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Wednesday, August 31, 2011

VASKO KOHLMAYER: INFLATION OR DEFLATION: WHAT KIND OF DEPRESSION LAYS AHEAD?

MOSCOW, August 30, 2011 – Most sober economists agree on one thing: The United States is headed for a depression.

Those who hold this view divide into two camps. The first camp says the upcoming depression will be deflationary, the second thinks it will be inflationary.

The question is not merely academic, as it has a direct bearing on how we should prepare for the hard time ahead.

If the forthcoming depression is deflationary, then we should hold on to our dollars, because their purchasing value will increase. To put it another way, money will buy us more things in the future than it does now.

If, on the other hand, the depression turns out to be inflationary, then we should get rid off dollars and buy things that are likely to hold value such as gold or commodities or perhaps other currencies.

In support of the first camp, most depressions tend to be deflationary. This is because prices usually fall as economic activity slows down.


Once we get into a full blown depression, this dynamic may hold across the board. As a result, your dollars would get you more bread, property and other useful things. If this should be the case, hoarding dollars now would be a good idea.

Not all depressions, however, are deflationary, especially not those that are caused by government debt. Such depressions almost invariably end in an inflationary spiral.

Even though the American economy suffers from many problems, debt is by far the greatest among them. The combination of our national debt and liabilities inherent in entitlement programs poses a financial burden which, to put it gently, is unmanageable.

In this respect our situation is analogous to that of Weimar Germany. Following WWI, the German government – like ours – was faced with astronomical liabilities, mostly in the form of war reparations.

The result was the famous hyperinflation during which people went shopping with wheelbarrows full of bank notes. In the end money became so worthless that when you got mugged on the way to the store, the perp would take the wheelbarrow not the notes.

The bottom line is that the US government of our day – like that of the 1920s Germany – is saddled with financial obligations it simply cannot make good upon. When governments face this kind of predicament, a hyper-inflationary depression is almost always the final outcome.

In light of this, holding onto one's gold would seem like a prudent thing to do.

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