Monday, August 9, 2010

Can It Be An Epiphany If You're Not Sure It Was An Epiphany? Oxymoron?

For the longest time I have been trying to get my head around the inflation/deflation question. Both sides make good arguments. I tended to agree with whoever I heard last. On the one hand, if the economy is slowing and people are out of work, they have less money to spend. Supply and demand should drive prices down, ie. my dollar gets more valuable. That's deflation. On the other hand, if Congress keeps deficit spending and the Fed keeps printing money more dollars exist to chase the same goods, ie, my dollars get less valuable. That's inflation. I have been struggling with these concepts for months and always came away confused. I was determined to keep reading, hoping that eventually the truth would gradually emerge into the front of my mind, or I would have some kind of epiphany and suddenly see the light. Well, I'm not certain, but this morning I may have had that epiphany. How's that for vague? How can it be an epiphany if you're not certain it happened. I read an article by Jim Rickards who I follow on Twitter. I think you should read it too. The article isn't very long, but the executive summary goes like this:

Due to recession or depression (you choose), we have deflation. The Fed is fighting it with inflationary policies like zero interest rates and Quantitative Easing. The two opposing forces are in balance or equilibrium for now. But the system is unstable and a crisis could call the value of a dollar into question. The coiled spring of inflation could be released with a vengeance and we get hyperinflation.

As one of the frequent commenters on my favorite financial website, Zero Hedge is fond of saying, "Gold Bitches!!"