INFLATION OR DEFLATION - THAT IS THE QUESTION

INFLATION OR DEFLATION - THAT IS THE QUESTION

So many differing views are put forward regarding this age old problem. I have tried to analyse and understand these and have set out below my humble opinion for what it is worth.

Firstly , here are some extracts from articles which appeared in GOLD-EAGLE, which I feel are of interest and relevant.

Bill Haynes - Debunking Deflation - 14th October
Over the last sixty years, as prices have risen 1000% in the US., borrowers have benefited at the expense of savers. Falling prices- as during the last30 years of the 19th Century -- rewarded savers as their dollars gained purchasing power. Now that falling prices are about to start to reward savers again, the central bankers are setting about to make the world awash in paper money. In the inflation/deflation war, inflation will win.

Hans Schicht - Gold in Macro Perspective - December 1998
Global credit creation has reached unbelievable proportions . Financial power has smothered all economic and social reality .The never-never-pay-back credit explosion has created a potential global inflation of threatening proportions. When the asset balloon bursts, and the basic livelihood of millions will be threatened, then the only way out for governments and banks will be to resort to hyper-credit and explosive money creation to forestall economic collapse and social unrest . Then stocks, bonds, fiat currencies will shrivel away and inflation will explode with a vengeance in our daily necessities, commodities and hard assets.

In a subsequent article - The United Weimar Republics - March 1999 - Mr Schicht said
But there is a major difference between the old Republic days and the present day; The financial mess we are getting ourselves entangled into will not be a temporary one with all problems solved and forgotten soon.

Daniel Ascani - Soon The Fed Will Regret Recent Monetary Policy - 16th September 1999
The Risk is for Deflation Not Inflation
This article in my opinion is brilliant and the best I have ever read on the subject. The full article should be read to get a sound overall picture of today's situation.

Where do we stand today. The stock market is in a very precarious state and it appears that a crash is imminent.

In other words the inflation over the past years has not worked. It has in fact had just the opposite effect and the crash will consequently result in far worse pain for the global economy.

The suggestion by Mr. Schicht above that governments resort to inflation after the asset bubble bursts is to me strange. Should the bubble burst ,which I have no doubt it will; who in their right minds will lend money to potential defaulters and bankrupts, and which sound organisation will need money at this time ? This was tried in the Nineteen Thirties and was not successful , interest rates went down and down, and yet the government was unable to reflate the economy.

We all agree that DEFLATION would be disastrous . We know this from our knowledge of what happened in 1929 and in prior depressions.

I think it is true to say that "CITY HALL" i.e. Governments, the Fed , Central Bankers the Large Finance Houses etc etc have done all they can to avoid the stock market crash and the subsequent recession/depression and DEFLATION. They have kept interest rates low .They have printed enormous sums of money and yet Debt has burgeoned out of all proportion ,they have encouraged spending and stock market speculation and have discouraged saving etc etc. In other words they have been INFLATING the economy to avoid the impending depression.

Will this policy of INFLATION succeed ? To my mind it has not, and will not. As so many of the GOLD-EAGLE contributors say; the stock market is almost certain to crash .

Let us now consider very briefly two other problems ; Investments, and Global Trade. The Dollar is weakening as the US credit bubble is fuelled by US inflation .But will other governments just sit around and watch their exports erode whilst the US exports blossom - not likely ! Will other countries just sit around whilst the value of their Dollar Investments and Assets are eroded. - not likely ! Already the BOJ is reversing the trend of a strengthening Yen and a weakening Dollar and what would happen if the rest of the world especially Japan redeemed their dollar investments.

INFLATION HAS GONE AS FAR AS IT CAN, THE FED HAS BEEN FORCED TO START INCREASING INTEREST RATES AND WILL PROBABLY CONTINUE TO DO SO.

A CHANGE OF ENORMOUS IMPORTANCE HAS OCCURRED -

INFLATION HAS ENDED AND DEFLATION WHICH HAS BEEN REARING ITS HEAD FOR SOME TIME HAS NOW FINALLY TAKEN OVER.

DEFLATION CANNOT BE AVOIDED.

TAKE THE NECESSARY PRECAUTIONS. As readers of the GOLD-EAGLE you will of course know what to do !

Norman Arcus
"The Backyard Economist"

18 October 1999

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