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We are in for a inflationary depression and, as such, investors should put their money in those things that will benefit from both inflation and strong demand and supply and stay away from where there is a deflationary impact, such as real estate. Words: 825
So says Paul Mladjenovic (www.ProsperityNetwork.com) in edited excerpts from his original article*.
Mladjenovic goes on to say:
The prices of goods, services and assets are most affected by two fundamental factors, namely:
1. The money supply (primarily enacted by government)
2. demand and supply (primarily enacted by the marketplace)
Demand and supply are an important factor in this debate and I believe that this becomes a source of misunderstanding. Inflationists talk about the money supply exploding and that this massive increase will (sooner or later) mean higher prices and even to the point of hyperinflation. The deflationists tell us that we are (and will continue to be) in a powerful deflationary environment. What gives?
Demand and supply complete the observation. Look … if a trillion dollars is printed right now but this money is not flowing toward anything (“demand”) then you probably won’t see a price increase. Demand has decreased for some goods, some services and some assets in recent years. However, demand has increased (or has had continued strength) in other goods, services and assets.
In other words, BOTH of the inflationists and deflationists can be correct if you break down the picture. You can have inflation in one part of the economic picture but not another. You can have demand and supply bring prices down in one part of the economy and not another.
Real Estate
Demand, for example, has been dropping like a rock in real estate. The real estate bubble of 2000-2006 artificially stimulated supply which increased the national inventory of available property (both residential and commercial) to the highest level in history. Too much supply with falling demand obviously means falling real estate prices. No amount of created money supply was able to overcome this.
Labor Markets
The same is true for the labor markets. Labor is priced higher than the market could realistically pay for. We forget that the price of labor is more than just “the gross pay”; it also includes many other costs such as payroll taxes, workmen’s comp, etc. The high cost of labor dampened the demand for labor; especially when demand for products and services fell. Right now, the supply of labor is much higher relative to the demand for labor.
In turn, as there are more and more unemployed, that means that less money is then available for discretionary purposes such as vacations and new cars. You get the picture.
“Deflation” vs. “Deflationary”
Keep in mind that there is a big difference between “deflationary” and “deflation”. It is much like the difference between “fainting” and “dropping dead”. Lower demand does have a “deflationary” effect. If less people want something then of course the price will likely drop and this can happen even if the government’s central bank keeps expanding the money supply. What does all of this then mean for us as investors and traders?
What to do With Your Money
It is actually simple to figure out what to do with your money given this historic debate. Consider putting your money in those things that will benefit from the monetary situation and from the demand and supply equation, i.e. put your money (retirement or otherwise) into those things tied to “HUMAN NEED”. If you have your money in those things that will benefit from BOTH inflation AND where demand and supply are strong, then this merits your attention.
a) Stay away from where there is a deflationary impact (such as real estate…unless you really need to buy a home). Go where the money is migrating.
b) Given this, I like gold, silver, grains, energy and other commodities. Investors and traders should consider “human need” and view it as a mega-trend during the coming months and years. I believe that a commodities super-boom is a likely event (and is already unfolding). No matter how good or bad the economy will be, people will still need to eat, drink, heat their homes, etc. For these reasons (and other ones), I like commodities for the long haul.
For those deflationists that believe inflation is not possible when there are bad economic conditions, I say think again. Most hyperinflations in history happened during bad economic times. Germany (1920s), Yugoslavia (1989-1994) and Zimbabwe (2007-present) are good examples.
Yes…inflation and a depression can happen simultaneously. Plan accordingly…
*http://www.resourceinvestor.com/News/2009/10/Pages/Part-II-Deflation-or-inflation-Here-is-the-answer.aspx (Check out www.ProsperityNetwork.net for Paul’s latest educational program “How to Cash in on the Commodities Super Boom Seminar” and visit his blog at www.Mladjenovic.blogspot.com.)
14 Months Year later and gold $ 400 higher
Very good article – just some insight regarding what happen to all those countries that went through hyperinflation at the end it was a deep ugly depression.
Theory is correct regarding a inflationary depression but this is caused due to the Central Bank taking the wrong course of action by switching the print press on.
The purge of the system would be the correct approach – as ugly as that might be it would be shorter – were as what is happening at this time is we are going through similar economy pain but with a slow release mechanism.
And it has just began – inflation hurting first and getting worse – only to find ourselves in hyperinflation with the depression to follow.
Just would like to know if all Politician and Bankers that are responsible for this will be executed for there action. They are highly educated people and even so they have created a bigger mess.
where to now
deflation, if less people want something then prices will drop, sounds logical
Around end 07 beginning 08 there was a surplus of retail goods at bargain prices many the result of businesses going under,since the second qtr of 09 prices of goods and services has risen sharply inflation, yet in general the vast majority of people have less money, I can only conclude there are less retail,manufacturing and tradesmen about, which will push prices up,and just see this trend in the UK continuing at a greater pace, to the extent that as base rates in overshooting on way down, will reverse dramatically on the upside around 2013/14 whilst savers may feel some respite in effect thier
purchasing power will plummet, but to the benefit of those paying off long term
interest only debt
Don’t forget all the new money created is sitting in banks and there is so much of it needed to pay down the debt. They won’t just let it sit there. They will drive commodities higher which will increase wages to companies that benefit. If we don’t see inflation we won’t be able to pay off debts and it will put severe pressure on our currency and it will spread and drive Gold and silver to unthinkable highs.
Most likely the US will be pressured to bail out states to protect stability. Either way Gold will at least retain its purchase power since it was historically undervalued in the 90s since it takes 75-125 ounces of gold to buy a house it reached an unheard of 700 ounces at its peak.
As the economy gets more confidence gold may drop but don’t be fooled, they must cause inflation to get rid of debt. Government spending created a huge amount of new debt (future money supply) that must make its way to someone to avoid default. There is no way we can afford not to do this now. Europe should give a proper example of what will happen, and if we must inject another stimulus it will need to be 1-2 trillion to inflate before we start spemding cuts.
The private sector desperately needs a few trillion of the govt debt so we can start fresh and do it right. Playing politics on cutting spending and raising taxes will not be healthy right now, but if we do spend we need infrastructure spending and technology to build the atmosphere for new ways of life. We are too far in debt to just cut spending. Taxes will have to go up way too much.
If China spent 500-700 billion we need to match with 2-4 trillion compared to our GDP vs theirs. In reality it just makes sense, if you disagree you don’t understand the magnitude of the fact we can’t pay back the debt we have with a deflating or low inflation economy. If we try I believe foreign holders of debt will get fed up and we will be forced to monitize anyway.