“The world is witnessing a climactic battle between deflation and inflation,” Jim Rickards writes in his excellent new book The Death of Money.
“It is just a matter of time” before this battle comes to a head.
At some point, the U.S. economy will experience “an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpected overwhelms the other.”[ad#Google Adsense 336×280-IA]Which one will win?
And what are the potential outcomes?
Rickards goes over each of those in his book…
Inflation is the easy one to understand…
For the most part, the government creates this one… by “printing” trillions of dollars.
Deflation is less easy to understand…
For starters, we “have no living memory of it.”
The last episode of persistent deflation was in the Great Depression. Rickards calls deflation “the Federal Reserve’s worst nightmare.” For one, deflation “increases the value of government debt, making it harder to repay.”
Because of fear of deflation, the Fed can’t stop its money printing. If it did stop, “deflation would quickly dominate the economy, with disastrous consequences for the national debt, government revenue, and the banking system.”
Which will win – inflation or deflation?
Rickards explains that “the most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation.” The Fed assumes it can later deal with inflation that it might create.
I agree with him. Governments have proven for centuries that – while they might be pretty bad at most things – one thing they’re pretty good at is creating inflation through printing money.
The easy conclusion is that inflation will win… but many times, the easy conclusion isn’t necessarily the right one.
In his book, Rickards builds a strong case for how deflation could win as well.
Whether inflation or deflation wins this battle, Rickards makes a strong case for a higher gold price.
If inflation wins, then it will take more paper dollars to buy an ounce of gold. And if deflation wins, then the price of gold will move higher to break that deflation…
The only way to break deflation is to declare by executive order that gold’s price is, say, $7,000 per ounce… the purpose would be not to enrich gold holders but to reset general price levels. Such moves may seem unlikely, but they would be effective… there is no other solution when printing money fails.
In my newsletter True Wealth, we own gold in a variety of ways…
Two of my favorite ways are through Royal Gold (RGLD) (whose business model is to drive to the bank and cash royalty checks), and through semi-rare gold coins (because they’re at record-low premiums to their gold meltdown value, but they have more upside than gold if gold takes off).
My money is on inflation winning the battle – ultimately – but I think it could take a few years for the clear winner to emerge. In the meantime, you can build your gold position now, while gold is still at reasonable prices…