Understanding inflation/deflation going forward

by Zalinsky

For all the talk of runaway inflation that gets the silvertards like myself excited, the truth is that since 2008, our world has been largely deflationary. Certain assets have had hyperinflation – stocks, education, health care, and limited supply goods of the rich (Central Park penthouses, wines, art, etc.), but that has masked pretty wide spread deflation in the cost of most manufactured goods.

For the average Joe then, the world has been mildly deflationary. But I think it is changing now, and I want to make sure everyone on here understands what’s happening.

Let’s start with the change. The federal government looks like it is going to start handing out stimulus checks like comedy club coupons in Times Square. This is a major change. Except for Trump’s tax cut, governments haven’t been handing out money much in the past few decades to the regular folks. But now we have the biggest handout in USG history, and it feels like it might be first of many.

Why is this different? Hasn’t the Fed been printing money?

For all the talk of printing money, the Fed doesn’t actually print money. It artificially lowers the cost of credit, which encourages people to borrow money to expand, which creates a temporary positive economic blip. But because the Fed has forced the cost of money below it’s natural rate, a lot of the investment is malinvestment (unnecessary or inherently unprofitable) and those losses eventually destroy the equity and leave only the debt service. Now more of the reduced overall income is needed to service this debt (even at a lower interest rate since there is so much debt), which is deflationary. Asset values benefit from the higher leverage available, but for everything else, deflation.

But if we are now looking at a federal government actually handing out fiat scrip, that is different dynamic. It is inflationary. The Fed will be involved – they will immediately buy new Treasury paper – but with the two bodies effectively working as a team, it will not be much different in effect than if the Treasury had their own printer to roll out fresh scrip.

This is money flowing directly into the hands of citizens. They will go straight out and buy stuff. They will buy IPhones and sneakers and vacations and swimming pools. For those goods that have fairly elastic manufacturing capability, manufacturing will ramp and the inflation will show up in the underlying commodity prices. For those goods that have inelastic manufacturing capability, a lot of fresh money will be chasing a limited pool of goods, causing the price of those goods to rise.

Either way, it will be inflationary.

Again, this is all contingent upon the USG starting to hand out stimulus every where, but considering how little push back there has been to the stimulus so far, I don’t see that stopping.

If it does, deflation. If it continues and expands, which I think it will, inflation. So watch the federal government and take your cues from there.

Personally, I think the government gets trapped giving stimulus in a failing economy and is forced to keep adding more stimulus every time we start to go down (kind of like the dynamic with the Fed since 2008, stepping in at any sign of a downturn). They are required to add bigger and bigger infusions, and they lose any sense of discipline. Inflation gets out of control, and no one in power, at the Fed or USG, has the backbone to stop it.

This is my default case. My price target on silver in this case is around $350.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.