Why High Inflation Is Inevitable

Tuesday, April 10, 2012
By Paul Martin

Apr 09 2012

How this economic disaster ends is something about which many of us speculate. Two extreme endings are likely — a sudden deflationary collapse or a period of very high inflation/hyperinflation which ultimately cripples commerce and resolves itself in a deflationary collapse. In either case, the deflationary collapse is another Great Depression.

It is important to know which route will occur because of what will happen to asset values along the way. A move directly into a Great Depression will depress severely most asset values, especially common stocks, housing and other hard assets. Bonds, cash and fixed incomes may be beneficiaries in the sense that their purchasing power increases.

If the Great Depression is preceded by hyperinflation, just the opposite will happen, at least through the transition stage. Cash, fixed incomes and bonds will be devalued, perhaps even wiped out, if the hyperinflation is severe. Stocks, housing and other assets are likely to benefit until the Great Depression takes hold. Once the Great Depression period begins, the effects on assets will be as described in the paragraph above. However, those who believed they had adequate savings and retirement incomes may enter the Great Depression destitute.

Regardless of which route is taken, most people will lose. Winners will be those prudent and fortunate enough to preserve their purchasing power. Wealth creation is unlikely for most; wealth preservation, in terms of purchasing power, would be an admirable achievement.

Phoenix Capital Research weighs in with their opinion which is that a deflationary collapse lies ahead. They believe we are going directly to the Great Depression because the Federal Reserve has run out of options. Their thinking runs counter to this statement from Bloomberg:

A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”

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