A debate has raged for several years amongst “scholars” whether we will “crack up” via deflation or inflation. I used the term “scholars” because at least these people had the foresight to see that something is definitely wrong, really wrong and will end badly. The “others” (95% or more), sheeple who are still sleeping (some beginning to wake and recently in larger numbers) and don’t even care because it doesn’t matter, as both words end in “flation.”
I have written several pieces explaining the concept of inflation in the things we need and deflation in the things we have. This has pretty much been true up until 6 months ago when financial assets began to “inflate.” From a textbook standpoint we have lived through a massive inflation as money supplies (and by extension in a fiat world, debt) have exploded even though many asset prices have dropped. All you need to do is look at what it costs you each month to live and it’s pretty clear that inflation is definitely present.
As a side note, some still believe that gold cannot do well in a deflation, in fact gold actually does better in deflation vs. other goods because gold IS money and gains in purchasing power. The basic definition of deflation is that money itself is scarce or there is not enough of it to support the economy. In the current scenario, a “deflation” would amount to the U.S. defaulting on its debt. Not through debasement but through nonpayment. Were this to occur then you must ask yourself what would 1 ounce of gold be worth if dollars became worthless because the issuer was bankrupt? By definition the answer is infinity. Since the U.S. has borrowed in dollars and can create dollars at will, a true deflation theoretically is impossible. But this is not what I want to talk about. The question in my mind is, “Will we have inflation or deflation AFTER we hit the wall (my earlier piece) in terms of whatever new currencies are introduced?” Along that same train of thought, will it be inflation or deflation in terms of gold?
I can tell you that Germany after the Weimar hyperinflation experienced immediate deflation in terms of gold marks and an even greater deflation in terms of gold. This only makes sense because there was very little “money on the streets” and money became “dear.” I would expect some type of similar action after new currencies are introduced and “reset.” At first I would think that unless the exchange rate is set high enough, not enough gold will come out of hiding and create a shortage of “money.” Of course this is only a guess on my part. The part about “new currencies introduced” is in my opinion a very educated guess and one with a very high (100%?) probability.
I guess the easiest way to explain the future “inflation/deflation” debate depends on where the price of gold is set or trades at versus whatever new currencies come out. Set the price too low and very little gold will be pried loose, set it too high and gold will flood the streets. My guess is that the price will be set too low initially and not enough gold will flow for maybe 6 months or a year. New paper will seek gold until the “right level” (whatever that may be) is reached… and then we start the entire process all over again. The “process” being governments slowly at first and then more rapidly issuing more currency than there is gold (at the then current prices) would allow. Please understand that in gold terms, if the price is set too high then gold will flow and thus an inflation in “goods” will occur as people will spend. If it is set too low then people will hang on to their gold and goods “prices” will come down until they are sold, a deflation.
As for now, central banks are pedal to the metal printing to keep the current system alive. This is necessary so that their sovereign treasury has a buyer for critical debt issuance to keep the doors open. The debate between “is it inflation or deflation” is moot since either way, in the end a fiat currency won’t spend. Either because there are far too many units of them or because the issuer (the sovereign treasury and or central bank) is bankrupt. Does it matter? An un-spendable nor acceptable currency is worth zero no matter how it technically happened.