Will the world enter into an era of deflation or inflation? This is the key question that will determine what type of investment portfolio will perform well. For the man-in-the-street who does not invest or have little interest in economics, the current global economic situation is of utmost importance to his well-being (economic and social) in the next five years.
Hence, Anthony Boeckh's new book The Great Reflation comes as a very timely read from an expert market economist who was the former editor/publisher of the widely admired Bank Credit Analyst reports. The first chapter of the book summarises well the inflation/deflation conundrum in simple language:
"..Inflation and deflation are both sides of the same coin. The more advanced an inflation, the greater the threat of deflation and debt defaults. In this chapter, we discussed how each bust triggers a political response and the authorities revert back to reflationary stimulus - easy money and fiscal deficits. ...Experience shows that it has taken increasing amounts of money, credit and fiscal deficits to generate each recovery. And then inflation, with a lag, accelerates once again."
Indeed, this is the credit boom and bust cycle we saw with the boom period between 2003-2007 and the bust period 2008-2009. Although the global and US economies have staged some recovery since the fourth quarter of 2009, the recovery was driven largely by (1) fiscal stimulus (2) inventory restocking which languished during the worst of the downturn in production.
Boeckh ends the chapter with these words:
"The Fed could easily tigthen too much too soon or it could do too little too late out of fear of triggering another bust in housing, stock prices and the economy. The reality is that the Fed has little room to maneuver because the underlying structure of the economy and financial system is rotten. The problem is too much debt..Debt got us into the crisis and has not come close to being sufficiently liquidated to avoid another one (crisis)."
