Inflation vs. Deflation: Elevating the Debate

By Rick Ackerman, Rick’s Picks

Chiding the inflationistas here yesterday, we elicited a torrent of informative responses, including the 5000^th post to the Rick’s Picks forum (worth a free 30-day subscription to the lucky lady!).  We’re going to stick with this provocative topic for now, since we think it’s crucial that readers understand why deflation will be with us for a ruinous while, notwithstanding The Guvvamint’s desperately extravagant but so far ineffectual attempts to resuscitate inflation in the housing sector. A popular misconception is that the Fed stands ready to do “whatever it takes” to beat deflation. In fact, the Fed has already shot trillions of dollars at the problem without producing even the tiniest blip in home prices. That’s because countervailing forces of deflation are drawing irresistible power from the deleveraging of a global financial edifice once valued at nearly a quadrillion dollars. Under the circumstances, Helicopter Ben & Co. might as well be attempting to raise the level of the seas using a garden hose. For our part, we have long expected home prices to fall by at least 70%, and nothing we’ve seen so far has changed our outlook. The implication is that home prices, even after having fallen for nearly three years at the steepest rate since the Great Depression, are no more than halfway to the bottom.

Concerning the inflation-vs-deflation debate, we’re going to try and kick the level of discussion up a notch or two with a couple of suggestions.  First, because the pro and con arguments often bog down in pseudo-intellectual claptrap about what constitutes “money,” we are going to provide you with foolproof way to recognize deflation for what it is – namely, an increase in the real burden of debt. Some will say that this is just a symptom of inflation, but we would tell them that it is ultimately only the symptoms that matter. Trust us on this: You’re a deflationist, just like us, if you believe that paying off your mortgage, servicing the $200,000 debt your daughter racked up attending Vassar, and retiring at 65 will not get any easier within the foreseeable future. If, on the other hand, you believe that Helicopter Ben and his band of tooth fairies will come to the rescue, raising your real income very substantially and causing perpetual increases in the value of your home sufficient to allow you to borrow against it just like in the good old days, then you are an inflationist.

When Money Dies

>> Next Hidden Pivot Webinar begins 9/22. Early-bird registrants save $50. Use coupon code 7D5629

Rick’s Picks is a trading newsletter for stock, gold, silver and mini-indexes. All trades are based on the proprietary Hidden Pivot technical analysis method.

© Rick Ackerman and www.rickackerman.com, 2010.