Inflation vs Deflation

In a free economy, the course of events in an economic downturn is somewhat predictable. Deflation would bring about the end of many institutions resulting in the freeing of capital. A necessary deleveraging would occur. Wise institutions with cash on hand would buy capital at bargain prices. New institutions would be the "green shoots" of smarter economic growth from a lower starting point.

In our hyper-regulated economy, things are much more difficult to predict. Deflation is a bad word today. Every hint of this necessary rearranging of relationships and institutions is met with bailouts, easy monetary police, money from helicopters, etc. So what does the future hold?

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Deflationist: The fundamental problem with the world is too much debt, and the governments of the world are trying to pay off that debt with even more debt. The final result, however long it takes, has to be default, even if that default is a world-wide default. That is, by definition, deflation. The super-duper final end-all resolution will be a massive deflation.

Inflationist: Deflation? Have you seen the last 70 years of history? The dollar has devalued by 97%. When exactly do you expect this deflation to happen and how? In the fiat currency era, governments can simply print money. It has never shown much control in how much it prints, so hyperinflation is our future.

Deflationist: Sure, inflation has been the norm for the last 70 years. But the ultimate contrarian is the one who believes that even the longest of trends fail eventually. That 70 years of inflation is a property of the current worldwide banking/fiat currency system, and that system is what will fail eventually.

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So what is the prudent investor to do? Invest in gold for the coming hyperinflation, or raise cash for the coming deflation? Heck if I know.

I see inflation as a monetary phenomenon but hyperinflation as a psychological phenomenon when people lose faith in the currency. Can deflation co-exist with hyperinflation? Will one follow the other? Which will happen first? Can one part of the world undergo hyperinflation while another undergoes deflation?

The way I will play this is as at time like the present, i.e., at what I believe to be the end of cyclical bulls, prepare for deflation. Raise cash, sell commodities. When panic sets in at what I believe to be the end of cyclical bears, lower cash, buy commodities. Either cycle could amplify into massive deflation or hyperinflation.

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Say again?

>Deflation would bring about the end of many institutions resulting in the freeing of capital. A necessary deleveraging would occur. Wise institutions with cash on hand would buy capital at bargain prices

Freeing of capital and buy capital? You mean freeing of cash?

Need to differentiate between money inflation and work hour infl

In every kind of consumer good it takes fewer work hours to obtain it. Even medicine would be cheaper if were satisfied with WW2 medical care. on a square foot basis, housing would be cheaper if not for zoning and other rules.