The vast majority of Americans have at least some level of anxiety over rising prices and inflation. So here at Birch Gold Group, we constantly marvel at those on Wall Street and at the Federal Reserve who somehow think we may soon face DEflation! How out of touch can you be? If rising prices are a symptom of monetary inflation, then deflation and sinking prices would be fantastic, right?
The answer to that question depends on who you ask, of course. And once you understand who benefits and who is hurt by deflation, the motivation behind the voices sounding the alarms makes a lot more sense. Simply follow the money…
The theory is that a low and consistent level of inflation keeps the economy humming, in part because it distorts our time preference. To put it simply, if you know the price for something will go up in the future, you’ll prefer to buy it sooner for less money. In this way, inflation encourages consumption.
Inflation also encourages borrowing because you can buy something today and then pay it back over time with money that is worth progressively less. Your money buys more today, so take advantage of that and spend it! Spend it before you even have it!
For the same reasons inflation encourages borrowing, it discourages saving. MarketWatch demonstrated that point very startlingly a few months ago with this example on buying a car: If the current inflation trajectory holds, in 50 years the median price for a car will be $170,000! What’s the point of saving that kind of money now when it will all be inflated away? All of the lifestyle choices you have to forego now will get you hardly anything in the future! (Unless, of course, you’re saving in gold.)
Now let’s turn our focus to deflation. Who does deflation help?
Deflation has the opposite effect of inflation; it encourages saving. Imagine if the money you had in your checking account and wallet appreciated over time. Appreciated. No investment required. Imagine if your money gained value instead of lost value. Imagine if, instead of cashing in a stock, you waited for your money to “mature” a little more before you made that big purchase.
This scenario would be awful, right? An economic catastrophe, right?
Of course not! That’s no doomsday scenario for you; that would be fantastic! You would still be buying things, but your whole outlook on consumption would change, as it could be much more on your terms. Imagine not having to scramble to get your money into risky Wall Street investments so you could make some gains to keep up with inflation. Imagine if your money itself was an investment! And a solid, safe and steadily appreciating one at that! Imagine not having to stress over vanishing wealth due to periodic market “corrections” or picking the wrong stock or mutual fund. Imagine not being beholden to bad advice from bad brokers and slip-shod advisers.
Which brings us to why Wall Street is really so hell-bent on avoiding deflation and maintaining high inflation.
Consider the entire cottage industry that has sprung up to take advantage of the problems inflation poses for you and your future. If we truly were to go through a period of deflation, what percentage of average Americans – those folks that Wall Street sees as its “bread-and-butter” investors – would vanish over night? How many would simply lose all motivation to gamble with irresponsible bankers and corporations and pull their money out immediately? Then, companies that needed investor funds would have to get it from professional investors, the ones who know what they’re doing and are prepared for risk, not people just trying to retire in a reasonable fashion. Mom and pop have no real passion for the latest IPO, or whether REITs or tech stocks or pharmaceuticals or commodities will do better this year. They just want to put some money by for retirement and not lose their shirt.
Inflation strong-arms everyday people into gambling on Wall Street, and that is one reason Wall Street needs it.
Another reason Wall Street benefits from inflation is that they are the first to have access to the newly-created money the Fed pushes out into the economy, which means that they can use it before the resulting devaluation takes effect. When that money ultimately works its way through the economy, expanding the money supply in circulation, that’s when mom and pop get it. By then, the effects have been felt. Prices have gone up.
Charles Plosser argues that the only reason we haven’t seen a dramatic rise in prices in the wake of Quantitative Easing is that the banks are just using the reserves to shore up balance sheets. They’ve taken all that money in and have just sat on it. But once lending picks up… all hell could break loose.
Meanwhile, we are seeing inflation picking up. And those it hits the hardest are the ones who can least afford it. It’s not just everyday expenses, either; rising costs are creeping into everything. Just for fun, here’s a look at inflation at America’s beloved Disney World.
Do not fear: Deflation is not something we are in any realistic “danger” of facing any time soon. And in fact, if we were, most of us would be better off for it. It’s Wall Street that would lose. So keep these things in mind the next time you hear someone fret about deflation. And remind yourself that the REAL threat is INFLATION. So if you haven’t already, consider adding gold to your portfolio today to blunt your inflation risk. It is still one of the most highly regarded hedges against inflation out there.