Between a Rock (Deflation) and a Hard Place (Inflation)

Between deflation and inflation our governments gamble on inflation as the lesser of two evils.

There is no doubt in my mind that Reserve Banks all over the world are an evil blot on our modern society. They are laws unto themselves and do not account to the voting public for their behaviour.

It took all of 30 seconds for Ben Bernanke to type a 1 Printing money and using it to buy our own debt is Banana Republic-type stuff. and 000,000,000,000 into his computer and create a trillion dollars out of thin air.

It is almost impossible for the man in the street to even get his head around what Ben has done and what it means.

The consequences are inevitable – inflation with a big I.

The fear right now is deflation with a big D (Not Depression yet – that word is forbidden for now).

Ben Bernanke is an expert on the Great Depression and he has more fear of deflation because it can develop into a deflationary spiral and lead to another Great Depression.

“Studies of the Great Depression by Ben Bernanke have indicated that, in response to decreased demand, the Federal Reserve of the time decreased the money supply, hence contributing to deflation.”

So Helicopter Ben decided it was time to increase the money supply and spread it around.

BUT apparently there are already many billions of dollars sitting in accounts all over the world waiting to be invested or spent. Banks are not lending so that money is just sitting there.

Why is deflation bad at this time? According to an article in the Australian Investment Review entitles, “Deflation: Why We Have To Trust Ben Bernanke and The FED” It is bad because,

  • In the current environment deflation could cause serious problems because household debt levels are high in many countries.
  • Sustained deflation would increase the real value of debt at a time when asset prices are falling and nominal incomes are weakening.

In a deflating economy the article says investors should consider government bonds and cash over equities, property and corporate bonds. However according to another article, “investing in a deflationary environment“,

“….. deflation can rapidly turn into high inflation if governments over stimulate.”

The above article is a great article on deflation and its affect on the economy, stock market, banks, property, resources, gold, energy etc..

So we have a situation where Ben’s greatest fear is deflation. His solution is to re-inflate the economy even though it is awash with money which no one wants to invest or spend right now. We also know that no one knows how to really combat deflation other than by increasing the money supply to try and create some inflation to offset the possibility of deflation.

As with all economic stimulus’ they take a while to impact the economy and so any manipulation by governments tends to over-shoot.

We have already seen in Australia the Reserve Bank increasing interest rates to stop inflation just as the sub prime crisis hit. There was a lot of criticism for the RBA over that increase.

So we have to expect inflation as the price for Ben’s helicopter money drop if it successfully kills deflation.

Inflation will destroy your cash if it heads towards hyperinflation. So you may have to be very quick and take on good debt to counter high inflation if it arrives.

Learn all you can about inflation. For those in the US I have mentioned Daniel Amerman and his course, “The Turning Inflation Into Wealth Workshop” before. Get onto it or buy his NTSC DVD version of it. (There is no money in it for me) šŸ™

What’s really weird though is the printed money is being used to buy the government debt back. What does this mean. According to Money and Markets Mike Larson in an article, “Fed Moves Spark Refinance Madness“,

“This is Banana Republic-type stuff! And Iā€™m not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.”

Venezuela’s President Chavez should be proud of America.

Where America goes so goes the world financially, at least for now – Banana republics all. It seems gold will have its day so buy some to live off if you have to, buy all the things you need for your home as prices drop and the economy deflates (a little) until the Ben Helicopter Money drop triggers inflation. Then look to buy “good debt” to offset inflation and loss of your wealth. For Americans, 30 year mortgages look good with interest rates low and house prices in the dump.

4 Responses to “Between a Rock (Deflation) and a Hard Place (Inflation)”

  1. mjB says:

    hyperinflation on Weimar scales is on the way thanks to Helicopter Ben!

    http://tinyurl.com/clck4y

    mB

  2. admin says:

    mB thanks for your comments.

    I do believe high inflation may be on the way like in the 1970’s. But hyperinflation just not eventuate in a democracy.
    In Germany I believe part of the reason for hyperinflation was to destroy the amount of reparations money Germany had to pay for the 1st World War. Maybe someone can verify or correct me on that?
    Also Ex FED Chairman Volcker is on Obama’s Financial Advisary Committe and has already stated a “little inflation” is dangerous.
    Also unless the US agrees to protect China, Japan and the Oil Countries from inflation destroy their US Bond holdings it just won’t be allowed to happen.
    That said if they don’t try to prevent runaway inflation then your prediction may well come to pass.
    So they are between a rock and a hard place in my view.

    David Bates

  3. Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing….The Undertow is likely to destroy us all!

    http://fargoneworld.blogspot.com

  4. admin says:

    TalithaTwoBlade,

    Thanks for the link to httl://fargoneworld.com. The article, “Is America on the Path to Becoming the Second Weimar Germany?” is detailed and does answer my specific question about War Reparations,

    “Following the Treaty of Versailles in 1919, which imposed severe reparations on the newly born Weimar Republic of Germany for the countries involvement in World War I, the Weimar Republic eventually was forced to print trillions in deutchmarks, leading The value of the Papiermark to declined from 4.2 per US dollar at the outbreak of World War I to 1 million per dollar by August 1923, leading to citizens purchasing loaves of bread and other basic staples of life with wheelbarrows full of cash.”

    I will try and second source that statement. However it covers far more than hyperinflation.

    With respect I still do not see a scenario where there is hyper-inflation. We know Volcker killed inflation in the 70’s with 20% interest rates. OK, it destroyed the economy fo a while but we got over it.

    The 1995 article titled “American Weimar” was written for its time and I do not believe the young people of today in general are even aware of those times. Objective history is not taught in school these days.

    The young who voted for Obama have exercised their democratic right – not avoided it. They voted for him because of their concern for how the world sees America after Iraq and want the image to change not the form of government.

    They may become disillusioned with Obama if the world economy moves into a depression but I still believe far more Americans believe in their US democratic system and will again use their vote accordingly in two years if things don’t improve.

    If the German people had been able to vote in the Weimar Republic without fear then the outcome may have been very different.

    Thanks for the link to a great blog post which I believe is worth reading.

    Regards,

    David Bates

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