Crossroads: Inflation vs Deflation

As time goes by, I get more and more Bearish on the long-term economy.  First, let me tell you what I know for certain:  We are in a depression, and the worst is yet to come. There is really no doubt about this in anyone's mind who has a clue about economics and a record of predicting market trends correctly.  Years from now, when the history books are written, this decade will be referred to as the darkest, deepest depression our country has ever seen, and there is nothing we can do to stop it at this point. The question is really what type of depression we will face.

In one camp, we have the inflationists, with Peter Schiff being one of the most well known. They say (in a nutshell) that the dollar will continue to plummet to farther and farther lows due to money printing and as a result we will see commodities and precious metals soar in price, dramatically raising the cost of living for the United States as unemployment stays high, taxes are raised.  This could very well cause hyperinflation.  However, in this scenario, since our economy is so weak, stocks would underperform inflation as everyone flocks to commodities to keep their net worth from sinking in value.  Ultimately, the United States would be forced to raise interest rates to stave off inflation but this will slow down the economy even further relative to inflationary pressures.

In the opposite camp, we have the deflationists, with Robert Prechter and his Elliot Wave analysis at the forefront of predictions. This scenario, which I regard as significantly more likely, will be caused by the American people pulling back spending with increasingly pessimistic views of the state and future of our country and economy, sending earnings and the stock market in a downward spiral.  Deflation has already started happening in the past few months, but it is only in its beginning stages. Deflation theory at its core says that this must happen in order to de-lever the decades of debt our country and its people have been building up.

In my opinion, both camps are right and it is only a matter of timing.  I do believe that in the next few years, we will experience severe, unrelenting deflation only to eventually lead to high inflation afterwards.

But make no mistake..... no matter how the scenarios play out, it will be ugly. Really, Really, REALLY ugly.  I have been saying that I believe that less than 1% of the american people really have any idea of how severely bad our economy is going to get in the next 5 or so years.  Very few people in our time have experienced the Great Depression, but most of us have heard stories about it.  Banks failing left and right, people losing their entire net worth... unemployment at 25%.  So what can we expect in this decade??  I believe it will be even worse than the Great Depression for reasons which I will outline in future blogs coming soon. I will lay out survival strategies and what you need to do to protect yourself. For now, I will leave you with one thought until next post. Whatever you believe or don't believe about how bad our economy will get, do NOT, I repeat do NOT underestimate the severity of how bad it can get. It's human nature to do so, as we are all optimists by default but this is not a time to be complacent. Keep these thoughts in the back of your mind, and I'll post back soon with some specific predictions, thoughts, and strategies.

Chris