Will Inflation or Deflation Win?
December 16, 2008
From the moment the stock market crash occurred in 1929 to the bottom in 1932 when 90 percent of peak market value was wiped out and 25 percent of the work force was unemployed there were people who exclaimed "inflation" every time a suggestion was made to arrest the devastating deflation that was occurring.
Nowadays, those who profit from the gold selling business also exclaim "inflation" when similar measures are taken to counter the present slump.
The debt of the federal government and of the Federal Reserve have expanded rapidly since September.
"Inflationary" cry the gold crowd.
Is it possible to be right and still be wrong?
Just as every equation has values on both sides of an equal sign, you have to look on the other side of the economic equation.
Growth in debt by the government and the central bank does tend to be inflationary. No question. The gold sellers are right. However, the spendable asset values that are daily being wiped out by the stock market, bad mortgages, bad car loans, bad credit cards, etc., are destroying more value than the Feds are creating so far.
The so-called inflationary policies are trying to counter the deflationary effect of the decline in value of bad assets. Inflation is the intention.
If I and everybody else choose to walk around with double the cash in our wallets, that might be inflationary, but if a greater value has been destroyed in our homes and retirement plans, we have less ability to spend in the economy than when we had half the cash in our wallets.
It is only when the inflationary tendency exceeds the deflationary that the net result is inflation. Anybody buying gold who justifies the decision solely on federal actions might end up being sadly surprised if the other half of the equation has a greater impact.
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