs they state a very funny line that has stayed with me, the line goes…

“It’s kind of funny everybody loves money to death, but only 3 percent control Americas wealth”

 Catchy, right? If it is true it raises quite a few red flags when it comes to inflation and deflation. Here is what I found on the matter; as of 2007, in terms of financial wealth -- total net worth minus the value of one's home -- the top 1% of households owned 42.7%.  That is not exactly what Nappy Roots claimed, but it is still pretty significant. Table 1 presents further details drawn from the careful work of economist Edward N. Wolff at New York University (2010).


Table 1: Financial Wealth

Top 1 percent

Next 19 percent

Bottom 80 percent








































So what does this have to do with inflation, deflation or Warren Buffet? Well on July 21st, 2010 Warren Buffet along with about 40 other high net worth individuals – including Bill Gates--pledged generous sums of their wealth to philanthropy. Although this pledge is nice in the long run, frankly it stinks in the short. Let me break my thought process down of why this could be hurting the lower-class people that these pledges will someday benefit (or may not benefit), and in the process may cause deflation, or at least an up hill battle to some inflation…

  • A great indication of inflation/deflation is business capacity utilization. When businesses are producing everything they can and people are tearing it off the shelf that tends to lead to higher prices to grab as much revenue as possible. Likewise, if capacity is not being utilized, companies will often lower their prices to sell more.
  • Demand is really the catalyst for this utilization. It really does not matter how much money is floating around in an inflationary environment, if people aren’t spending it, then demand will not increase, capacity will remain low, and prices will be lowered a.k.a. deflation. 
  • So back to Warren. Since these guys (and gals) control such large sums of money, and they are stockpiling it away for the mass give-a-way, we have a situation were a few people are not spending money (but these few have A LOT of money), which mutes the money supply, means consumption will not be as strong as it could, leading to capacity remaining weak, and deflation becoming our new friend or enemy (depending if you are a borrower or a lender).

Articles like this one below would tend to support the deflation ideals…

So yes the Fed may in the end win because they have more resources then Bill and Melinda Gates (like a printing machine…) but it won’t come without a fight. It could mean another round of quantitative easing for the economy in the hope that the increased cash will increase demand. All of which may well be avoided if billionaires act like billionaires, not like Mother Theresa of Mona Ray Beach. 

Finally, all this makes me wonder; once these give-a-ways do take place will the Fed be prepared for that much cash influx? That is a lot of money on the sidelines and once it gets on the playing field it will sharply increase the money supply and mean really high inflation. What an interesting situation when billionaires giving money away creates more problems then them spending it on a new house. Oh what a world we live in! 

Disclosure: "No positions"