Inflation vs. Deflation – What Comes Next? (Part I)

Sunday, June 14, 2009

I want to cover quite a bit of background here to properly set up today’s topic of Inflation vs. Deflation. But because of my schedule, this would require stringing out three reports over five weeks, and given where we stand in the markets today, that isn’t ideal. There is much afoot, and I want you to be armed with as much timely information as I can provide.

So we are going to jump to the end and discuss the conclusions before the background. I will fill in the background in a later Martenson Report. If you find this report difficult to follow for this reason, I invite you to re-read it again after the background information comes out in a few weeks. I appreciate your understanding.

Executive Summary

• Inflation correlates best with government spending.
• Inflation/deflation is a dance that exists between the supply/demand for money and the supply/demand for goods and services.
• Most government spending growth is in mandatory categories – not simple to reduce.
• Inflation will bail out debtors?  Don’t count on it.
• Future generations have been consigned to a tremendous economic challenge.
• Prepare now for upcoming destructive inflation.

One of the key questions of our day, especially for those who have wealth to protect, is, “What’s going to happen to the dollar?”  More specifically, do we foresee an increase in the value of money going forward (deflation), or a decrease in the value of money (inflation)? Should we reserve a small amount of concern for the possibility of hyperinflation, which means the rapid and often total destruction of a currency?

There happens to be a lot of discussion around this topic these days. Unfortunately, much of it is confusing and contradictory, because far too much misinformation is included in the mix. So let’s begin by getting ourselves on firm footing before we look at the data.

Definitions

The symptom of inflation is rising prices, and the symptom of deflation is declining prices. The cause of either over the long-haul is a persistent change in the amount of money relative to goods and services. Over the short term, supply and demand can influence prices up or down, as can changes in productivity. But over the long-term, inflation and deflation are a function of how much money is floating around compared to goods and services.