There is much talk these days about whether we are headed for deflation, or inflation. In fact, just the other day a friend approached me and said “are you for inflation or deflation” which I thought was an odd question coming from this friend, specifically because our relationship doesn’t generally involve these type of questions. So I think my main point is that this topic is making it to main street and sadly either way you look at it the result is not positive.
Ok so let’s address it. First, my answer is that I think as I have repeatedly said, we are headed for inflation, and in fact it could be hyper-inflation which would likely be as bad as deflation, except of course if you are a real estate speculator.
Why, do you ask? Well the main reason is, and I have been steadfast in this assertion, through the recession the governments across the world, but specifically in the USA, have been printing money at a breakneck pace. With all that excess money in the economy the only plausible result will be inflation. When? As soon as that money starts to flow into the economy. Yes, the tail end of a recession will always make people and more importantly institutions (banks) hoard their money. But hold on and fasten your seat belts when that money starts flowing.
Would you like to have the inside track on when inflation will trend up? Book mark this page and return periodically to track the M1 money multiplier graph. The money multiplier measures how much money is circulating in the economy, and as you can see it has fallen steadily since the 80′s but fell off a cliff at the beginning of our severe recession. Note: the Grey bars are all the past recessions.
Economists like Benjamin Tal have repeatedly reminded us of this law of economics, when money supply rises, which it has significantly, then inflation will follow. Look for the M1 money multiplier to rise in the next 12-18 months will bring inflation.
Now, for all you people who have an insatiable appetite for real estate speculation, please don’t use this post to justify more real estate speculation. To be clear, there is much to much risk in today’s inflated market to be involved in speculation.
Finally, and this from Peter Schiff, if you don’t know who he is you should. Peter is one of the only experts who called the real estate disaster in the U.S. He is currently saying that gold will hit $5,000 an ounce, due to what he believes to not only be inflation, but hyperinflation. Why? Because in is mind he thinks Bernanke, the federal reserve chairman, is keeping interest rates artificially low, to continue to save the housing and stock markets, at the expense of long term pain for the entire economy in hyper-inflation.
Where do we go from here?
1) Watch the M1 graph.
2) Buy any big ticket items you want (i.e. a house) now, as inflation will drive up both the prices, and the interest rates, which brings a net effect of substantially reducing affordability.
3) If you are tight on your budget, lock in your existing mortgage Tuesday. Rates WILL rise, and likely will continue to do so, for some time.
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By Bill Scott, October 11, 2009 @ 11:47 pm
Thanks Greg – interesting article. I haven’t really considered the inflation/deflation debate, but will start to gather more information. Thanks for the eye opener!