The Fed Faces Two ChoicesA man shipwrecked bobs along in his lifeboat…
The cruel sun cooks him. His thirst tortures him. His sufferings are doubled, tripled and quadrupled by this impossible irony:
Water, water is everywhere — yet there is scarcely a drop to drink. Salt water in any quantity would murder him.
Thus he dangles from the hooks of a lethal dilemma. He dies if he does not drink… and he dies if he does drink.
The Federal Reserve offers a parallel example. It is the agonized wretch in the lifeboat.
It is mad for inflation. Yet inflation is lethal…
The Cry for InflationJerome Powell and his crewmates cry aloud for inflation. Inflation is the spark of growth, they believe…
Inflation takes a match to the dollar. The consumer wishes to unload his dollar before the flame burns through it. Thus inflation spurs the consumer to spend.
He will purchase his goods today because his dollar is a wasting asset. It will fetch him more goods today than it will fetch him tomorrow.
Today’s purchases, in turn, add a figure to the gross domestic product.
A benign inflation therefore keeps an economy on the jump… and business in funds.
Under deflation — conversely — tomorrow’s dollar packs more wallop than today’s dollar. Consumers expect lower prices tomorrow.
They will therefore postpone today’s purchases until the price falls to them.
The “Evils” of DeflationWhat is the evil result of postponed purchasing?
Goods wallow upon shelves, stockrooms overflow with surplus. Commerce loses its steam.
Under extreme deflation, it may stall almost entirely.
Thus is deflation the ultimate bugaboo, the ultimate fee-fi-fo-fum of most economists.
You may relish the formidable dollar gaining strength in your wallet. This buck will give you a greater bang tomorrow.
Yet you are not an economist. You do not hear the music of the spheres. You do not realize deflation is your foe.
Deflation, Inflation and DebtDeflation is certainly the ultimate bugaboo, the ultimate fee-fi-fo-fum of all debtors…
Deflation raises the real value of debt. A man borrows $1 today. Under deflation, he must repay perhaps $1.07 when his creditor thunders at his door.
Under inflation, the opposite dynamic obtains. The man borrows his dollar. Yet he owes merely 93 cents when his creditor knocks.
The borrower escapes with a whole skin — and a bit of blubber. Yet the creditor comes away a man reduced. He lent a dollar and received cents in return. He is the victim of a swindle.
As Jim Rickards reminded us yesterday: dailyreckoning.com
Inflation decreases the real value of debt. It’s easier to pay down debt because you’re paying back debt with dollars that are less valuable than when you originally borrowed them.
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