Inflation or deflation? - the most important question of our day
Vast disagreements exist
Timing
Inflation = persistent increase in money and credit
Inflation Myths
What you can do
There is simply no more contentious or important issue sitting before everyone these days than resolving the question of whether deflation or inflation lies before us. Sides have been drawn, opinions hardened, and camps formed.
When I write these reports, I do my best to peer just a bit further down the road than most. I study and analyze and write because I have found great value in being ahead of the curve. Illuminating the path a bit further out can provide an enormous benefit, especially if actionable ideas are the result.
So let's clear something up right away: Unless the economy collapses into a smoking deflationary ruin, there's another business cycle in front of us. Nothing ever goes straight to zero, and the most probable outcome for the future involves a whole series of wiggles going up and down. While I am confident that the distant future most likely consists of a world of less, not more, I expect we will not get there in a straight line. My belief is that there's a business cycle or two in front of us.
Dr. Martenson,
I cannot thank you enough for this report. It clarifies many things for me. You are a fantastic educator and very fastidious observer. Thank you for sharing your thoughts with us.
The idea that we’ll have another business cycle before "smoking ruin" is a novel one to me. I’d love to see that happen – one last chance to divest – of assets that are vulnerable during a collapse-ish scenario – without taking a yuge hit.
More data for the ol’ brain to consider… Thanks Dr. M!
When I write these reports, I do my best to peer just a bit further down the road than most. I study and analyze and write because I have found great value in being ahead of the curve. Illuminating the path a bit further out can provide an enormous benefit, especially if actionable ideas are the result.
This is a really interesting comment. Although one certainly needs to be cognizant of what potentially lies ahead, is it not the inability to understand the infinite interactions of every day life which defines its magnificence? Imagine actually knowing what lies ahead. I believe it would be the cause of spontaneous insanity.
Once again a great read… but just before I sat down to read this John Mauldins outside the box newsletter hit my inbox on the case for deflation and I thought it to appropriate to read that first.
The counter-argument to what Chris is presenting is the example of Japan’s economy and the number of tools they tried to fend off deflation with no success (QE, zero interest rates, govt spending, devaluing currency). It’s not exactly easy to escape the deflationary cycle, even dropping money in the banks of citizens has a bad track record (I think) the Germans tried this with what they called disappearing coupons. The coupons were for free money that had expiration dates but the crafty germans found ways to post date them, circumventing the effectiveness.
What I love about visiting this site is that an education can be attained from all the sources of information presented here and I’m not a mule that believes every newsletter I read. Rather, I analyze and think alongside my reading. The comparison of Japan and our economy lacks a few key points; the US is a resource rich nation and we are the Worlds Reserve Currency. The WRC being probably the most important of the two but I’m having a hard time explaining just why will save us from Japans defaltionary spiral but I;m researching this presently.
Kemo,
I read that same Mauldin OTB article earlier, and it reminded me of the April 09 Client letter from Sitka Pacific Capital Management which discusses the effect of QE during Japan’s 20+ years of deflation.
I think its safe to say that the "next 20+ years will be very different from the last 60 years"
Et Tu, CM? Egads, my problem with this debate is exactly what CM says in the article, which is one of perspective.
Just like inflation, I think deflation proper would be a drop in prices, wages, everything across the board. If some produced items do not drop in price, even as a result of a drop in demand, and consequently if some items are still rising in price, then I think a better term is "disinflation," like Jim Willie’s website asserts.
Assets: If I bought a tractor for 5000, then the whole world told me my tractor was worth 7500, then 10000 the next year, and 15000 the year after that, I would be the greater fool for believing those inflated numbers and basing my future business decisions based on a 15000 asset, I would be an idiot, unless I sold that tractor for 15000 when I could. Bubble numbers are just that bubble numbers. Its not like the FED just started to print money. Shadowstats says real CPI is still 2%, we have always had inflation.
Wages: Lets face it, the income expectations of the west are uncompetitive, otherwise there wouldn’t be so much outsourcing. Is a move to equilibrium deflation? No its just a move to equilibrium. The working guy on the other side of the world just wants to buy milk and eggs with his wages. QE’s ultimate goal is to try to avoid this mean reversion. Is that deflation? I dont think so.
Attempts to apply the "macro" talk is sounding like a bunch of malarky to me. Some of us in the US have always avoided credit like the devil it is, save like "the Asians," and live very much below our means. Those that do have never seen or experienced deflation.
but JAG,
what would be your take on the point that i bring up that because we are the WRC that we can avoid Japans misfortune? As I see it everything I foresee happening (the main prediction is a massive default of companies loaded to the hilt by private equity debt) is deflationary in nature… but… the fed has a certain amount of control in this situation and they will veer the economy away from deflation towards inflation. The WRC being the reason we succceed in creating inflation.
BTW, I went back and visited a Krugman article where he mentioned ‘diappearing coupons’ and germany was considering these coupons but never implemented them becasue they can be circumvented. The Japanese on the other hand have done these disappearing coupons, with very little success.
