They are at it again! “They” being the “inflationists and deflationists.” The battle seems to be heating up again whether the end game is inflation, deflation, both, which comes first, which one, follows the other etc. The funny thing is that both camps agree on one thing…”it ain’t gonna be pretty.” They agree as to “how” we got here and “why” a financial disaster is coming…but not the final results.
I have written several times before on this subject but since it is coming up again I figured I’d take another crack at it. Basically both camps are alike with the exception of what will happen to the dollar and gold…which when all is said and done is all that really matters because between these two (and of course foreign fiat currencies) is where “purchasing power” resides. And isn’t this what investing is (should be) all about? Who cares if you worked your whole life for just one dollar, euro or ounce of gold…What if that one “unit” held enough purchasing power to carry you and your family to life’s end?
That said, both inflationists and deflationists agree that a financial collapse is coming. The inflationist argues that fiat currencies by necessity will be “printed” (digitally created) with such speed that we hyper inflate and devalue the currencies to virtually zero. The deflationists say that the debt will default faster than the central banks can print new money and thus the money supplies will shrink and hyper deflation (like the 1930’s) will result. True inflationists believe that gold will explode in fiat price (and purchasing power) while the deflationists disagree and believe the “price” of gold will plummet versus the dollar. My opinion is that both of these camps are correct, and both of these camps are incorrect…however, only one can be correct regarding the purchasing power of gold.
Let me explain why I believe both camps to be correct at the same time. Yes debt (and derivatives) will blow up so quickly that the central banks will not be able to supply new money fast enough and yes the central banks will “try” by “printing.” …But, currencies today are debt based meaning they have value that is derived or “foundationed” by debt. If debt is collapsing it then follows anything that has value based on this debt will also collapse. Gold is a different animal, as JP Morgan once testified to Congress, “Gold is money and everything else is credit.” Gold has value because it “is,” it has inherent value while no other currency on the planet does.
I guess it is best explained as “gold will be the last man (currency) standing.” I think the most major flaw by the deflationists (who are history buffs) is that they equate the 1930’s directly with today’s situation. The difference and it is a huge and central difference is that “money” was gold back then…today’s “money” are simply pieces of paper. “Money” (gold) did not “go away” when everything credit collapsed, it was left standing… as was the dollar since it was interchangeable and directly backed by gold. The difference today is that the dollar is no longer “your grandpa’s dollar” anymore.
All of the above said, in my opinion the inflationists will be correct as to the central banks efforts and regarding the nominal price of gold. The deflationists will be correct about debt and the failure of central banks efforts but completely wrong in regards to the dollar. If the deflationists would only substitute gold for what they mistakenly believe the dollar “is” they would be as correct as or even more so than the inflation camp.
In my opinion, we will and are witnessing both inflation and deflation bouncing back and forth like a bobsled out of control. We certainly have inflation in the things we need and the deflation of asset prices has been fought tooth and nail by QE, Abenomics and other central bank foolishness. The grand “deflation” will be seen when everything is devalued. When I say “everything” I mean EVERYTHING nailed down, not nailed down, paper, credit, currencies or what have you. Gold will be revalued higher because the “edifice” even after it has crumbled needs a bigger foundation than the current gold price can provide. In this respect we will have a “deflation,” only not in relation to dollars…in terms of gold.
You see, the deflation that we experienced in the 1930’s was against gold, not dollars. Before you start screaming at and correcting me, please remember what dollars actually were. Dollars were merely “claim checks” on gold but then a funny thing happened in 1933, the dollar was devalued by 75% when the “official rate” went from $20 per ounce to $35. This is where the deflationists are wrong, yes goods and services lost value versus the dollar…but they lost even more value versus gold. Why? Because as JP Morgan said, “Gold is money, everything else is credit” which included (even back then) “dollars” and absolutely specifically means “dollars” (or any other currency) in today’s world.
Which brings us to where we are now, I have long contended that a “reset” will occur. I believe that we will see both, massive inflation and deflation at the same time as a result of this reset. The dollar will be devalued by maybe 30-50% which will make the inflationists correct…AND gold will maybe have a “zero” added to its dollar price which will make the deflationists correct (only in real money terms but still incorrect in dollar terms). “Stuff” will cost more in dollars and far less in terms of gold which will “feel” like inflation but in reality is deflation.
Before you bombard me with the true definition of inflation and deflation, yes I get it and have read Webster’s dictionary and their definitions. All I am saying is this, I feel confident saying that “there will be more dollars outstanding in the future than there is today.” I also feel confident that saying “there will be less gold to support the system in the future than there is today (at today’s price).” The “dollar part” I think you will understand and agree with me but what about the “gold part?”
We have 2 major and largely unknown (to the masses) future events coming. A. central banks (with the exception of China) have far less gold than they say they have and B. because of the nature of “fractional reserve gold” there is only 1% or at best 2% the quantity of real gold ACTUALLY in the system. Between these 2 events, the actual supply is far far smaller than the system “acts like,” when this fact becomes common knowledge we will experience the greatest deflation (versus gold) in all of history. If I am correct about a reset rather than the markets doing it over a period of time, we will experience the greatest transfer of wealth in all of history. We will see the greatest wipeout of “wealth” to the greatest majority ever and at the same time we will witness the greatest accrual of wealth to the smallest minority ever…including the “wealth created” over the last 5 years of QE specifically for the current elite “1%’ers.”