How much deflation before we get to the hyperinflation of money printing?
Posted on 28 June 2012 with 1 comment from readers
Look around the world as ArabianMoney always does in the summer because the excessive heat of the Middle East drives us all to seek out cooler climates, and you very quickly realize this year that the main issue is deflation, not inflation.
Gas prices are falling with the oil price. Indeed, falling commodity prices are taking the pressure off input prices across the board.
Demand destruction
The demand destruction of widespread economic contraction is doing the rest. Shop discounts are deeper to sell goods.
Hotels are struggling to sell rooms. Upgrades are cheap. Hire car companies can only give away their more expensive models.
Pricing muscle is low. Customers who overpaid in advance will not do so again, or certainly not next time.
Yet central banks are not unaware of this situation, or in any doubt about how dangerous a deflationary spiral could be to the global economy.
Deflation makes all those debts in the world even bigger and more impossible to pay off. It threatens the banking system with destruction.
By printing money central banks can offset any amount of deflation. The problem is that fine-tuning this process is equally impossible.
Money supply
All they can do is to keep on expanding the money supply until deflation is checked and then try to undo its bad effects with tighter monetary policy.
Central banks will likely act is coordination. This should help to make their action more effective but it does create a universal flood of money that will definitely do something big.
From past experience of much lesser crises we know that monetary inflation once unleashed is terribly difficult to control.
Putting two and two together and we get a climate in which the rather mild deflation of prices we see now will more than likely be followed by higher levels of inflation.
From an investment perspective readers of the ArabianMoney investment newsletter (subscribe here) will be familiar with the argument that we are making for buying real assets, preferably in this deflation phase.
Real assets
Not doing so will leave fixed incomes like pensions or bond coupons particularly vulnerable. On the other hand, precious metals would perform very well and probably outstandingly so. Gold and especially silver are our top tips (click here).
Stay ahead of the investment curve by realizing what deflation really means. Things will get cheaper for a while and then prices will go up again and then some.
1 Comment posted by readers:
I don’t see inflation being a problem for several more years. It beats the hell out of deflation, unless you are sitting on piles of cash with no debt.
Q1 US GDP is finalized at 1.9% growth. A little below my 2% to 2.4% estimate from last year.
Weekly jobless claims are stuck at 386,000. The 4- week moving average is virtually unchanged at 386,750, down only 750. Those changes are rounding errors in numbers of that size.
How about those UK banksters manipulating LIBOR !!! The government over there is talking doing a CRIMINAL investigation. Sure. Like after the massive USA sub-prime fraud!
Housing in the USA appears to have finally bottomed.
Obama is leading in the polls in 3 key swing States. I laugh when I see the TV ad with the woman giving Obama a big hug. I can’t see Romney as too hugable, although those close to him say his public coolness isn’t the real Romney. Maybe, maybe not.
RAY NAGIN BULLITIN: The last mayor of New Orleans is about to be indicted for numerous crimes by the United States of America. (There is a God.) 3 people who paid him bribes have pled GUILTY already, and are ratting him out to the Feds. It is so beautiful that I can hardly stand it. Nagin was mayor during the tragedy of Hurricane Katrina that drowned 1,500 people in New Orleans after the Federally built junk levees collapsed and flooded most of New Orleans. Then he played the race card and divided the voters along racial lines with his racist “chocolate city” comment. I pray that he won’t cut a plea deal, so that the judge will give him about 15 years after the jury convicts him. (Assuming he can’t get 2 hung juries, because the Feds NEVER try anyone 3 times.) Federal judges in the USA HATE when they know the defendant is guilty, and they have to conduct a trial. Those Federal judges tend to be a bad- tempered, mean bunch. (I would cop a plea deal in a second. There is a big difference between 3 years behind bars, and 12.) You can read all about the case at http://www.nola.com. You would not believe the number of politicians from this area who are in jail. And they make good money while in public office ! Thank god for the Federal Justice Department, or this place would resemble Russia and China. Politicians would be exempt from the rule of law, unless they murdered someone.
They say that the Supreme Court striking down the Obama health care law might actually help Obama. He could blame the Court AND Congress for being obstructionists. It worked for President Harry Truman.