Well, that’s the question, isn’t it? We are seeing a rise in world inflation, no doubt. It appears here to stay. I can see that possibility. But I am also reading quite a few articles form some seemingly bright financial people who are posing the serious possibility that net deflation and demand destruction is going to be unstoppable. Inflation should not exist if property values fall 60%, 25% of businesses close their doors, their is wholesale slaughter with bank failures, and if unemployment soars.
Deflation is nasty but it can’t result in inflation. I’m really struggling with trying to decide where we are heading — net deflation or net inflation. But some very bright people are convinced that deflation is going to win.
“Deflation is nasty but it can’t result in inflation. I’m really struggling with trying to decide where we are heading — net deflation or net inflation. But some very bright people are convinced that deflation is going to win.”
I believe you might be right...
Deflation might take place if the market is allowed to work...
The Fed won’t allow it...
The Fed will let the money presses hum...
“”””But I am also reading quite a few articles form some seemingly bright financial people who are posing the serious possibility that net deflation and demand destruction is going to be unstoppable. Inflation should not exist if property values fall 60%, 25% of businesses close their doors, their is wholesale slaughter with bank failures, and if unemployment soars.
Deflation is nasty but it can’t result in inflation. I’m really struggling with trying to decide where we are heading — net deflation or net inflation. But some very bright people are convinced that deflation is going to win.””””
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Here’s the way some others that are equally bright are reading the inflation/deflation scenario.
In the global economy, the devaluation of the US$, which is 30% in the last several years, and some say has another 30% to go, down that is.......causes the other currencies to become stronger, especially now in resource rich countries that are stable, witness the Aussie $ and the Canada Loonie. The Euro is plenty stronger as well, but that will not last. So stronger currencies are able to buy goods cheaper than US citizens whose currency is devaluing, rapidly. Add to that growing economies such as China, Vietnam, India, Brazil, where oil and other goods are subsidized by the government. These subsidies cut the risk of “demand destruction” in those countries at the same time we have it here, witness gas consumption down on the order of 5% year over year here, but demand up worldwide. I believe the US will take a back seat in how much our economy drives the global economy. Then as the Fed and Congress issue more and more bailouts with funny money, the US$ devalues further and the cycle continues.
It is not a pretty picture. Add to that the $60 Trillion in unfunded SS and Medicare obligations and..........well......I see no way out of it.
Essentially, there is a hierarchy of asset classes. At the bottom are the most basic - subsistence food, water and air. Just above that are survivalist needs of minimal clothing, shelter, whiskey and ammo.
Above that are basic utilities such as transportation, electricity, Internet and phone. Some of these weren't so basic in the 1930's, but they are vital now.
The hell in a hand basket crowd is figuring we will be down to the whiskey, ammo and stock piled food level before this is over. I doubt that. I'm figuring we will be down to the basic utilities, perhaps, but not lower. I am however prepared to adapt, if I was insufficiently pessimistic.
This ordering of asset classes all rather resembles Maslow's hierarchy of needs.
What's happening is that we are working our way down that hierarchy. One by one, from the top down, things to toxic or worthless. Lower layers become more valuable at the same time.
Mortgage Backed Securities and Credit Swap Derivatives and stock in Bear Stearns or IndyMac have all gone bad. Stock in American car companies, banks, Fannie Mae and Freddie Mac has lost much value. Overpriced real estate in California, Detroit, Nevada, or Florida has lost perhaps 25%, so far. Stock in Dow (DJIA) or S&P 500 index funds has weakened perhaps 20%. These losses stated so far are relative to the dollar, hence those of us who sold the above weaker assets and went to the dollar were ahead of the game.
The dollar itself, relative to gold, oil, gas, various foods, industrial minerals or the stronger currencies, has weakened, perhaps 50% over the last couple of years, varying in detail. The dollar is higher up in this stack of basic needs than is oil, gas, minerals and food. The strongest currencies roughly manage to track energy and food.
Gold, in times of great distress, has historically been money, but in these times is buffeted by the manipulations of some large banks and by some major investor mood swings, making it difficult for me to tell what it means, or where it is going next.
In summary, you want to get out of the asset classes higher up in the order before the mob does, to preserve your net worth. So long as there are asset classes of substantial dollar denominated value that are higher in this order (intrinsically less essential) than the dollar itself, these classes (like bank stocks) will get lower in dollar denominated value, at the same time as asset classes lower in the order (more essential assets like food and energy) will gain in dollar denominated value.
The dollar still has, and for Americans likely will continue to have, substantial value for its liquidity. I can't just go put my entire life savings in canned food, ammo and whiskey because I can't easily pay my bills and conduct my ordinary financial affairs using such stuff, and would have to pay to store it meanwhile.
Investing dollars in asset classes that are liquid, like stocks, bonds, currencies, ETF (Exchange Traded Funds) shares in gold or commodities is like sailing in a typhoon, without satellite weather. Most things are going down most of the time, but there are dramatic swings back and forth, which one might be able to gain on, if one doesn't get soaked or washed overboard and drowned.
So I recommend moving down, to the more basic end, of this hierarchy of asset classes, while staying as liquid as one can, which includes lowering ones standard of living and reducing ones cash flow needs. Get the heck out of any leveraged asset classes (such as overpriced, highly mortgaged, real estate) and get your life to a point where you could imagine living on half your current income.
Stay healthy, each nutritious food, keep your job, and avoid debt. If you do lose your job, do your best to remain out of debt.
If inflation means rising prices, we will see both rising and falling prices, depending on which asset class, when.
If inflation means too much money and credit chasing too little goods and services, we will see great dislocations in that area, as huge assets classes providing credit, such as mortgage lending funds, collapse, even while Congress and the Fed try to pump more funds into the economy.
This "inflation" versus "deflation" debate is of little more use than the analysis of the six blind men in the Fable of Jaswant the elephant.