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Will inflation or deflation win?

From the moment the stock market crash occurred in 1929 to the bottom in 1932 when 90 percent of peak market value was wiped out and 25 percent of the work force was unemployed there were people who exclaimed “inflation” every time a suggestion was made to arrest the devastating deflation that was occurring.

Nowadays, those who profit from the gold selling business also exclaim “inflation” when similar measures are taken to counter the present slump.

The debt of the federal government and of the Federal Reserve have expanded rapidly since September.

“Inflationary” cry the gold crowd.

Is it possible to be right and still be wrong?

Just as every equation has values on both sides of an equal sign, you have to look on the other side of the economic equation.

Growth in debt by the government and the central bank does tend to be inflationary. No question. The gold sellers are right. However, the spendable asset values that are daily being wiped out by the stock market, bad mortgages, bad car loans, bad credit cards, etc., are destroying more value than the Feds are creating so far.

The so-called inflationary policies are trying to counter the deflationary effect of the decline in value of bad assets. Inflation is the intention.

If I and everybody else choose to walk around with double the cash in our wallets, that might be inflationary, but if a greater value has been destroyed in our homes and retirement plans, we have less ability to spend in the economy than when we had half the cash in our wallets.

It is only when the inflationary tendency exceeds the deflationary that the net result is inflation. Anybody buying gold who justifies the decision solely on federal actions might end up being sadly surprised if the other half of the equation has a greater impact.

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5 Responses to Will inflation or deflation win?

  1. Dan says:

    Those who borrowed to purchase homes and other assets at a fixed interest rate should probably be rooting for inflation — assuming wages increase at the rate of inflation — since it effectively lowers your relative cost of the debt payments.

    For example, if you have a fixed mortgage payment of $2,000, but the purchasing power of the dollar is cut in half because of inflation, as long as your income rises with inflation, the opportunity cost to you of making the mortgage payment is cut in half.

  2. Mark says:

    Right now the banks are not lending. All the cash infustions they have received is either being horded or being used to by T-Bills and Bonds. Once they start to lend again, inflation will heat up very quickly.

  3. Dan says:

    Your comment is correct… if deflation wins, those who are asset-rich, whether in gold, or homes, or whatever, lose.

    Based on reports of U.S. savings rates, there are many more Americans with debt than savings; Americans are consumers, not savers. Savers — those with cash under the mattress — do better in a deflationary economy, as their money has greater purchasing power, they are rewarded for their thrift. In an inflationary economy, savers lose out; each dollar they have under the mattress has less purchasing power. Those who buy gold as a hedge are betting on inflation, on the presumption that gold will rise with the level of inflation.

  4. Scott says:

    Gold is a universal monetary instrument that has traditionally been a safe haven during times of economic and political unrest. Those who invest in gold are merely trying to preserve their wealth through a portable, easily exchanged medium with the longest history of any monetary instrument. During the depths of the depression, Franklin Roosevelt de-valued the U.S. dollar by raising the official price of gold from $20.67 per ounce to $35 per ounce. Very few people today realize the primary reason the U.S. Dollar was the preferred currency around the world for so many years was due to the fact that any government could convert paper U.S. dollars into gold until August 15, 1971. Gold is wealth you can put your hands on when times are tough and it will always be “REAL MONEY”, unlike imaginary paper profits that can vanish within hours. There will always be a demand for gold, even 1000 years from now when the U.S. paper dollar is totally worthless.

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