The “Black Hole of Deflation” turns into runaway inflation. What of Gold & Silver – Part 3
By: Julian D. W. Phillips
Friday, 6 July 2012
n a Democratic world as well as in undemocratic nations the political and social consequences of deflation are considerably worse than those of inflation.
But the concept of inflation is poorly understood. In today’s world it is thought of as simply rising prices due to shortages. In economics there are several forms of inflation that appear in different circumstances.
Overall governments favor low inflation because it gives the appearance of rising wealth as prices rise, provided that these levels are restrained around, say 3%. Above that and savings are visibly damaged and consequently the economic power of a nation.
But we are moving far away from such a concept now. In today’s world the bulk of inflation has come from rising oil prices [an insidious, usually imported inflation] and the like. At the moment, we are at a time when inflation is at very low levels, so low they no longer represent a fear or concern.
Deflation is now the global fear, far more so in the developed world than in the emerging world. But the deflation we are talking about is not simply an economic slowdown. Today’s deflation is a decay of trust, of confidence and consequently, hope. Deflation breeds prudence, caution, discouragement, which attacks growth. Banks slow down their lending, delay the processing of loan requests, take only very secured collateral for their loans. Individuals save in the hope that they can manage those rainy days they see coming.
As the current type of deflation persists, it accelerates slowly but surely. Central banks [particularly Mr. Bernanke] are aware of this and try to simply promote an expansion of money that replaces lost asset values and no more. It is critical that no more than has been lost to asset/debt deflation, be added.