Well my friends which is it and which one will be victorious? In the course of my business day this debate rages and almost boils over to and including heated arguments as signs do point to either scenario possibly unfolding. I will attempt to postulate and form a salient conclusion for you so as to keep us prepared.
In a perfect world, a small dose of inflation ie. 1.5% +- would be optimum. To the uninitiated 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 Federal Reserve Bank 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 these 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 and currently of no concern.
Consider, attempt a request of a pay raise from your employer based on the current fuel price. You get the point I believe. 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 accommodate 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 meager 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 resolve the deflation that the World is feeling. True, private market demand is the best medicine to heal us all now.
We too must factor in the massive deleveraging by consumers and governments into the equation. This can be especially deflationary as the liquidation of assets ensue at perhaps fire sale pricing.
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.