Charles,
Do you thus think that a crash this time might be met with hyperinflation? It's an important question.
For long-term investors, this is THE question. My own opinion has been vacillating quite a bit lately.
It would appear Asia has a preference for deflation. Why this is, I'm not sure. Deflation-based debt is absolutely crippling. Whether this preference persists to its ultimate conclusion is yet to be seen. Lately, some have suggested that Asia switch gears and inflate its problems away. It will be interesting to see if this develops.
The US and Europe, on the other hand, have had direct experiences of both deflation and inflation this century. If it comes down to it, and we had to pick our poison, and that assumes we even have a choice, the US will likely side with "heavy" inflation, but well short of hyperinflation. Inflation: a great way to reduce debt burdens without explicit repudiation, bad for stocks but not deadly, relatively fewer job losses, the illusion of increased pricing power, and everyone pretends they're getting a raise. :o)
Of course, the bond market will have absolute triple fits and interest rates could sky-rocket. Stocks might not even crash, depending on how quickly rates rise. Real companies, unleveraged or at least sensibly leveraged, for the most part, will not go out of business. Contrast this with severe deflation, where a great many businesses and their banks, even basically sound ones, go under. Even the US Treasury would be better off with inflation. At least business activity wouldn't grind to a halt. They would still collect (inflated) tax receipts.
Also, depending on how Y2k plays out, whether warranted or not, I anticipate a certain amount of "stockpiling" by both businesses and individuals as that event draws near. This, too, would be at least mildly inflationary, if it happens.
Note also that most commodity markets have already been conveniently "positioned" for an unfolding of the inflationary scenario.
That said, inflation vs. deflation, as of now, is still something of a toss-up. But, IMO, events are leading us to having one or the other -- and lots of it. |
