Deflation vs. Inflation

There is a lot of talk and discussion between people talking about inflation and deflation. People who think inflation will be the problem point out the hyperbolic expansion in the money supply due to the printing press of Bernanke doing overtime for the last few years as well as since the closing of the gold window in 1971 by Nixon and cutting all ties of money with gold. Deflationists argue that Fed is failing on expanding the money supply due to a fall in the velocity of money and lack of lending by the banks even as the Fed continues to increase the monetary base to unprecedented levels. These people argue that "asset" prices will go down and people will be faced with deflation.

Without picking a winner first, we can see how we would first see deflation (as described by the deflationists as a decrease in asset prices) followed by even more money printing by the Fed ending in a hyperinflationary scenario as more financial institutions, municipalities, and sovereigns have trouble raising more debt to cover their interest payments and deficits and in the case of banks mask their insolvency. However, there is a possibility where we have deflation in asset prices and inflation in consumer prices. Asset prices that could fall meaningfully are houses and stocks and debt instruments. Consumer prices that could go up in the face of falling asset prices are food and energy prices as well as other essentials as well as some other discretionary items that are consumable. The main reason for this is demand and supply and valuations. Stocks, houses, and bonds are very overvalued. By ridiculous amounts. They should all be down 50% and more. On the other hand the prices of a lot of commodities such as wheat, beef, gold, silver, natural gas, sugar, soy beans, and etc. are still very cheap compared to what stock, home, and debt instrument prices have done in the past several decades. There is an imbalance between different asset prices due to government subsidies, policies, central bank manipulation, and the bubble mindset of moneyed interests and the common public.

 Imbalances never last for ever even if they can last for quite a few decades. We are coming to the end of one of those cycles. Another cycle that is ending is the expansionary cycle of debt and that of the experiment of fiat money that enabled another cycle that is about to be over: ever expanding deficits and indebtedness of both individuals (mainly Americans) as well as firms and governments.

Gold continues to be a highly manipulated (suppressed by the Federal Reserve) asset that is a great investment for the longer term both as a way to preserve your wealth and as a speculative investment if you have the time as the unsustainable short position of the Federal Reserve, which is short 30,000 to 50,000 tonnes of gold (to put it in perspective: all central banks combined claim to have 30,000 tonnes of gold and all the gold ever mined in history add up to 160,000 tonnes of gold) creates a very explosive situation with a very uncertain timing due to lack of justice and transparency in the current environment surrounding the Fed.