Deflation vs. Inflation: Who is right and Where will we end up?

The deflation and inflation camps have been at it for quite some time. Each one expressing opinions based on intelligence, historical precedence, and thoughtfulness. I have been a long time inflationist when it comes to fiat currencies; in fact I expect a bout of hyperinflation in the not so distant future. However the Deflation/Inflation debate is not that simple and requires more thought by all parties. In this opinion piece I want to take a moment of your time to submit my humble opinion for your consideration. First of all a little bit about my background. I am an Senior Vice President, involved in the management of a small/medium sized business which is not remotely involved in the financial services whatsoever (i.e. no stock promotions, no financial services, no banking, etc.). I first moved all (yes ALL) my meagre savings into precious metals related investments in 1999 in anticipation of a NASDAQ, DOW and economic meltdown. I have sat comfortably in that position since then. I am not a trader, but rather I am an investor. Therefore I made my move and I am sitting on my investments until I see the storm go by. I dont see that happening anytime soon. Some of the arguments that are stated in the defence of deflation range from: Discussions revolving around the Kondratieff winter cycle and Prechterites Elliot wave analysis, The unsustainable levels of government, corporate and consumer debt, and Comparisons to the US 1930s great depression. Some of the arguments most often stated for future inflation (and potentially leading to hyperinflation) range from: The insatiable and undisciplined appetite of governments to create & spend fiat money, The publics eventual loss of confidence in purchasing power of fiat money, and Comparisons to Germanys 1920s hyperinflation. It is not so much that I disagree with the deflationists, as it is that I see it from a different perspective. The Kondratieff cycle dictates that we are now heading into the winter cycle which leads to debt implosion and significant deflation (I.e. your money can buy more tomorrow than it could yesterday, think computers). They site 1930s USA as a perfect example. During that time frame cash was king. If you were lucky enough to have cash reserves, you could pick up major bargains in stocks, real estate, etc. A deflationist strategy to build up cash reserves would have done you well. Why cant this comparison work today? The USA currency was backed by gold in the 1930s. When we talk about deflation what we are really saying is that the cost of goods sold went down verses gold. The currency of the day just happened to be attached to a gold-standard. In todays world with fiat currencies not backed by anything (except the goodwill of government), what we will eventually come to understand (and it is happening right now) is that we will witness a

great deflation insofar as it is measured against Gold and Silver. Measured in terms of FIAT currencies, we will experience inflation and then eventually a hyperinflation once the masses come to understand that the fiat money has been losing and will continue to lose purchasing power due to the relentless printing and spending by governments. Hyperinflation will be brought on by a loss in confidence towards government fiscal management. Let us instead look at the German hyperinflation in the 1920s for guidance. Here we had a country that had gone off the gold standard in 1914 and did not return to it. They had almost no gold left in their coffers due to WWI reparations. The printing presses were turned on high speed to pay for reparations and to buy required importations. Without getting into too many details, hyperinflation destroyed their currency by 1923. The Situation today in North America and Europe is such that we can and are printing money without regard to the impact on the future purchasing power of our currencies. Instead of Germanys massive reparations owed, the North American and European countries are facing massive bond debts and future social benefit payouts, all of which these governments cannot afford. Thus why we are starting to hear the words Austerity Programs kicked around. The governments are going to devalue (inflate the amount of) fiat currencies by massive printing. These actions are highly inflationary. The environment we are currently living in is highly inflationary. These actions will reduce the value of each currency and the dollar amount paid out by government on their debts will not keep pace with the cost of living. Few amongst us understand that Inflation is created by governments deficit spending and that it is a hidden tax on our savings and future incomes. The following two charts have been borrowed from pricedingold.com.

http://pricedingold.com/us-home-prices/

As you can see home prices peaked in late 2005 at approximately 145 ounces of gold. In late 2011 we are looking at a home costing you roughly 30 ounces of gold!! Thats an 80% drop in value. In the same time frame, home prices as measured in Fiat went from approximately 225 to 155, a drop of 30%. The fact that real estate has fallen in price, as measured by fiat currency, in an inflationary environment tells you how massively overvalued the real estate market became. This extreme overvaluation can be attributed to past governments highly inflationary economic policies. The DOW Jones INDUSTRIAL chart tells a similar story.

ht tp://pricedingold.com/dow-jones-industrials/

I like the DJs chart because it shows one how misleading the fiat currency can be. In currency terms we all feel that stocks evened off in 2011 from a previous high in 2007. Hey we waited out the 2009 low and we are back in the money!! In gold terms however the true picture tells you that it is not the case. In gold terms, from 2007 to 2011, we went from 6 to 2, or a loss of 67%. I cannot make it any clearer. Hence I dont see deflationists as being wrong per se, but rather they havent kept their eyes on the ball. The Elliot wave analysts and the Longwave Kondratieff followers are both strong advocates for deflation, and I believe them to be correct but not in fiat terms. We need to understand that deflation will rear its ugly head and the beneficiaries will be the holders of precious metals and PM stocks. Simultaneously, those storing their wealth in paper currencies (Cash, bonds and financials) will see a massive loss of said wealth. Take away concepts from this article: Inflation = government generated hidden tax on your savings and future purchase power.

Government Deficit Spending = a strategy used to reduce the value of currency and thus reduce the value of outstanding debts and promises. Gold = is real money, by which real value is measured. Fiat Currency (i.e. USD) = has no intrinsic value beyond the faith we have in it.

If you dont understand or agree with these concepts, then you wont understand or agree with the conclusions. If you find yourself off-side with these views, I urge you to at least keep it in mind and revisit it from time to time. In time it may start to make sense. Robert Nuez November 28, 2011 Comments to: robnuez@hotmail.com
Disclosure and Disclaimer Statement: The author advises that he is not a disinterested party in that he has personal investments gold and silver bullion, gold and silver mining. The author's objective in writing this article is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.