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Inflation or deflation? The truth:



July 08, 2008 – Comments (5) | RELATED TICKERS: SLV , GLD

I keep reading that we are experiencing deflation because of plummeting house prices etc. Actually, this further reinforces my argument that we are in a severely inflationary environment. Housing prices, unlike skyrocketing food and energy prices, are priced into reported inflation. Even with freefalling housing priced into the figures, we still have inflation (and no, dropping rates of reported - or even real - inflation do not mean deflation). Yes, house prices and securities, plasma TV's and even labor are all becoming more affordable. But education, foreign currency, precious metals, and foreign securities are all enjoying a long-term secular bull market, all helped by the falling value of the dollar. Just because houses are deflating from bubble valuations or people can't sell luxury items to working families anymore doesn't mean the dollar is increasing in value.

The value of the dollar is decreasing, and that is inflation. If you define inflation and deflation differently than that, feel free. I don't care. But the value of the dollar is decreasing, and that decrease is accelerating because of an ineluctable political tailwind. And regardless of reported inflation, gold and silver will be sought so desperately that those who invest in them will increase not only the number of dollars in their net worth, but their purchasing power (because the flight to inflation hedges drives up the prices of gold and silver faster than the rate of inflation, real or reported).

Does the current environment fit someone's definition of "deflation"? Almost certainly. Does that matter? Not remotely. The only thing that matters is real value. The real value of homes is soon to be reflected in their prices, and the same goes for the dollar, as priced vs. metals.

5 Comments – Post Your Own

#1) On July 08, 2008 at 12:16 PM, Sqwii (< 20) wrote:

If we look at the inflation rate you can see that is is falling from 4.3% in January. The next months we will still see a fall in the inflation rate. Precious metals dont have to go down , but if its neutral and housing is going down and other things. US economy is in an inflation period now :-)


In the comming months we will see a decrease in oil near 100$ a barrel.

 Gold will be neutral for the next months




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#2) On July 08, 2008 at 2:09 PM, alstry (35.03) wrote:

Inflation is simply a money supply issue.  Prices are a by product of inflation or deflation.

One could argue that food and fuel prices are up because people are speculating and there are few other areas right now to deploy capital.  Or it could be argued that it is a supply and demand issue.  Or it could be argued it is a by product of inflation.

If you look at the dollar value of rising food and fuel prices, it is only a fraction of the decrease in value of assets a result, overall....values are declining on a net basis.  Some call that the seventies, assets and wages that was inflation.

Time will tell.

Note:  In the second paragraph I was using inflation as commonly used as rising and falling prices even though I noted in the first paragraph it is simply a measure of money supply.  I technically should precede it with the word "price" and maybe distinguish "price inflation" from inflation.

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#3) On July 08, 2008 at 3:25 PM, FleaBagger (29.37) wrote:

I thought you both were deflation-siders. Whatever. I'm just very confident that the money supply will be increased at a dizzying rate by congress and the president, and that will constitute inflation in my view, and increase the price of hard assets, except those unwinding from a bubble (houses, for instance, but not oil). That's what I mean by inflation. Decreasing consumer electronics prices may very well be. (I hope so, in fact). But the dollar, in absolute terms (terms probably best approximated by gold) will decrease in value.

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#4) On July 08, 2008 at 4:30 PM, tradingfool2 (33.84) wrote:

Inflation in items we buy to live and deflation in assets we own(homes, stocks, and bonds) add up to inflation on steroids.  Just imagine how much more the asset values would drop if a falling dollar weren't proping up their values as it is doing with commodities.

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#5) On July 08, 2008 at 7:09 PM, Imperial1964 (97.93) wrote:

"Inflation in items we buy to live and deflation in assets we own"

In the intermediate-term, I expect "price inflation" to moderate due to global demand destruction and the dollar to slow its slide when everyone figures out that the rest of the world is still dependant on the US and Europe and Europe is almost the same boat we are.

My 2 cents.

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