Most of the time inflation rules. The last time we had deflation was late 20's and 30's but Japan had it for 20 years recently.
There is a huge difference between Japan and the US.
Japan is a nation of producers ,and because of that their citizens have been amassing huge savings.
The US is a nation of consumers and as a result it is amassing huge debts.
Let's perform a "lesser of two evils" analysis.
Japan has fared quite well, considering the scope of its huge bubble in the 80's, that had to be unwound.
For Japan, slight deflation in the last decade was the lesser of two evils. Inflation would be much worse for Japan as it would destroy huge savings of Japanese citizens as well as destroy their strong work ethic and productivity, which is a foundation of their export economy.
What would be worse for a japanese ? Losing his entire life savings to inflation and ending up destitute, or having the value of the residence decline 50% while still having the residence and his (now more valuable) savings ?
True, some japanese debtors walked away from their debts and turned the keys to the bank, but eventually the government printed up some money and bailed out the banks.
Here in the US things are totally different, most people have no significant savings, while having huge debts.Their only "assets" are a home and 401K.
Losing their home in foreclosure and most of the 401K value due to a deflationary spiral, would be a much worse outcome, than having significant inflation that holds up stock and home "values", since for most, there are no significant savings to be wiped out.
For most people in America, inflation will be a lesser evil than deflation.
The Fed knows this.
Unfortunately for some, many retirees and savers, they have been slowly losing the wealth that they have accumulated through a lifetime of work. Somebody that has held cash for the last 5-6 years has lost at least 50% of savings due to inflation.
The standard of living will drop significantly here, as 5% wage increases and 4% SS inflation adjustments will not offset 10-15% annual inflation.
Most people in the US refer to home "values" , not home prices, which to me is stupid because a house is a consumption good and society's standard of living goes down in the long run as home "values" increase.
The Fed will protect those values at all costs.
The only deflation we will have is deflation of purchasing power of the dollar. -g-
The result will be huge inflation. The question is will be it be orderly, drip by drip, like until now or will it turn disorderly at some point ?
Either way, at some point, current dollar bills and coins will find their place not in your wallet, but in numismatic collections.
-g- |
