Saturday, October 25, 2008

Won't This All Be Inflationary?

It's a popular notion when the financial winds are blowing unfavorably:

Money is being printed uncontrollably ... inflation is the only option ... fiat currencies are doomed.

The thing is, if you're buying into this idea, you're mostly perpetuating a misconception. Actually, inflation isn't as simple and certain as it's cracked up to be.

Until the global economy recently got tossed on its rear end, prices were rising in most every part of the world. The focus, of course, was on the cost of energy, food and various other raw materials. Central banks in a position to stand firm on monetary policy did so at all costs. Inflation was the real threat.

But did that idea get turned around in the blink of an eye or what?

Prices for natural resources have collapsed and continue lower still. Economies, developed and emerging, are feeling the pain of a U.S.-led slowdown. Global capital flow is shifting direction and composition. In other words, money is escaping risky assets and making a beeline to safer U.S.-dollar based assets and cash.

The majority is starting to agree that deflationary forces are becoming strong. And at times when recession spans much of the globe, any upward pressure on prices nearly vanishes.

But even those joining the deflation camp now have no idea what to expect in the future. They see all the money being pumped into the system and feel as though that seals the deal on a nasty wave of inflation not far down the road.

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