Why a great inflation still seems more likely than a big deflationary slump
Posted on 13 October 2011 with 4 comments from readers
The sort of financial and more specifically banking crisis that is enveloping the world is extreme and so we should logically expect an extreme outcome. Stability is the least likely outcome from such instability.
That leaves two extreme possibilities: some kind of systemic breakdown in credit, trade and business activity leading to a massive slump in asset values and a depression; or government intervention in markets on a heroic scale like the $16 trillion bailout by the Fed post-2008 and an inflation of more asset bubbles, much higher levels of food and energy price inflation and a muddle through for trade and business activity.
Bust and boom?
Of course, the risk is that you get both with horribly volatile swings between bust and boom. That is to say an acceleration and amplification of the booms and busts we have seen in recent years.
In late 2008 Warren Buffett bet heavily on a government bailout working and it worked for him. He is doing the same thing now albeit a bit early once more with his investment in the beleaguered Bank of America during the eurozone banking crisis. Then again nobody ever said being a contrarian investor did not require a strong stomach.
This thinking comes down to a simple analysis: if a government is given the choice between a deflationary slump and kicking the can down the road to inflation in the future then it will always go down the survival route, even if some short term pain might actually be better for long term gain.
The problem is that a great inflation may come at huge cost and also end in a deflationary slump. Consider what happened in Russia after the fall of the USSR: hyperinflation crushed the value of savings and brought the real economy to its knees. Recovery then took almost a decade with the economy handed over to corrupt oligarchs for a pittance who finally integrated it with the global economy.
Nightmarish future?
Is that where the US, UK, Japan and eurozone are heading? You have to wonder. Certainly the piling of debt upon debt to solve the problem of a debt mountain is no solution. It is the economics of the madhouse, and one that leads down the road to hyperinflation and a market implosion.
If you are in a hole the first thing to do is to stop digging. Making it twice as deep just leaves you in a deeper hole. Taking what seems to be the easy option is not always a good idea as most people learn from life.
For investors the survival package lies in real assets that will stay with you through an inflation or deflation and still be worth something. The next issue of the ArabianMoney investment newsletter will consider what ought to go into that survival package both in terms of assets and strategy (subscribe here).
4 Comments posted by readers:
There is historical evidence that waves of inflated prices are followed by periods of stable prices. However, the change to price stabilisation is invariably accompanied by depopulation.
The inflation, which began in the 13th century in Europe, ended with the Black Death when an estimated 30-40% of the population died.
The inflation from the end of the 15th century in Europe ended in the 1650s after the religious wars between Catholics and Protestants had ground the antagonists into the ground with much slaughter.
The inflation which got going in about 1775 in Europe led to the French Revolution and the rise of Napoleon. The thousands killed in the Napoleonic wars led to the period of price stabilisation of the Victorian era.
The inflation of the Weimar Republic ended in the preparation for war under Hitler in which some 15 million Germans died.
Presumably the inflation in the USSR was brought to an end by Lenin’s slaughter of, perhaps, 50 million Soviet people.
If prices rise because human beings en masse have more children than their immediate predecessors; and if prices rise because those people want a higher standard of living than their immediate predecessors, then prices will rise inexorably into a period of inflation.
Since it is individual people’s demand for more food, commodities and manufactures that creates a progressively increasing demand en masse with consequent inflation of prices, then the only historical solution seems to have been depopulation.
In depopulation, a dead person neither reproduces nor demands higher living standards! If this event is repeated multiple times, the demand, which raised prices to inflated levels, dies away and, therefore, prices fall leading to a period of price stablisation.
At the current time, too many people have lived at standards of living made high by the debt-producing nature of fractional reserve banking.
The solution, sadly, may be the old historical one of depopulation.
Ed Note: Inflation is mainly about the money supply, not demographics, not sure where you got this idea from. Despite the loss of life wars are hugely inflationary because money is printed to pay for them!
Cheap labor from Asia, along with greater use of robots, will keep inflation in check in the developed Western world until peak oil becomes evident. If Iraq and Kazakhstan keep increasing oil exports, that could be as late as the first half of the next decade.
During part of the 1970’s, the USA had double digit inflation caused by a wage price spiral. That can’t happen with 9% unemployment, cheap goods flooding in from Asia, and unions a shadow of their former selves.
The stock market will continue to go up. Stay away from all bank stocks.
IF YOU ARE IN A HOLE YOU DIG A DEEPER HOLE ADJACENT TO THE EARLIER ONE.FILL THE EARLIER HOLE AND LIVE AS IF NOTHING HAS HAPPENED.YOU REPEAT THE SAME WITH THIS HOLE AFTER SOME TIME.IN THIS ERA OF OURS I AM SURE YOU WOULD NOT RUN OUT OF THE PLACE CALLED EARTH.YOU WILL ALWAYS FIND A PLACE TO KEEP ON DIGGING.
ALL THE BEST
Guys remember the 3 G’s. Gold, Guns, Groceries and Bullets for Barter. Keep a passport and learn a new language. Another country may be better than fascist Amerika. Lie low and stay amall. When the shit hits, have a escape plan. Rural area where farming and guns are the law may be an option.