Inflation and Deflation: Two Sides of the Same Coin! by
Larry Edelson
The most frequently asked question I seem to get is,
"Larry, don't you see hyperinflation for the U.S. in the years
ahead?"
It's understandable. After all, we have seen the U.S. Federal Reserve print trillions of dollars.
We see, in real life, most costs rising. And there is no shortage of pundits out there
proclaiming the U.S. will soon experience hyperinflation.
So let me clarify my position, here and now: There was a time
when I expected the U.S. economy would eventually experience hyperinflation. But in September 2011, when the price of gold
failed to react to the Fed's QE III announcement of virtually unlimited
money-printing and the yellow metal entered an interim bear market, I knew
something had radically changed.
So I further researched the known periods of hyperinflation in
the world. And I found something that completely changed my view: There has
never been a major core economy that has died at the hands of hyperinflation.
There was the Weimar Republic, of course, but it was not a core
economy for the world. And even more important, the Weimar Republic's
infrastructure had been wiped out, and it had no bond market to boot — a market
that could contain inflation via bond vigilantes, who would inevitably
send rates high enough to kill it off.
Then there are the hyperinflations of Zimbabwe, Brazil, Argentina
and countless other small economies that were never at the core of the global economy, and importantly, also
didn't have bond markets deep or liquid
enough to counteract the forces of inflation and hyperinflation.
And upon further study, I found that even the Roman Empire, certainly
a core economy during its reign, didn't even die of hyperinflation. It died largely because of abuse of power by
politicians, which drove citizens away from the Empire. By rapidly rising
taxation, which had the same effect; and
by a corrupt Treasury and justice system that tracked down and confiscated citizens' wealth,
largely to fund increased military
campaigns, which were hoped to revive the Roman economy. Sound familiar?
Was there high inflation in Rome before it fell? Yes, but nothing
like the hyperinflation we saw in Weimar Germany or any of the countries I
mention above.
So, then, what does the U.S. economy face? Further disinflation,
outright deflation, eventual reflation or something else?
My view, and I am not hedging my answer or talking out of both
sides of my mouth: We face a combination of further disinflation in the short
term, followed by a rather large jump in inflation years from now.
But we don't face hyperinflation, period. Our economy, even as
it is eclipsed by China a few years from now, is a core economy.
Our bond markets are too deep and liquid, and our bond vigilantes,
ever sensitive to inflation, will simply not allow hyperinflation to ever
emerge in our country.
How high will inflation eventually go? It's hard to say, but
I wouldn't be surprised if three years from now, we see 20 percent or even 25 percent
inflation.
But I highly doubt we will ever see inflation in the thousands
or even millions of percent. It's just not possible in our economy, which is at
the core of the global economy, and given our deep, liquid bond market.
Whether we have deflation or inflation is also the wrong way
to think about the U.S. economy.
The reason? Ever since we abandoned the gold standard, inflation
and deflation have become two sides of the same coin. In other words, they are
both present in the economy at the same time. You can have certain goods and services
and even asset classes deflating, while others are inflating. It's as simple as
that.
Ever since we abandoned the gold standard, inflation and
deflation have become two sides of the same coin. For instance, the price of LED
TVs has crashed, as have the prices of laptop computers, cell phones and many
other goods. Not to mention real estate prices since their peak in 2007.
Meanwhile, other items have experienced inflation. Food prices,
legal and health-care services, and more. So it's not a matter of one or the other, it's
a matter of what sector is inflating and why, versus which sectors are
deflating and why.
Nevertheless, there's another important underlying force that
you need to understand, another one that resulted from the abolishment of the
gold standard. A certain level of general, system-wide inflation is always
baked into the cake.
It's due, again, to the fact that we no longer have a gold standard.
But it's also due to many other forces, such as population growth, limited
availability of natural resources, the constant desire for people to improve
their lives and more.
This is important to understand, because it's the chief reason
prices will be higher a year from now, five years from now and even 10 years
from now ... no matter what the U.S. or global economy does.
