Inflation vs. Deflation? Some thoughts to consider.

Well my friends which is it and which one will be victorious?  In a perfect world, a small dose of inflation ie. 1.5% +- would be optimum.   To the unititiated on this subject , a stop at the Gas station cries out inflation quite loudly and painfully.  To those who purchased a home between 2004- 2007  the opposite is the case and the pain is also substantial.   Two competing forces leaving us all the worse for the wear.  Many pundits decry the Fed and Congress for the borrow/print/spending binge of the last three years.  A case can be made that it was both necessary and yet unnecessary.  I believe the latter to be the case as I have yet to see any visible evidence of any real success, excluding the reliquifying of the Banking system .  But the Banks now sit on an estimated two trillion dollars  on deposit with the Fed and are cautious to lend to say the least.  There are numerous reasons for this and we will comment at a later time.  So the point is the funds are out of circulation and in my opinion so long as they remain there, inflation of the magnitude I am hearing  ( Hyper ) seems unreasonable for now at least.  We are also faced with a real Unemployment rate in the area of 18% and of course so long as this remains, Wage Inflation , a key component in the inflation spiral is beyond tame.  Consider, attempt a request of a pay raise from your employer based on the current fuel price.  You get the point.   These two factors also have an impact on the Weaker Dollar indicator leading to inflation.  The bottom line here is many factors must align for this theory to turn to reality.  Yes I agree we have increased prices currently on many items and with the growing middle class in many former/still third world countries, this is to be expected.  The markets will ultimately balance these factors out with more supply to meet demand.  These countries still have a long way to go and we have the time to prepare to accomodate them.   I personally tend to fear the Deflation much more as it is a Monster to get under control.  Witness Japan for the past 20 years. Their bubble has been deflating for that long and they have applied far more ” stimulus ” than Uncle Sam and they have  only been able to  manage meagher growth. Believe me it is a Bear.  Many countries in Europe are in the same boat at this time and have very serious problems to unwind.  I believe as this progresses, we will see a far weaker Euro and a much stronger dollar.  This is good against the inflation fight but will not resove the deflation that the World is feeling.  True, private market demand is the best medicine to heal us all now.  In summation if you will allow me, herewith an albeit rudimentary and short  projection for the investment world.  My view is the China/European bubble will continue to deflate and with this I surmise a flight to the greenback and US Stocks and Bonds will see a mighty resurgence.   There are numerous caveats which I might employ as there are many land mines to pass along the way, but this is how I see it as of this moment.  Good life.

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2 responses to “Inflation vs. Deflation? Some thoughts to consider.

  1. I too believe that the market is the best remedy for this deflation/inflation issue. Manipulation never works, whether it is the economy, social engineering, or your personal life. The Market, the universe, life, whatever you want to call it, always seeks a balance, when we mess with it, it will always cause problems.

    • I could not agree more. In fact you reminded me of a famous quote by C.S.Lewis which kind of fits. ” There is no neutral ground in the Universe, as every second and every inch is claimed by God and counterclaimed by Satan. Maybe a bit much/esoteric for this topic, but I conclude from this quote that we will balance out albeit naturally and not man manipulated. By the way, Many Happy Returns.

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