Comments on: Inflation on the horizon (and why it matters)

By: Simon

Simon — Sun, 17 May 2009 02:29:58 +0000

“There is nowhere for the U.S. government to get that kind of money — no how, no way — but to fire up the printing presses,”

There’s another path going unmentioned, which is the one Russia took under similar circumstances: Defaulting on the debt.

California may soon be a leading indicator of trends here.

By: Andrew Bissell

Andrew Bissell — Fri, 15 May 2009 01:03:28 +0000

That’s good to hear, Peter. I sometimes worry that a lot of libertarians are being led over a financial cliff by guys like Peter Schiff touting hyperinflation. That is an outcome against which it makes sense to purchase “insurance” by putting a portion of one’s wealth in real assets including precious metals, but it must be an *appropriately sized* portion and not taken with the expectation that gold and land will soar to the moon, or even maintain their current prices.

By: Peter Saint-Andre

Peter Saint-Andre — Thu, 14 May 2009 15:32:45 +0000

Thanks to Andrew, I’ve starting reading the deflation “report” by Robert Prechter. He makes a compelling case. I’ll report more once I’ve finished reading.

By: Andrew Bissell

Andrew Bissell — Tue, 12 May 2009 07:00:15 +0000

For example, the Stansberry letter posits that $80 trillion of liabilities will be added to the federal government’s balance sheet over the next ten years, and that it is these liabilities that will cause the government to try and print its way out of the debt. But we have to get *into* that debt into the first place. If, instead, our creditors balk at funding such a gross expansion in liabilities, we may never reach a point where printing to fund the debt has an inflationary effect.

The thing to remember about our monetary system is that a huge share of the “money” outstanding is actually *credit* (I believe the ratio is something like 45: or 50:1 between various forms of credit and actual, base currency). If that ratio contracts to, say, 10:1, Bernanke can multiply the base money supply by five times and still not cause any runaway price increases.

You can get some of Prechter’s writings on deflation for free here (with a registration on his website): http://www.elliottwave.com/club/Inflation_vs._Deflation.aspx?code=27252

Prechter actually does believe that hyperinflation is a serious possibility over the next decade, but that a deflationary contraction is likely in the near- to intermediate-term first, as bad debts are written off en masse.

By: Joshua Zader

Joshua Zader — Tue, 12 May 2009 06:35:21 +0000

Thank you, Andrew. I’ve been looking for good resources that present the deflationary perspective.

Perhaps you can explain: In what way is the printing of money dependent on someone loaning it to us?

By: Andrew Bissell

Andrew Bissell — Tue, 12 May 2009 05:41:33 +0000

Inflation seems an obvious outcome, but the markets rarely follow the obvious path. A lot of this analysis assumes that America’s creditors will continue blindly buying our debt when we have no hope of repaying. And it assumes that we’ll maintain our bloated entitlement programs and federal spending even as it becomes painfully clear that they are plunging the nation into total insolvency. I’m not sure either of these outcomes is likely. Remember that we can’t borrow the money (and get ourselves into the hole that requires inflation or hyperinflation to dig our way out) unless someone is willing to lend it to us.

There is so much credit imploding right now that a *deflationary* outcome is actually possible, even likely, in my opinion. I highly recommend Robert Prechter’s “Conquer the Crash” if you would like to understand the case for deflation. Prechter is actually an Objectivist as well, and brings a refreshingly clear-headed perspective to the financial realm where hope and fear so often predominate.