Tuesday, August 18, 2009

Deflation or Inflation?

Nathan A. Martin writes the Economic Edge blog. Martin is the author of the 'Flight to Financial Freedom' book and is certainly a guy who knows what hes talking about when it comes to finance and the economy.

I bring his blog up for a reason. During this recession, the alternative and independent media has focused in on the idea that the outcome of this recession will be inflation, if not out-and-out hyperinflation like the Weimar Republic of Germany faced earlier this century. Much of this sentiment originates from the so-called Austrian School of economics. Dr. Ron Paul is one notable politician who has warned about the hazards of hyperinflation (and who I respect quite strongly).

Mr. Martin is also quite pessimistic about the future of the American, and world, economy, judging by his blog posts. However, he argues that, rather than inflation, the U.S. is about to enter a deflationary cycle. I don't really feel capable of answering this question, of predicting whether we'll face inflation or deflation, but I found his argument to be enlightening and educational nonetheless and really quite compelling. So I strongly urge you to visit his website and read his post, which you can find *here*.

Here is an excerpt from his post:

No, I’m not being over-dramatic. It is time to buckle the heck up. The resonant disconnect between reality and the pumping that is going on in the media and among supposed “experts” is at an all time historic, never been here before, Economic Mass Psychosis, HIGH.

To Quote John Kenneth Galbraith, “The majority is always wrong.” Right now the majority believe we are exiting the crisis. They are just plain old fashioned WRONG – again.

To prove my point, I’m going to show you the week in charts courtesy of the St. Louis Fed. This week, however, I’m issuing a WARNING. The evidence in these charts points to the beginning of a DEFLATIONARY SPIRAL. The PPI data comes out next week and will be a key piece of evidence in this regard. The results of a deflationary spiral will be UGLY if entered. You will see another round of deleveraging to go with locked credit markets. Equities will get hammered and the real cleansing of the economy will accelerate. This process will be PAINFUL but necessary to end the malinvestment. It will be the phase where more businesses who were hanging on HOPING for recovery will simply run out of cashflow to maintain operations. The same thing is necessary to cleanse a way over-bloated government and military.

The fallout will affect everyone. These charts are HISTORIC, they are NOT indicative of a short recession. As you view these charts, pay attention to the negative trends and look at them from a historic perspective. Many market callers are looking for immediate inflation due to the money pumping. I challenge them to point out inflation anywhere in these charts besides the money aggregates, which, by the way, are not growing at the rate they were. Those who look solely at the money aggregates are not seeing the destruction of credit which is very real and has hobbled the consumer. Never ending growth was a fantasy and is over for the time being, there is simply too much debt/credit in the system.

*Please* go over and read the rest of his post right now for the rest.

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