Gary North has an interesting article on the deflation vs. inflation issue. He believes that we will end up in a deflationary Depression, although provides consideration for the possibility of a hyperinflation. In the short and intermediate term, which one of these occurs is critical for investors.
Readers know that I expect the inflationary fires rather than the ice of deflation. But that is my opinion and other opinions are at least as valid. Here is Mr. North’s summary:
I do not believe that hyperinflation is inevitable. I think it is unlikely. I do think that a Great Default is inevitable. Governments will default when the workers who are paying into Social Security and Medicare finally figure out that (1) this is not in their self-interest and (2) they outnumber the geezers.
Central bankers are arrogant. They really do think they have the upper hand. They really do think fiat money creation by central planners (themselves) is more powerful than free market forces (investors). They really do believe that they can find a suitable middle/muddle road between deflationary collapse and hyperinflation. So, they will not pull out all the stops. They will not hyperinflate unless Congress compels this.
Paul Volcker is the model. He reversed the policies of the ill-equipped G. William Miller, who was persuaded to resign by Carter after only 18 months in office. Volcker stuck to his guns from the fall of 1979 until August 13, 1982. By then, the public had lost its fear of inflation. It had gone through back-to-back recessions.
Volcker saved the dollar and the bond market. He let the politicians pay the price: first Carter, then Reagan. Reagan weathered the storm because the economy had turned back up by 1984. He smashed Walter Mondale.
The leverage is much greater today. The leverage of the big banks is much greater. The public still trusts Bernanke and Draghi. The investors think the central banks can save the system from a catastrophe. I don’t. But I think the central banks have their choice of catastrophes: deflation/depression vs. hyperinflation/depression. I think they will try to navigate a middle ground, but when push comes to shove, they will risk a controlled deflation, with selective bailouts for the largest banks.
The central banks are not there to save the governments, which come and go. They are there to save their clients: the largest banks. They know where their bread is buttered.
But if Congress ever nationalizes the FED, then hyperinflation is a real possibility.
To the extent that I disagree with Mr. North, it is over his last sentence which I have emboldened. I do not expect the political criminal class to stand by and see their plunder scam destroyed by some central banker. Nor do I think that nationalization is a necessary condition. Merely reminding who Mr. Bernanke or his successor work for and who granted them a charter which can be revoked should be sufficient.
If you have the time, read North’s full article.