Very interesting read, which led me to the piece below on whether we are heading for hyper-inflation (yes, initially) or deflaltion (yes, eventually):
http://cij.inspiriting.com/?p=337One thing we have to be clear. Assuming that the ?rules? are strictly adhered to, there will only be one outcome for the current credit crisis: deflation. But alas, we live in a democracy where the mob rules. As we said before in A painful cleansing or pain avoidance at all cost?,
" Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles? heel of democracy. The mob will scream at the Fed to bail them out by ?printing? money (i.e. pump liquidity into the economy in the form of cutting interest rates). Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.
There is no way any politician can sell the message that America needs a severe recession (or even a depression) to cleanse the economy from the gross excesses, imbalances, blunders and mal-investments. Thus, it is very likely that they will have to fight deflation till the very bitter end, till the last drop of blood from their last soldier. Since the current structure of ?rules? will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ?rules.? If they press on relentlessly till the final end, there can only be one outcome: the US dollar will be joining the long list of failed fiat paper money in the annals of human civilization. Since the rest of the world?s currencies are as fiat as the US dollar and are based on the US dollar standard (see How does the US export inflation?), you can be sure the result will be ugly for the global financial system.
Therefore, watch what the US government is doing with the monetary ?rules? in its attempt to fight deflation. And hold gold as you watch them. Remember what we said before in Have we escaped from the dangers of inflation?,
" One final word: fiat money is only as stable as the government that enforce it, and only as safe as the stringency and integrity of the central banks who create it. Gold, on the other hand, yield to neither control nor will of any government.
Edit, and then again:
http://globaleconomicanalysis.blogspot. ... ation.html
To date, I have not seen a single plausible all encompassing theory that started with massive consumer debt accompanied by rising unemployment and sinking housing prices that leads to hyperinflation prior to a deflationary collapse happening first.
(I understand he believes deflation will occur first)
The reason the inflation/deflation discussion is important is because there is are dramatic differences in how one prepares for each outcome in terms of investment ideas. Many people have been writing to me wondering what to do. I will offer some ideas on how to prepare for both hyperinflationary as well as deflationary outcomes coming up shortly.
