Inflation or Deflation?
Don StottDeflation is all the rage now. Everyone says we're going to have "deflation," and I place that in quotes, because of the fact that it is impossible for us to have true "deflation," now. Lower prices on some things, surely, but not "deflation." Deflation, means there is a decrease in the currency supply, and inflation, means an increase in the currency supply. Look it up in the dictionary if you don't believe me. Some prices will go down, and especially real estate. Real estate, is the only thing holding the economy together now, in my opinion, and when real estate goes, it will all go. I believe the Greenspan controlled Federal Reserve, will lower rates once again pretty soon, in an effort to keep the real estate bubble afloat, for just a smidgen longer. This will mean more re-financing, more people buying homes, and more real estate activity. Lowering interest rates, always does this, even in California, where the real estate bubble will burst with intensity…eventually.
How can prices go down, when the currency supply is going up, and obviously, the value of the currency is decreasing? Easy, once again. Profits will go down, meaning prices will be lower. Car manufacturers are already giving cars away at no profit, just to keep the labor force busy. Laying off employees, would cost far more than selling cars at no profit, so the zero percent finance continues, and now is added, actual cash kickbacks, plus zero percent financing. Homes are now being sold by realtors who have cut their commissions from the usual 7% to far less. Why? Because they are now fiercely competing against other realtors for every sale, the volume of which has faded as the sunset. My son sold his home in California, and the realtor charged him 3%. Computer prices tumbled a couple of years ago, and things like this screw around with official figures, making prices officially go down, which DC birdbrain economists call "deflation."
Prices going down, have limits. They won't go below production costs, other than to forestall bankruptcy. No builder is going to build a house, which cost $100,000 to build, and sell it for $90,000. He may not make a profit, and sell it for $100,000, rather than the $125,000 he had hoped for, but that is prices going down, not deflation. Prices going down, are a sure sign of trouble. In prosperous times, prices do not go down. In prosperous times, people sell things for more than they paid for them, because in prosperous times, there is a huge demand for consumer goods, homes, cars, TV sets, computers, et al. When times are bad, as they are now, people cannot afford to buy, and to offer them an incentive, auto makers finance them at zero percent, give huge rebates, or as is happening now, give both. A Dairy Queen, before it closes for the winter, usually sells things cheaper than in spring or July, because they want to use up the mix, and other materials, which will not keep through the winter. The economic winter is setting in, and businesses, service people, and just about everyone, are selling on the cheap. This is to survive, keep from laying off employees, get rid of inventories, or a host of other reasons, but this is a temporary situation. Realtors will cut commissions to stay in business, but if that fails, they will go under, and the strongest will survive. This is true in all fields. The strongest and most efficient will survive.
Example: Why am I usually the cheapest place to buy precious metals? I am a one man show, with no employees, no rent to pay, no advertising budget, and I am one hell of an efficient guy. Why does the local newspaper in my town sell full page ads for $300, which normally would sell for twice that? Because it's a lousy paper, has competition from another town close by, people locally hate his liberal politics, and are not renewing subscriptions. Will it survive? I don't know, but I hope not. I won't renew, and I know lots of others who haven't and won't. Will a local realtor, not having to pay a percentage to Coldwell Banker, Century 21, or other, make it, because of not having to pay that percentage? Possibly. Franchises always cost a franchise fee, plus a percentage of profits, as opposed to a guy who opens up with no alliances, no percentages to pay, and no franchise fees. Franchise operations have it down pat, search locations, and know what they are doing, which is a good selling point. Baskin-Robbins, is probably one of the least successful franchises, and I drove them nuts when I had a chain of ten ice cream parlours in Philly, 30 years ago. The efficient will survive, and they can cut profits and overhead to the bone to defeat mistakenly called "deflation." "When the going gets tough, the tough get going."
Back alley garages, proprietored by someone who knows what he is doing, can undercut new car agency repairs, by many dollars per hour…and survive. Joe Blow's frozen delight, can undercut Dairy Queen by not only the franchise fee, but the 9% of gross, which Dairy Queen charges its franchisees. It's all 5% butterfat mix, no matter under whose name it is sold. I could go on, of course, but you get the point. "Deflation," so called, means that warehouses are emptied, prices are cut to the bone, as are commissions, rates, interest, and even rents and sale prices.
Inflation, on the other hand, by dictionary definition, means an increase in the currency supply, and this is happening all around the world, at the same time, for the first time in history. All nations are inflating, and all currencies are going down in purchasing power. The so-called "strong" currency, is only "strong," in relation to other currencies which are proliferating. Strong is in actuality 'weak,' only 'less weak.' There is not a single "strong" currency, compared to what they were 30 years ago. Inflation will continue, till the currency crashes, whereas miss-named "deflation," can only continue till the limit of cost and survivability is reached, and then it is over.
Deflation and inflation at the same time? Only if one miss-defines deflation. Having both at the same time, is like saying an elevator is going up and down at the same time, or a car is stopped and moving at the same time. Both at the same time, is the same as saying the dollar is buying more and less at the same time. Impossible. What can happen, and is happening, is that the currencies are going down in value, do to their supply being raised, and prices going down at the same time, because of efficiency, over-stock, or desperation. We then have inflation and prices going down…briefly, not inflation and deflation. Foods cannot be cooked and frozen at the same time, and corn cannot be planted and harvested at the same time, which is what inflation and deflation together is…an impossibility.
With inflation, all things go up in currency prices. Is the price going up, or the dollar going down? The value of things purchased stays the same. A Gold Eagle or Krugerrand will always be one ounce of gold, regardless of whether it sells for $365, or $4535. The gold doesn't change; only the unbacked currency with which it is bought. This, quite obviously means, that we should trade our unbacked dollars for things tangible, which will remain constant in content, when the buck slides to ever lower purchasing power.
Want an example? In Zimbabwe, a beer costs Z$650 (Zimbabwe dollars), and a roll of single ply toilet paper, with 72 sections, costs Z$1,000. In other words, in Zimbabwe, it is cheaper to use Z$10 bills for toilet paper than to buy it. Will the dollar come to that? Why shouldn't it? The process of endless printing, is the same in both countries. Protect yourself!
June 20, 2003
Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
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