To paraphrase what I said earlier: I don’t know what the economy is going to do over the coming years, but I know that it’s not going to be good.
While I agree with the author that world governments will do everything they can to prevent deflation, there are some things that are just out of their control.
What if Israel wipes out Iran, and Iran retaliates by lashing out at both Israel and the Sunni Muslim nations surrounding it? The price of oil would necessarily skyrocket and the world economy will go through a severe contraction. It would take years for the flow of oil to resume to current levels.
Check out this entire read by Puru Saxena at FSO:
At present, the investment community is divided as to whether the world economy faces hyperinflation or deflation. 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. So, 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. So, it is 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, US Dollar and Japanese Yen.
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Coming back to the subject of this essay; the reason why I don’t foresee immediate hyperinflation is due to the fact that the velocity of money is currently weak. In other words, at least for the moment, the private-sector in America isn’t participating in Mr. Bernanke’s inflation agenda. Despite the fact that Mr. Bernanke has injected a massive amount of reserves in the banking sector, this money is currently sitting as excess reserves within the American banking system. The fact that this money isn’t being lent out rules out immediate hyperinflation. However, once the American economy stabilizes and the velocity of money picks up, these excess reserves will trigger a massive inflationary wave.
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