Can Inflation and Deflation Coexist?, Part I

By Robert Ringer

Another one of those dimwitted financial experts recently popped up on CNN and said that she believed the economy would start "turning around" by the end of the first quarter of 2009. She offered four reasons:

1. Banks are now lending to each other. (So?)



2. Government programs are working. (They are?)



3. Consumer confidence will rise. (It will?)



4. The housing market is ready to revive. (It is?)

I've gotten so used to this kind of gibberish from TV-created experts that her inane opinion did little more than cause me to shake my head and smile condescendingly. It was right up there with O'Reilly saying that the media is hurting the economy by scaring people. Sure, Bill. Maybe we should put a cap on scare mongering right along with gas prices.

Sorry, Ms. CNN Financial Expert, but the end to our financial woes is nowhere in sight. What we do not know with certainty, however, is when and how the end will come — and whether it will be a result of inflation or deflation.

The primary cause of today's economic firestorm is government's ever-increasing appetite not just for becoming involved in things that are none of its business (e.g., the economy), but for trying to control them — and you.

The groundwork for today's financial mess was laid clear back in 1913 (some would argue in 1789). Things deteriorated rapidly as a result of FDR's "New Deal" and then LBJ's "Great Society" — and every president since has been more than willing to throw more gasoline on the fire.

Now, with whole industries collapsing before our very eyes, and with the upcoming Obamastration promising to give us ever more socialism in the form of bailouts, increased unemployment benefits, and the creation of millions of "green jobs," it's hard to imagine how the piper can be held off much longer.

Remember, government has only three ways to pay for its unconstitutional expenditures: It can print fiat currency; it can borrow; it can tax. Printing dollars leads to an increase in prices, which lowers everyone's standard of living. Higher taxes lead to more unemployment, less money saved and invested, and a slowdown in the economy. Borrowing leads to ... well, I guess it ultimately leads to having to learn Chinese.

Though I have believed, for at least the past thirty years, that the weapon U.S. politicians ultimately would use to commit national suicide would be hyperinflation, the government's audaciousness has humbled me. These guys and gals are capable of coming up with anti-business and anti-liberty schemes you and I could never even dream of.

While no one has yet to sell me on the possibility of a massive deflation of the economy, I do try to remain open-minded. (I should add that when I refer to deflation, I'm talking about a financial scenario where all Americans are forced to live within their means, as opposed to the false prosperity that tens of millions have enjoyed for so many decades.)

Now, along comes my friend, Leo the Centimillionaire. (Many readers may recall that I interviewed him for my Mastermind Discussion Group series.) Because of his remarkable ability to keep his finger on the pulse of the financial markets, when Leo talks, I listen.

I recently received an e-mail from him in which he said, "The deflationary cycle is already well underway, and the defaults, unemployment, bankruptcies, etc. are going to sweep over us like a tidal wave. There is zero chance of inflation for years. I spend all day, every day, studying the markets, reading the Financial Times, WSJ, etc., and talking to investment advisors in Europe and New York. From what I can see, deflation is the best bet by far."

In a subsequent e-mail, Leo went on to say:

"The facts today are clear: We're in a major deflation. How long it will last before The Monetary Machine floods the world with sufficient paper to humble deflation is another issue and a patent unknown. (A case can be made that the amount of inflation will not be sufficient to offset the losses via deflation, and, therefore, inflation may not be felt again for many years.)

"The consensus now seems to be for one to three years of serious deflation, as unemployment inexorably escalates and incomes decline. Then, all that new money should begin to catch up, but to what degree? For now, in any event, we are forced to bet on today's reality: Deflation."

Could Leo be right? We'll take a look at that possibility in Part II of this article.

Next - Can Inflation and Deflation Coexist?, Part II

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