My thoughts travel back-and-forth on deflation vs inflation. Fundamentally, the problem is too much debt, and the governments of the world are, as you said, trying to pay off that debt with even more debt. The final result, however long it takes, has to be default, even if that default is a world-wide default. That is, by definition, deflation. The super-duper final end-all resolution will be a massive deflation.
The inflationist skeptic can respond to this argument as follows:
"Deflation? Have you seen the last 70 years of history? The dollar has devalued by 97%. When exactly do you expect this deflation to happen and how? In the fiat currency era, governments can simply print money. It has never shown much control in how much it prints, so hyperinflation is our future."
The deflationist response might be as follows:
"Sure, inflation has been the norm for the last 70 years. But the ultimate contrarian is the one who believe that even the longest of trends fail eventually. That 70 years of inflation is a property of the current worldwide banking/fiat currency system, and that system is what will fail eventually."
So what is the prudent investor to do? Invest in gold for the coming hyperinflation, or raise cash for the coming deflation?
I see inflation as a monetary phenomenon but hyperinflation as a psychological phenomenon when people lose faith in the currency. Can deflation co-exist with hyperinflation? |
