Sunday, September 24th, 2017 MST

Fear of deflation guarantees inflation

Fears of financial crises aside, the primary reason for owning gold is as a hedge against inflation, inflation being defined as an increase in the money supply.   As more money is printed, the dollar loses value and prices rise.  A excellent example of this principle is the menu at an iconic restaurant in Phoenix, Durant’s.

Today, steaks at Durant’s are priced in the $50 range, with as much as $5 being the difference in the cuts available.  On the wall at Durant’s is a March 1957 menu.  The most expensive steak on the 1957 menu was $1.50, with other cuts priced at $1.45 and $1.40.

In 1957 a nickel was so valuable that it differentiated the costs of steaks.  Today, you won’t stop to pick up a nickel off the street.

Yet we are told by the Establishment that deflation, falling prices, is what we are to fear.  Price Inflation is equated to growth and prosperity.  Right now, 2 percent inflation is the magical target. (Try to figure out how they came up with that number!)

However, hitting that target is proving difficult.

Japan and the US have tried massive money creation in recent years, yet price inflation–as the Establishment measures it–is less than 2 percent, which is resulting in cries for still more money creation, especially in the Eurozone.  Two articles in today’s “Financial Times” illustrate the point.

Headline: Eurozone woes–Italy fears chill wind of deflation.  A UniCredit Bank analyst is quoted as saying “Even if you think the probability of damaging deflation is low, if it were to happen it’s a disaster.”  He goes on to praise the ECB’s recent announcement of its plans to implement quantitative easing.

In an article about five themes that FT is watching this year, one theme is “Economic Recovery.”

“The world has moved beyond the financial crisis but growth remains tepid and the threat of deflation looms large, especially in Europe.  (Our reporters) . . . ` will be watching the central banks’ every move.”

“Damaging inflation,” “disaster” and “the threat of deflation looms large,” words meant to invoke fear.  Nowhere do we find articles about how consumers benefit from lower prices.  Establishment discussions paint inflation as good and deflation as bad.

FT said that it “. . . will be watching the central banks’ every move.”  Other than setting reserve requirements for commercial banks, central banks basically do two things.  They create money (inflation) and they destroy money (deflation).  It’s been decades since a major central bank has employed deflationary policies.  (Was Paul Volcker in 1980 the last?)

No doubt of about it, the threat of deflation guarantees inflation.

One Response to “Fear of deflation guarantees inflation”

  1. Dr Herbert Smith

    To really appreciate the loss of the purchasing power of the U.S. dollar, I only need to think back to when I was a kid and could buy a double ice cream cone with 4 scoops of ice cream on it for a nickel. Now days a 5 cent coin is not made of nickel as it is no longer even worth the base metal. Come to think about it, it’s been a long time since I’ve seen a double ice cream cone.

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