In his most recent Gloom Boom & Doom Report Dr. Marc Faber discusses different aspects of the inflation-deflation debate. In interviews over the last year Dr. Faber has warned that inflation will be the end-game, but rarely has he gone into detail on the deflationary aspects of the ecomomy. In his most recent report, he spends quite a bitÂ of time analyzing the near-term potential for deflation and long-term hyperinflation.
If deflationists are right (and they could be right in the near term, in my opinion), then the US government bonds and the dollar will rally, while stocks, commodities, real estate, and lower-quality corporate bonds will tank. But if I am very confident about making one predicition, it is that, if we have further deflation in the immediate future, there will be not one more, but many more stimulus packages and further massive monetisation. So, government debt-to-GDP could easily double within five years. Now, does anyone seriously think that the dollar and government bond prices wouldn’t at some point begin to reflect concerns about the financial condition of the US under these conditions?
source: Marc Faber, Gloom Boom & Doom Report, August 2009, p. 10-11
Dr. Faber points out that deflation is definitely a near-term concern, but as soon as a deflationary spiral occurs, he suggests the stimulus packages involving bailouts and monetization of debt will be rampant. Deflation’s time frame will be very limited:
…if the deflationists are right, it will only be for a limited period of time — in my opinion, a maximum of one year but more likely much less…
So, for those out there waiting for a massive correction / collapse in stocks and commodities, be ready to pull the trigger when it happens, because there won’t be too much time for the markets sitting at the bottom before another “rally” ensues.