I would like to try this inflation / deflation debate one more time and see if I can make both sides happy. Silverharp and I were discussing this on the forum and when both sides made their point with clarity, it seemed to me our thinking was quite close; the difference was more in terminology and timing.

I’ll start off with one analogy then skip to another and finish with the first.

Bobby Orr was once asked how he always seemed to be in the right place at the right time as a hockey player. His answer was, in effect, I skated, not to where the puck was, but to where the puck was going to be.

Likewise the major driver for any economy in the inflation / deflation debate is what is happening to the money supply. Credit is a form of money but does not have the same effect as money.

Let’s take a look at the 2nd analogy. I want to make a fantastic burnout with my wheel spinning powerhouse of a car. I put the car in reverse and get about 10 mph of rearward momentum. I then drop the car into 1st gear, floor it, and drop the clutch. The car continues to go backwards but the rear wheels are rotating madly in the forward direction desperately clawing for traction which they will eventually get.

Likewise the destruction of credit, the falling of prices, the closing of businesses are all “deflationary effects” caused by the mispricing of supply and demand. Indeed, the car’s momentum is backwards.

Credit was given to those not worthy, prices have dropped because people don’t need to buy the stuff they were purchasing and now recognize the need to tighten their wallets, and businesses will fail as a result; further hurting creditors, a very real deflationary spiral. But remember those rear wheels are spinning violently in the forward direction.

Unless the drive train breaks resulting in total and catastrophic failure, this car is absolutely going to rocket forward. Such a total failure is not beyond possibility; and it would result in a deflationary meltdown.

Barring that calamity, the rearward momentum will continue for a bit longer but eventually the wheels will gain purchase on the tarmac and the vehicle will shoot forward in short order. Everyone who has bet on the deflationary side will be crushed. T-bonds will become certificates of confiscation, the dollar will buy but a shadow of the goods it did in the past. Those typical deflationary positions will be crushed. Those positioned for inflation will do quite well in that they will not lose their investing capital.

In many respects it is a question of timing. If a person is a trader, they are interested in these shorter term fluctuations, so be it. As an investor, and one who feels total collapse will be averted for a few more years; I want to skate to where the puck is going to be, not to where it is.

Fortunately precious metals and their derivatives, the miners, do well in either environment.

P.