Bullion Vault

As the US fights deflation, credit inflation is alive and well in China…

The INVESTMENT COMMUNITY is divided at present as to whether the world economy faces hyperinflation or deflation, writes Puru Saxena of Money Matters and Puru Saxena Limited in Hong Kong.

Some observers are convinced that the central banks’ printing press will take the world towards hyperinflation whereas others believe that the ongoing contraction in American private-sector debt will result in outright deflation.

But what will the future bring? It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that, over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So I maintain my view that due to the unprecedented policy responses around the globe, the world’s economy will face high inflation over the medium to long-term. And the general price level will double over the coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the ‘green shoots’ hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year.

It is therefore possible that before year-end we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in US government bonds, the US Dollar and Japanese Yen.

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Tom Lindmark submits:

An interesting analysis of the prospects for gold from Ambrose Evans-Pritchard this week. Along the way to his conclusion he does a nice job of stating the cases for inflation and deflation.

He starts out by noting that the Chinese have substituted gold for some of the paper they could be buying from the West and also touches on John Paulson’s big move into gold and his new real estate-oriented fund. Evans-Pritchard sees Paulson’s moves as a reflation play. Others have made the same observation and it probably is an accurate depiction.

He points out that Paulson and others of his age — early 50’s into their 60’s — may well be drawing on the experience of the 1970’s. That may be relying a bit too much on psychology but it is true that our views are shaped by prior experience and that often is the prism that we fall back on in times of stress. It’s probably a good reason why so many of us fail to predict the outcome that ensues.

On the other side of the argument are those who either had experience with or are students of the Japanese experience. This group sees deflation as the primary risk and is concerned that it might well become a chronic condition. Essentially all of the stimulus that the West is pouring into its economies is just being used to offset tremendous deflationary pressures.

Evans-Pritchard is in the deflationary camp. He feels that the likelihood of a Japanese outcome is the most obvious, yet he’s also a gold bug. Here’s how he rationalizes the dichotomy:

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By Clive Maund, GoldSeek

From August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The wilful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis which burst the bubble was the sub-prime mortgage debacle.

Instead of accepting the deflationary implosion as the necessary price to be paid for years of excess, and something essential for eventual renewed growth from a firm foundation in the future, politicians and governments around the world, unable or unwilling to face up to the economic pain and probable political instability that would result, have been and are trying to obstruct the contraction through enormous ramping of the money supply in many countries and propping up defunct entities that according to the laws of economics and capitalism itself should be allowed to fall by the wayside. This is creating a highly anomalous situation where massive and ultimately unstoppable deflationary forces are colliding with an outright and reckless attempt to block them through means of massive reliquification. Because of the enormity of the debts and the scale of deleveraging necessary to purge the system, they can only delay or temporarily mitigate the forces of contraction, and that is probably all they are trying to do with the intention of further lining their pockets before they head for the hills. However, their continued efforts to obstruct these forces by means of the very profligacy and fiscal abuse that created the monstrous bubble in the first place, will lead to an even more catastrophic collapse later on.

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