I have a few questions for you though, how long can the Fed and their crony banksters keep gold suppressed through their arms length market operations? How long before the game is finally up will the system have to completely collapse before sanity prevails and gold and silver are seen as the real money they are?
Now for the mother of all questions, will even gold or silver have any relevance in a truly energy starved world (think Jay Hanson and "Die Off" web site) or do you see a truly barter system evolving?
i think that even in a currency collapse our dollar will remain intact simply because for purchases and clearing transactions there really is no substitute. bartering indivdual pieces of gold/silver is cumbersome and inefficient, paper (or digital) currency exchange is lightning quick and efficient. what could happen however is that our paper currency can be once again backed up by a gold/silver (a bretton woods 3 agreement).
But for international settlement you may see gold/silver inflows and outflows as foreigners distrust each others paper currency so they demand the physical bullion. Inside of every country some form of paper currency will dominate due to what i mentioned earlier.
i don;t at all buy into the idea of myself carrying gold to the grocery store and bartering. Although I can’t count out anything nowadays but our situation would have to deteriorate 90% from where it is now for that to happen.
I’ll preface this by stating my belief that nobody knows for sure what’s going to happen, but this is a very convincing article on why deflation is likely for the next few years.
i agree chris kesser. stoneleigh over at the automatic earth does make a compelling case for continuing deflation caused by massive debt deleveraging/credit destruction (which will overwhelm any and all government quantitative easing efforts). her and ilargi do agree with Dr. M that massive hyperinflation will eventually result in the ultimate destruction of the USD, but they believe that event is years away. they say we all have to get through this deflation tsunami first. although this seems a bit at odds with what Dr. M is forecasting, TAE echoes this blogʻs recommendations: hold no debt, find your people and get close to them, work on building community, do not trust the banking system (FDIC insurance will fail), work on becoming as self-sufficient as possible in regards to lifeʻs basic necessities, etc. next to this site, TAE is one that has helped me understand and get ready for the transition from a more complex to less complex economy with the resulting reduction in our standard of living.
Great to see you over here, Stoneleigh! Welcome to CM.com. I actually did see your conversation with Aaron and found that to be very helpful as well. Sharon Astyk wrote a post yesterday about your recent articles - that’s how I heard about them.
A question for you: what is your opinion about the likely performance of gold and silver during a massive deflationary period? That is a subject of tremendous interest here and elsewhere. Common wisdom holds that PMs do well in inflation, but not in deflation. However, Mish’s article Is Gold an Inflation Hedge makes a convincing case that in fact the opposite is true. He references Jastram’s The Golden Constant and his Classic Study of Gold Purchasing Power, as well as an article called Gold & Deflation: a Dissenting Dissection by Bob Landis, to show that gold is actually a poor inflation hedge, but performs very well during deflationary periods.
I found Mish and Landis’ arguments to be compelling, and I’d be interested to hear your opinion on this. Also, though all of these articles discuss the performance of gold during deflation, they don’t specifically address the performance of silver. Silver is obviously a different case because of its dual status as an industrial commodity and a form of currency.
There is no question in my mind that gold will hold its real value over the long term as it has for thousands of years. What I would exepct in deflation is for its price to fall initially along with virtually everything, as people sell whatever they can to raise the cash they need for debt repyments, margin calls and living expenses in a world without credit. Desperate people who cannot sell what they would like to will be forced to sell what they can. For instance, a couple of years ago the Gaza strip became a gold exporter despite not producing any gold at all. The people had finally become desperate enough to sell their most valuable possessions.
I think gold will bottom early in this depression though, and will then rise significantly. Buying it now would be expensive as the spot price is much higher than I think it will be later, but it would be a good insurance policy for someone would had already covered other bases and, still had money to spare and would be able to sit on his holdings for a number of years. Later the price should be lower, but hardly anyone will have any purchasing power. For the few who do (having preserved purchasing power as liquidity now), gold should be cheaper to obtain then, assuming it is available for purchase. This may not be very straightforward as public markets may not be available and black markets carry their own risks.
At some point gold ownership is likely to be made illegal, as it was during the depression, which doesn’t stop you from owning it, but would make it very difficult to exchange for essentials. This is why you would have to be fairly sure you wouldn’t need it for a while.
As an industrial metal, silver should do less well than gold.
Thanks for your response, Stoneleigh.
To recap, it sounds like in your opinion at the current price gold is only a good investment for someone with a long-term horizon who has already paid off debts, set aside cash, stored food and addressed all of the other necessities of preparing for a massive deflationary period?
I’m assuming you recommend US treasuries or cash as the safest haven for the next few years?
Hi Stoneleigh,
I just wanted to give a quick thanks to you for the work that you do. I’ve been following your work for only about a month, but I have been very impressed by the clarity of your perspective. We are very grateful to have you as a member of our community.