Sunday, July 5, 2009
Executive Summary
- Inflation or deflation? – the most important question of our day
- Vast disagreements exist
- Timing
- Inflation = persistent increase in money and credit
- Inflation Myths
- What you can do
There is simply no more contentious or important issue sitting before everyone these days than resolving the question of whether deflation or inflation lies before us. Sides have been drawn, opinions hardened, and camps formed.
At the moment, I am somewhat agnostic on the subject, but I am leaning toward inflation, with my personal portfolio structured with a 70/30 weighting for inflation/deflation. If deflation continues to worsen and the economy utterly falls apart, I expect to neither lose nor gain any wealth (as measured by purchasing power, not dollars), but I don’t expect such an outcome as there’s at least one more business cycle in front of us.
At times like these, where so much confusion and data reigns, I like to get back to basics and simplify the situation as much as possible. So let’s back up twenty paces and start all the way at the very periphery of the entire mess.
Viewed from a great distance, an economy consists of people exchanging money for things. Those things can be goods, or they can be services. Over the long haul there must be a balance between three things: consumption, production, and the supply of money. If that balance doesn’t exist, then that condition will be rectified, typically by what we call inflation or deflation.
More specifically, living beyond one’s means via the use of excessive debt, as exemplified by the period from 1985 to 2008 (especially the last eight years, as we’ll see below), will terminate in a deflationary decline in living standards (with California as a current poster child for this process). Attempts to remedy this process by printing too much money will result in inflation and/or a currency collapse, either of which may be in our near future.
by former_user