Ever since the current economic downturn started a few years ago, there has been a constant debate of whether or not weâ€™re moving into an inflationary environment or deflationary environment. The argument has taken up much of our focus. The reality is that this debate is nothing more than a distraction to a bigger, harsher reality.
The reality is that weâ€™ve increasingly moving towards a complete loss of confidence in the system. By the system, I mean the economy as a whole and the â€œleadersâ€ ability to manage it. The leaders include the politicians and the Federal Reserve. The economic situation is increasingly spiraling out of control â€“ out of the control of the hands that believe the could control it. The examples are not far for us to see.
First, the Federal Reserve has drastically altered its tone with regards to the economy recovery. The Fed has revised its economic expectations lower just in the last 2 months. Bernankeâ€™s ridiculous â€œunusually uncertainâ€ comments recently also reflected a shift from his constant pumping of the recovery for the previous year. Lastly, the Fed moved to restart the quantitative easing efforts â€“ this was a complete admission of failure with regards to the effectiveness of their previous efforts to â€œfixâ€ the economy.
Additionally, you can watch the financial television channels just this past week to see more heated debates and â€œexpertsâ€ fumbling to defend the Keynesian religion in the wake of deteriorating economic data.
Of course, those of us who have doubted the ability of the government to fix the economy all along are not shocked. Those of us who have doubted are the same that have been preparing for whatâ€™s coming next.
Whatâ€™s coming next is a loss of confidence. Getting back to the initial point of this article which is that the inflation/deflation debate is a waste of timeâ€¦ we usually have this argument in the context of investing. What should we invest in if we expect inflation or deflation? Should we own gold if we expect inflation or deflation? The answer is yes. The reason: the coming loss of confidence.
The reality is that we have both deflation and inflation. The incredible credit contraction that is happening in our economy is definitely deflationary. Consumer credit is plunging. To combat this Federal Reserve worst-nightmare, they print extraordinary amounts of money to attempt to stop the collapse. The result of the printing is a rise in speculative assets especially commodities. As the economy continues to worsen over time, we can expect more of the same. More deflationary realities in the economy and more inflationary responses by the Fed. As it becomes more and more clear that it wonâ€™t save us, the public will lose more and more confidence in our leaders â€“ and lose more and more confidence in the dollar. As it becomes apparent that this isnâ€™t your typical business-cycle recession, but still the early innings of an economic depression, you can be sure that the faith of the masses in the system will evaporate.
This loss of confidence is what will propel the price of gold to the moon. There is no greater reason to own gold than the potential for a massive loss of confidence â€“ regardless of deflation or inflation. As more and more people shift their confidence to the shiny yellow metal and away from the slick rhetoric of Bernanke and Obama, gold is going to explode.
Gold, obviously isnâ€™t your only answer, because as the economy collapses, there is great potential for civil unrest. Make sure you are preparing in other areas (not just financial) as sites like this one often encourage.
Donâ€™t get distracted in the constant bantering over things such as inflation vs deflation. Instead focus on the big picture and the incremental steps you can take personally towards self-sustainability and preparedness.