Of course, the gold bugs and the deflation folks could both be right, but that takes a somewhat difficult bank shot to be so. And while that may be a terrific subject for a debate, this post is going to stick to the traditional and straightforward views of the two camps. Generally speaking the precious metals guys think that our debt is out of control, inflation is already here and the dollar will collapse even further than it already has. Many, and I do mean many, think this situation is so bad that the dollar risks total destruction. Their inflation argument comes down to two basic points. One is that the government numbers are faulty and that anyone who buys food and gasoline knows they are faulty. And two, the decline of the dollar is a form of inflation, with oil prices being the most used example for this hypothesis. If it weren’t for the dollar problems, this argument goes, oil (and other imported commodities, of course) would have been down precipitously already. It is hard to argue with this core assessment as it is clearly true. But the deflation folks see the very same data and come to a different conclusion:
Right now, the risk of deflation is greater than the risk of explosive inflation. And the probability of continuing to undershoot the inflation target is far greater than the probability of overshooting it. Indeed, the Fed’s own estimates suggest that it expects to continue undershooting the inflation target for at least three more years.
That’s right. Not only are some people worried about deflation, but they think the Fed is being too stingy with their endless QE (quantitative easing) programs! The deflation folks’ argument is a little more murky than the gold bugs, which may help explain why the latter’s views tend to get much more attention. But the deflation argument is, basically, that deflation leads to severe depression as in the 1930’s. So, while their argument’s core may not be as sexy as the gold bugs, their conclusion is just as painful. And they are no less prone to hyperbolic statements either:
With inflation continuing to undershoot the Fed’s inflation target, and millions remaining needlessly unemployed, policy makers need to start acting as if their hair were on fire.
And yes, by “acting” they mean the Fed is not doing nearly enough money printing (to use a simplified term) to rescue the world from outright collapse. As in any good argument, it is easy to see where both sides are coming from. However, in this case, if either of them are correct it’s horrible news for the average citizen. That leaves those of us rooting against both outcomes to put our faith in the Fed and trust they know what they are doing and their predictions are right. Oh, jeez…