I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.
Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.
“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”
I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.
Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.
Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.
