Inflation-Driven Boom Will Be Followed By Deflationary Meltdown

We got this note the other day, “You say in part, ‘In markets today, to get along, you have to go long. And if you don’t, well you’re out of luck.’ Are you no longer worried about a melt down in the short term? How long is long? One year or two?

“Your past words of imminent doom had me very worried with its effect on my investment actions, (or inaction ) are you now changing your timeline? I am a daily reader of your investment letter and look forward to your response.”

We answer that a melt-down must be preceded by a melt-up. Or in economic terms, a deflationary bust characterised by over production and capacity surpluses must be preceded by an inflationary boom.

We are in the boom phase. And like it or not, related to real value or not, prices are going to rise as global money and credit creation booms. If you’re in the markets, you’ve got to make a choice with your money. So we’ll be choosing assets with tangible value that are in economic demand as well.

Dan Denning
Markets and Money

Are we in the middle of an inflationary boom? Leave a comment below.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Inflation-Driven Boom Will Be Followed By Deflationary Meltdown"

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Chris. Fulker
Yes, we most definitely ARE! Prices of everything are being driven to otherwise nutty levels. I’m a stamp collector; it’s true even in my field. Ditto Ebay coins, PM stocks, and base metals. But some things have been so beaten down that they will have value even after a general stock melt-down, I suspect. Search junior miners carefully! Some of mine are doing well and, moreover, can be bought at reasonable prices. What about gold? On one hand, some say it is somewhat overpriced considering weak (current) investment demand. But in a world of constantly increasing asset prices, don’t you… Read more »

Even people with a ‘balanced’ portfolio have purchased some portion of it with current cheap credit, if our national savings rate is any guide. They will initally at least sell things of value that they actually own to pay the interest/margin call. No asset will be immune, but some may move through the trough of disillusion faster than others.

There are a number of contributing factors to a deflationary “outcome”. Two key aspects for Future Watch is “over-indebtedness” and “structural change”. In support of the first aspect, Irving “permanent plateau” Fisher, Professor of Yale University, an optimism in 1929, who did not see the coming correction, “examined the depressions of 1837, 1873 and 1929, identifying a number of common factors, but he found these played a subordinate role compared with two dominant factors, namely over-indebtedness to start with, and deflation following soon after” (Max Walsh, Inflation: No joy, only depression, SMH, January 30, 1992, p.23). It has taken a… Read more »
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