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[ThatHawaiiGuy]

Great one by ZEAL:

Excerpts:

Just like last time, there is no way that we can constructively discuss inflation and deflation unless we get the definitions out on the table up front to utterly annihilate any ambiguity. For some reason great confusion reigns today regarding the actual precise meanings of these words. Here are the real and true definitions, according to the massive Webster’s unabridged dictionary that keeps my desk from flying away.



Inflation … “A persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.”



Disinflation … “A period or process of slowing the rate of inflation.”



Deflation … “A fall in the general price level or a contraction of credit and available money.”



There are two key points in these true definitions of inflation and deflation that every investor must understand.



First, note the key monetary nature of inflation and deflation. Both of these macro economy-wide forces are the result of changes in the underlying money supply relative to the available pool of goods and services on which to spend the money. If the money supply grows at a substantially different rate than the US economy, the inevitable result is inflation or deflation.



Second, inflation and deflation are economy-wide forces affecting general price levels. Rising or falling prices in particular narrow sectors of the economy often have absolutely nothing to do with inflation or deflation. Energy prices rising alone in isolation often have nothing to do with inflation. Conversely computer equipment prices falling alone in isolation have nothing to do with deflation. Inflation and deflation are only relevant across economy-wide general price levels.

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Before 1933 was the Age of Gold. Back then a dollar your grandfather saved in the early 1800s would buy the same amount of goods and services as a dollar you saved in the early 1900s! Can you imagine living in an environment where housing prices never skyrocketed, where grocery prices were always constant, where transportation and energy prices never rose, and where the value of money was as solid as the gold that fully backed it? Compared to today’s tragic environment where the prices of life’s necessities relentlessly rise every year and impoverish millions, the Age of Gold was financial paradise!

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Franklin Roosevelt was without a doubt the worst president in America’s history. After destroying the solid golden foundation of the US dollar he built the immoral foundations of the modern Welfare State which steals 50% of the income of the productive today to subsidize the lazy and unproductive in order to bribe them for votes. Almost all of the huge financial and debt problems America faces today would have never happened if Franklin Roosevelt hadn’t betrayed the very US Constitution that he swore to protect. May history curse him and his blighted memory forever.



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Since the end of 1998, the US Gross Domestic Product, or the total pool of available goods and services produced in the entire US economy, has grown by 17.5%. This is impressive in light of the immense financial pain felt in the States since 2000. But in comparison, over the same short period M3 has rocketed up by 46.0% and MZM by 59.8%! Money supply growth in the US, by the Fed’s own measurements, is currently outstripping US economic growth by 2.6 to 3.4 times! As relatively more money chases after relatively fewer goods and services, how can general price levels do anything but rise?

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So when bureaucratic Fed or government types like Greenspan ignore true monetary data and constantly publicly proclaim they are “fighting the threat of deflation”, odds are they are just stage-managing bond-market expectations. The sleight of hand is designed to draw the huge bond markets’ attention away from the real monetary growth that will lead to inflation and instead refocus it on the manufactured threat of falling general price levels. Unless someone nukes the Fed, it is hard to imagine general prices ever really falling in the States under this sad fiat-paper regime with which we have been saddled by the Keynesian socialists.



The long rates matter so much to the government and Fed because the only thing holding back the necessary Great Bear bust in the States is the mammoth wave of mortgage refinancings by American consumers. With general debt levels so high, stock-market valuations so extreme, and the economic situation so dire, any disruption of so-called “equity extraction”, which is really just digging deeper into debt using houses as collateral, will lead to much lower consumer spending in the States. Since businesses are not investing and their excess capacity remains so high from the bubble years, if consumers in the US substantially slow their spending a very long recession or Depression is virtually assured.



Higher long rates, the natural consequence of monetary inflation, are the greatest threat to the mortgage-refi boom in the US and hence the entire fragile basis for today’s consumer-driven US economic “recovery”. Our final graph shows the Long Treasury rates, the 30y mortgage rates, and the ballooning money supplies tossed in for good measure.

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While general deflation was possible in the early 1930s with a Gold Standard severely limiting monetary growth, it is all but impossible now in the Age of Fiat Paper when central bankers can print unlimited amounts of inherently worthless fiat currency which inevitably leads to steep rises in general price levels.



So what’s an investor to do?



Inflationary environments marked by rising long rates decimate bond portfolios and lead to horrible bear markets in equities. The US stock markets essentially traded sideways to lower for a decade in the 1970s until the early 1980s, the very inflationary time marked in the graphs above. Inflationary price rises spawned by fiat monetary excess are bad for all intangible paper assets, not a good omen for stocks or bonds.



The ultimate financial asset to own in times of excessive monetary growth and hence widespread inflation is gold.

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http://www.zealllc.com/2003/infdef2.htm