Let's face the facts about the inflation/deflation debate:
1 - No one really knows or can possibly know what the "endgame"
will be ...
2 - The goal for investors is to be "future independent" as much
as possible: a strategy that wins in nearly any market.
Consider the real issues facing the authorities right now:
1 - If they allow significant price deflation banks could fail
in great numbers, and then they may be forced to really monetize
which could ignite hyperinflation
2 - If they push in significant price inflation, the currency
will collapse, and they may be forced to really deflate to bring
back confidence (the "austerity" plans)
In sum, the Fed is facing a cliff on both sides of the path.
They will try and stay in the middle.
That means the Fed will end up oscillating policy between price
inflation and deflation with a bias toward whichever risk (U.S.
government creditors or the banking system) they perceive as the
Now consider the dollar. It is bad, except:
1 - Everyone else is in real trouble and in more trouble than
the U.S. !
2 - The Euro is the only substitute in tradeable size against
the dollar, and Europe is in real trouble!
The financial elite hold far more wealth in financial dollar
assets than they possibly can hold in real goods. How are they
going to hedge the risk that things might get out of hand if the
dollar "must" devalue?
Let's get a quick answer.
You might note that savvy market players, with the help of the
central banks, can push markets to extremes and this helps the
nimble set up to benefit from the other side (sell high, buy
Consider the fact that, in 1998, the real estate tax exclusion
was quietly passed and the Fed subsequently allowed huge increases
in mortgage credit.
Now, what is the one market, that recently was busted, that can
take the kind of money flows that the big boys have stored in
financial assets? After all we are talking trillions ...
In other words, the big boys can prepare for the risk of
devaluation by buying cheap real estate and stocks of banks "that
will survive" at near dirt cheap prices. This offsets the risk that
things get out of hand (necessitating rapid price inflation) before
(if) a global currency is introduced. If a solid global currency is
introduced, then, in my view, the dollar is really toast.
So how to invest?
1 - Buy gold. It will benefit from a collapse in assets and from
devaluation. Note that the dollar price of gold has almost nothing
to do with "price inflation" and "price deflation" (convince
yourself of this by noting the huge fall in the price as inflation
continued for decades). It is more sensitive to whether there is a
solid foundation under dollar assets - and the foundation can be
broken by either a higher risk of price inflation or price
2 - Hold cash.
3 - Determine when your income is (1) price inflation advantaged
or (2) price inflation disadvantaged or (3) price deflation
advantaged or (4) price deflation disadvantaged.
For earners in industries that are doing well in price inflation
and price deflation, hold medium amounts of real estate debt. Since
income tends to hold steady, price deflation means other expenses
drop and the debt is affordable; if there's price inflation there's
an increase in income allowing a real return. This can take the
place of some gold investment.
For any other combination, lean toward more cash, severely limit
use of debt, build up a cushion, gain alternative income sources,
and put some money in gold or alternatives like gold that are not
someone's liability. While you may decide to bet on one side of the
market, the premise here is that it is difficult to know the
4 - Keep in mind that the authorities face real trouble with
both price inflation and price deflation, so they may administer
"survival" (they already have) and let some financial institutions
fail which will curtail the price inflation effects when giving out
lifelines financed with printed money.
5 - Remember, the purpose of the Fed is to benefit the banks and
elite finance. They do that by providing a market for treasuries so
that Congress can overspend. But now that the Fed can issue it's
own perpetual debt (paying interest on reserves!) the next step is
to insulate themselves from U.S. government control and U.S.
6 - Remember, the most logical outcome is oscillation of price
inflation and price deflation. When one seems to be reigning,
operate with the other side in mind. In other words, during high
and slowing inflation (indicating a peak), accumulate cash invested
in shorter term assets in preparation for price disinflation.
During price deflation, pick up bargains. Worst case, you will
likely do better than those that believe the trend will be in one
Good luck investing.
Author holds a position in Gold ETFs.
Traders Intuition: Market Euphoria About to Come