For instance, $5,000 in cash squirreled away in a bank in 1913,
when the Federal Reserve was created, is now worth only 4.13 cents. That's right: 4.13 cents. Put another way, it would take $121,000 of
today's money to buy what $5,000 would have bought in 1913.
Want more recent examples? Consider the following
It now takes $6,760 to buy what $5,000 bought just 14 years ago
... $8,910 to buy what $5,000 bought in 1990 ... and roughly $30,000 to buy what
$5,000 bought in 1970.
Even a McDonald's Big Mac, which cost a mere 57 cents
in 1959, now costs about $3.99, an
increase of 600 percent, for an average annual
increase of just nearly 11 percent a year.
The bottom line: There are several. First, we have, and
pretty much always will have, a base level of inflation in our economy. It's
the natural state of things. Second,
that said, inflation and deflation are again, two sides of the same coin. While
there will always be prices and sectors that inflate, there will also be prices
and sectors that simultaneously deflate.
Just consider the stock market, which is inflating. Or the dollar,
which is also inflating, its price rising, which in turn, causes deflation in
certain other assets, namely commodities, because the inflating dollar
automatically purchases more of those goods.
And third, and perhaps most importantly, never let anyone convince
you the U.S. is headed into hyperinflation. It simply will never happen. Buy
into their theories, and you will lose your shirt, failing to recognize the yin
and yang of the markets, the deflation and inflation that are both ever
present.
I repeat, I am not talking out of both sides of my
mouth. Deflation and inflation are ever
present, two sides of the same coin. Once
you recognize that, you will become part of the savvy investor crowd, and you
will be able to follow the money flows as they shift from sector to sector,
asset to asset, based on the ever present and ever changing faces of inflation
and deflation.
Gold and other precious metals are still largely on the deflation
side of the coin, and I sure hope you have taken advantage of my recent
suggestions to purchase inverse ETFs on both. If you have, you should be
sitting on some very nice gains indeed.
Grab life-changing profits as the world battles over
dwindling supplies of oil. A series of bloody wars are breaking out over
oil and energy. Multiply your net worth by 3 to 5 times with natural resource
investments that are now set to EXPLODE in value as the U.S. dollar plummets.
Source: Email from
Money and Markets, Wednesday, November 12, 2014, by
Larry Edelson
Comments
This report covers the basics. but doesn’t
dwell on the bubbles ahead. We will “enjoy”
deflation as demand heads lower and we will suffer inflation after the Feds
figure out how to isolate their own debt from it. Larry Edelson is simply making a case for
staying with some stocks for now. I
think the rush to stocks is another designed bubble. They sold gold to keep the
price of gold from rising because they could still make money running up US
stocks. The betting tables are open.
What is not factored in is much mention of
how lower demand affects stocks and what happens when bubbles break. Governments
are broke, so they shouldn’t be propping up demand. I think we are at a tipping
point for a downward slide. The besides lower demand caused by a poorer
customer base, government debt and unfunded liabilities and unsound fiat money,
other fundamentals don’t look good.
Mega-Banks have gone to the casino gaming
tables and own $700 trillion in derivatives.
These are bets that things will go up or down that are covered by
insurance contracts. Banks often hedge
against their own bets and they lose money. These banks have proven that they
can do a lot of damage to the global economy and there is no oversight on these
derivatives.
The end of QE is the Federal Reserve’s way of
saying that giving $16 trillion to the Mega-Banks is enough.
Russia and China won’t be using US dollars
anymore and neither will other groups. This reduces the demand for US dollars.
Gold is being purchased by countries and
rumors of using it to back their currencies are numerous. The price of gold is
being manipulated to allow these countries to purchase more.
The US federal government shows no signs of
changing its over-spending ways. The US economy shows no signs of recovery.
Predictions of long term US economic problems are numerous.
Norb Leahy, Dunwoody GA Tea Party Leader
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