Hi workinjammies.
Well, there may be others on this board more knowledgable than myself who could address your questions, but here's M2CW.
((My questions would revolve around the potential crash of our current real estate bubble. Could this event be enough of a catalyst to cause deflation in our country (I suspect it can) )).
Yes, absolutely. If it leaves a big enough hole in the credit system, and the monetary authorities have difficulties "reliquifying" the system. Soon-to-be Fed Chairman Ben Bernanke feels the Fed can always reliquify the financial system, by pursuing "unconventional means" if necessary. I'm not so sure. But a real estate bubble crash and "spiriling deflation" is not the only option. Muddling by, stagflation, and hyperinflation are also possibilities.
((if so, would the resulting economic conditions become a global crises leading to a global deflationary downturn.))
It is entirely possible. But the effect of the deflation will likely vary in its impact. In the 1930's, the country that experienced deflation most profoundly was the emerging economic superpower - that is the U.S. Today, China would likely be the #1 candidate IMO for serious deflation. For one, China is a both creditor nation and a nation of savers. A strenghtening currency might be painful for the Chinese economy, but it would probably be managable. Not so the US. China has also built significant capacity in large part to make stuff for overleveraged U.S. consumers to by. If this merry-go-round stops, Chinese excess capacity would likely prove a serious deflationary drag.
The U.S. IMO is simply too indebted for its monetary authorities to allow a deflation of the 1930's variety. As the world's largest debtor, a secular inflationary policy is inevitable I'm afraid. But significant inflation can also pair up with economic recession or depression. I personally think this is a more likely scenario in the US. Also, this inflation will be a secular phenomenon, as the US must take some pains to protect the value of the US$.
The other alternative, of course, is to reneg debt obligations as might occur in the case of war. Not the most likely scenario, but not an impossibility either.
((It is in this situation that gold might become the preferred hording vehicle over cash and the like.))
Yes, I think gold tends to perform well when you have periods of significant monetary instability - be it inflationary or deflationary. In contrast, in periods of relative monetary stability, be in disinflation or moderate inflation, gold tends to not perform so well as an investment.
For very good weekly dialog on credit analysis in the modern economy, I strongly recommend Doug Noland's Credit Bubble Bulletin over on Prudent Bear. The link is provided below:
prudentbear.com
Hope this helps. Any further questions, please ask.
Regards,
Glenn |
