David Haas, Consultant Rotating Header Image

Why The Inflationists PROBABLY Have It Wrong, For Now

Many people are trying – with increasing desperation – to discern the future and plan correctly for the economic environment we’re most likely to find ourselves experiencing.

My continued bets have been that deflation will prevail, at least in the early years of the great collapse, and nothing has yet occurred that changes my view.

To further advance your personal understanding of the powerful forces (people) at work in the hidden halls of high finance, here is an excellent “scholarly” historical analysis of the inflation/deflation debate and how it might pertain to the US economy going forward.

The Politics of Deflation

I think the author, Vijay Boyapati, really “nails it” in the above article and his conclusion describes exactly what we are seeing and will continue to see for, perhaps, up to two decades – like Japan now and the US in the 1930’s and 1940’s.

Longer term, I believe that US politicians are likely to be less patient with the continuation of a painful and protracted deflation than Japanese politicians have been, so we’re somewhat less likely to experience deflation running out to – or beyond – 20 years as the Japanese have.

In the meantime, unless the political class wrests complete control of the ability to dictate monetary policy (money creation) from the banking class, controlled deflation will most likely be the policy pursued to correct the excesses of the (Greenspan) housing bubble and the other bubbles that led up to it.

(Background Note: To long-time observers, the US housing bubble is seen, essentially, as the terminal blow-off phase of the great 25 year inflation experiment initiated by “Reaganomics” in the early 1980’s. Its creator, Alan Greenspan, pursued this inflationary policy relentlessly until he, quite literally, “pricked his own bubble” with his remarkably well-timed retirement as Federal Reserve Chairman. Some might even call this global inflation experiment “Greenspan’s life’s work”. I call it “little more than a lot of hot air”. So much for Greenspan’s life’s work and Time Magazine’s 1997 “Man of the Year”. Reminds me of Barack Obama “winning” the Nobel Peace Prize, but I digress…)

Should we happen to see the political class gain control of monetary policy (most likely as a result of a powerful “in the streets” social revolution brought about by too much deflation and too much “fiscal austerity” for too long a time), then hyperinflation does become a VERY REAL threat. But probably not until then.

As we’ve seen, bankers are not suicidal (actually, they’re quite cowardly) and aren’t likely to deliberately pursue a policy of slitting their own wrists monetarily. They prefer to see ONLY the blood of others running in the streets – while they enjoy their afternoon tea and crumpets.

All holders of assets that depend upon inflation to drive further price expansion (read: speculation) should take note. Precious metals are included in this group and – despite some natural, intense price volatility due to panics – will probably continue to succumb to the powerful deflationary forces this time around, too, as they have in deflations of the past.

In this expected “slow, grinding deflation” environment, safe, boring assets can come out winners along with executing a long-term plan for the slow, deliberate accumulation of both real and financial assets at generational low prices. In a deflation, this is EXACTLY what the bankers, themselves, will be doing.

Of course, real and financial assets are the things that will benefit from the EVENTUAL RETURN of inflation once the deflation has fully played itself out. We’re nowhere near that point yet. Cash is still king.

Remember, baby-boomers and their heirs will be “net sellers” – liquidating virtually anything and everything they can – for the next 25 years.

Since subsequent generations are smaller, who will be buying and at what price? Sounds like an environment ripe for “yard sale” pricing to me.

Just my two cents (or 4 cents thanks to Greenspan…).

0 Comments on “Why The Inflationists PROBABLY Have It Wrong, For Now”

Leave a Comment