Saturday, November 20, 2010

Inflation vs deflation revisited

I am flattered to receive attention from the Economic Policy Journal re my recent post on the Weimar hyperinflation of 1923. (I should have made it clearer that the graph is not mine - it comes from the site I linked to in that post, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

Some may think that I'm scaremongering, talking about such a scale of inflation; and we must hope that it doesn't come to pass. After all, history cannot be repeated exactly because the later time has the memory of the earlier, a point made elegantly by Jorge Luis Borges' short story "Pierre Menard, Author of the Quixote". But we may simply get to the same destination more slowly - after all, the dollar and pound have lost something like 98% of their value since the beginning of the 20th century.

So I responded to the comments as follows:

You're right, we're in a deflation at the moment, but the undermining of the currency is already showing up as inflation in energy and food prices. Recently ( Mike Shedlock and Dr Marc Faber appeared together on an interview and they agreed that inflation was the end stage, the only real difference of opinion between them was over timing.

Deflation would greatly benefit holders of cash (and gold, which seems to be a great each way bet if you buy in at the right price), but pretty much cripple and bust everyone else, so you're right again. Which is why our governments are so very motivated to find a way to restimulate inflation.

This time, the most indebted countries seem to be competing to see who inflates most (so they end up debauching their currencies in parallel), and the creditors who depend on exporting to them are trying to follow suit. The global economy has never been so interconnected before so we're in new teritory.

Faber reckons we are heading for a global bust; in which case I suppose global trade will break down, the focus will be on national and individual self-sufficiency and those who have spare assets will hold commodities of one sort or another until a new, sound currency arises.

Scaremongering? My mother's family lived through the Weimar inflation, but got through OK because they were farmers; until the busted German middle class turned to a new leader. The farm is now in Russian-held territory and we haven't seen it since 1945.

I have hope for the USA because it has natural resources (including land) that could satisfy the reasonable needs of the population; and because you have a Constitution that could be your storm cellar, if you don't let your corrupted elite persuade you to fill it in and build over it.

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