The game is on! In one corner we have Deflation, pounding his chest and bragging of his recent exploits knocking down home prices and flattening the CPI. In the other corner is Inflation, shrouded under a cape and being coaxed to come back out for the next round by trainer “Helicopter Ben” Bernanke.
A boxing ring is defined by ropes and posts. The ropes of this ring are big banks and investment banks and the shadow banking system of credit default swaps and other derivatives. The ropes are being held up by the posts of government intervention and there are gaps and openings that can easily allow a contestant to get out of the ring and injure the innocent spectators.
Deflation is a powerful force that is driving down values. There is a tendency for this force to be self-sustaining as lower values discourage investment which produces job losses and slows economic activity, causing more job losses and even lower values because people cannot meet their financial obligations and so either assets are sold or they are never purchased in the first place.
Inflation on the other hand has a hidden power of his own. Beneath the cape hides the government, powerful corporate interests aligned with government, and every social welfare special interest and lobbyist known to man along with thousands of others of whom you have never heard. When Inflation enters the ring and begins pounding back at Deflation, his real power will still be hidden back under the cape.
We have seen this fight before. Deflation will land some heavy blows and win a few rounds. But in the end, Inflation will come charging back and throw Deflation out of the ring. Many bystanders will be injured, some fatally, as the effects of the contest spill outside of big banks and breaks small banks and businesses as well as household budgets.
It will not be a pretty contest and how long it will take to play out is unknowable. My guess is that it will take longer than we expect and that there will be some back and forth which may seem to make the final outcome uncertain when in reality it is not.
Eventually, the ability to print money will re-inflate asset values, although it may not be the assets the government would choose. Inflation sometimes lands in the stock market, sometimes in real estate, sometimes in natural resources, and sometimes in commodities or precious metals or collectibles. When the great contest is over, some will be rich and some will be broke. I hope you will not be among the latter.