"YOU COULD BUY A CAR FOR $10, BUT NOBODY HAD $10"

Will prices go up or down as we head into a recession or depression?

Should we prepare for inflation or for deflation?

In deflationary times, cash is king. In inflationary times, we want to own things like gold whose price will rise. My mother told me that in the Great Depression of the 1930's, “You could buy a car for ten dollars, but nobody had ten dollars.” On the other hand, in hyperinflationary times, a gold coin may be worth a fortune.


German Children Play with Money During the Great Inflation of the 1920's. Employees were paid daily or several times daily so they and their families could rush out and buy things before the money lost most of its buying power as prices skyrocketed.

Having cursorily researched expert opinion on the relationship between recessions and inflation and deflation, I can summarize the results as follows:

A recession may see either inflation (rising prices), or deflation (decreasing prices). Brilliant! Wikipedia: 'Recessions are the result of falling demand and may be associated with falling prices (deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant economic growth (stagflation).'

Armed with this lack of knowledge, I predict that despite the example of deflation during the Great Depression, we are entering a period of increasing inflation.

Logically, the economic collapse the United States is experiencing will result in loss of jobs, loss of spending power, and a surplus of goods over demand, which will lead sellers to slash the prices of refrigerators and television sets and automobiles in order to find buyers. So, prices will go down, right?

Yes, right in the near term for some items, but wrong in the longer term. The increase in the supply of money (combined with eventual decrease in production of cars, refrigerators, etc.) is the giant fly in the ointment. During the Great Depression the government let the money supply go down, but at present the government is creating money by the ocean-full and pumping it into banks virtually without limit. To my amateur eyes, this certainly looks like an unprecedented increase in the money supply which will drown any deflationary tendencies of the recession/depression.

The government's panicky efforts to make us borrow our way out of a crisis caused by borrowing will most likely result in a long-term tsunami of inflation. If production is decreasing, as we hear every day, then how can the supply of goods keep up with the supply of money? And when money supply grows in proportion to things for sale, the prices of things for sale go up. Even with the current financial malaise, most grocery items are “on sale” for far more than they were a year ago.

I would really appreciate some comments on the issues raised here. I want to know whether to buy a new refrigerator or a new car now, while desperate sellers are offering price-cutting sales, especially leading into Christmas, or whether I can get even better deals next year. I want to know whether to prepare for inflation by buying gold or gold mining stocks, or whether to prepare for a deflation in which “cash is king” by putting cash under the mattress.

I am betting on inflation and will be closely watching those sale prices to see if they go down or up.

Yet Another Sign of Decline

BYE, BYE DOLLAR


The following story by Wanfeng Zhou illustrates the erosion of the importance of the United States dollar in the world economy discussed in my previous post – a symptom and harbinger of U.S. decline generally. To me events of this kind are the advance rumblings of the real avalanche – the refusal of nations to lend America more and more money through purchase of U.S. Treasury bonds, etc., which are nothing more than IOUs repayable in dollars. In view of Bush’s inflationary policies, buying Treasury IOUs from the U.S. is like accepting an IOU from someone promising to repay $1000 in five years when you know that $1000 will be worth $500 in buying power by the time it’s repaid. I’m not an economist by any means, but I understand that when a debtor nation like the U.S. loses its sources for borrowing, it tends simply to print more and more money in order to preserve its previous status and avoid a depression, with the result that inflation impoverishes its citizens. . . in particular those who have retired.


‘NEW YORK (MarketWatch) -- The Central Bank of Kuwait's decision over the weekend to untie its currency from the U.S. dollar might signal a growing trend among global central banks, especially those with large foreign-exchange reserves, to more actively manage their currencies.
‘And such a shift is likely to put the U.S. dollar under increasing pressure, analysts said.
‘The significant drop in the exchange rate of the American dollar against most other major currencies had a negative impact on the Kuwaiti economy over the past two years," Sheikh Salem Abdel Aziz Al Sabah, governor of the central bank, told the official Kuwait news agency.
‘"In the Middle East, it's a story of dollar-concentration risk," said Stephen Roach, chief economist of Morgan Stanley. Kuwait's just-announced decision "may well be the first step in a regional diversification strategy that attempts to temper such risks," he said.
‘Global central banks' ongoing reserve diversification has been a main factor weighing on the U.S. currency and Treasury market in recent years. Many people argue because foreign central banks have played a vital role in financing U.S. borrowing by buying U.S. debt, a diminished appetite for dollar-denominated reserves could have a significantly negative impact on the dollar and the U.S. economy.’