Deflation Is Not On The Menu

Deflation Is Not On The Menu

April 19, 2010

Executive Summary

• Why creating inflation is our official policy.
• Deflation would destroy our economy, our financial system, our hopes, and our dreams.
• For budgets and pensions to be repaired, we badly need a return of economic growth. Or inflation of our asset markets. Or both.
• The flood of liquidity that we’ve been tracking is very real and is distorting prices for all financial assets.
• This ‘recovery’ is a gift.  Use the time wisely. 

A constant debate rages over whether we will ultimately head down an inflationary path or get sucked into a deflationary whirlpool.  In fact, the most common question I am asked at my public talks is whether the future will consist of inflation or deflation.  So I thought we’d spend a bit more time on the subject here.

While I can’t tell you which will happen for certain, I can tell you that the inflationary path is infinitely preferred over deflation by our fiscal and monetary authorities.  Given their druthers, we’d most definitely head down a path of inflation.  While a renewed bout of deflation may be in our future, it is simply not among the acceptable range of policy options.

With the right amount of inflation (and I am talking primarily about asset inflation here), state and federal budget woes would diminish, pensions could be rescued, the housing market could heal, and the inflamed tempers of various populations around the world could mend.

Deflation, on the other hand, would ruin banks and political careers alike, destroy entire industries, and crush the retirement dreams of tens of millions.

Unless stocks and bonds can be compelled to continue heading up in value, an entire financial edifice and all of its associated promises will come crashing down.  Therein lies the pressure to ‘get everything back to normal‘ again as fast as possible.  By this, I mean to get the stock market back moving up, and, as a first step, create the appearance of economic growth and health.

In this piece, I will explore the reasons why inflation is the preferred path for our monetary and fiscal authorities and why they will fight extraordinarily hard to keep us on an inflationary path for as long as they can.