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Is Deflation Really A Risk Today?


Graham Summers

I’ve been getting a ton of emails asking me the following question: does deflation pose a REAL risk today?

My response is absolutely. Remember, the entire financial system is broken in the US. Until we take our medicine and deal with the hundreds of trillions of bad debts sitting on the banks’ balance sheets, there is ALWAYS the risk of another 2008-type event.

The Federal Reserve has attempted to paper over these issues by offering Wall Street an endless stream of Dollars. But this hasn’t addressed the underlying issues in any way. The banks are still insolvent and the derivatives market is still the primary concern for anyone who works in finance whether they know it or not.

So yes, deflation is and always will be a potential threat that can erupt at any time. However, should deflation even take hold of the markets again, the Fed and other central banks’ responses will GUARANTEE that it is short-lived and that inflation, then hyper-inflation takes over in a short period of time.

Remember, Bernanke has NEVER admitted that he was wrong about anything. The guy literally believes he’s an economic genius who can save the world (thanks Time magazine for buffering his ego). He is 100% positive that his policies are the right policies. So if deflation reared its head again, he would do the same things he’s already done (print money, engage in more QE, etc) only on an even larger, more aggressive scale.

This will destroy the US Dollar and insure that we experienced either severe inflation similar to that of the ’70s or hyper-inflation similar to Weimar. Bernanke’s nearly pushed into the former already and deflation hasn’t been seen in the financial markets in over two years.

So you better believe he’d go all out if deflation poked its head up again. Imagine if a grizzly bear got up and tried to attack you after you already brought it down with repeated gunfire. What would you do? You’d blow its head off and then walk up to the body and shoot it until you ran out of bullets to make sure the thing didn’t get up again.

Bernanke would do the same thing to deflation. He’d throw so much money at it that he’d not only kill it dead, but he’d also kill the US Dollar and send us straight into Zimbabwe-land without even a moment’s pause.

So yes, deflation is a threat. And it will always be. But we might very well not see it again thanks to Bernanke’s actions. And if it does show up again, its presence would be very short-lived.

In the meantime, I want to address some analysis regarding Gold as an investment.

Occasionally I see an article written by some Guru claiming that Gold has no real investment value. They usually use points such as the fact that Gold has no cash flow or you can’t use Gold to buy goods or whatever.

All of this stuff is outright moronic. Sure Gold doesn’t have cash flow… but then again Gold also:

  • Doesn’t engage in accounting fraud.
  • Doesn’t miss quarterly earnings.
  • Isn’t affected by Obama’s health care.
  • Doesn’t lie about its real balance sheets.
  • Doesn’t lose market share due to stupid management practices.
  • Doesn’t perform stupid mergers or acquisitions.
  • Doesn’t waste money on buybacks.
  • Doesn’t lose profit margins to rising commodity costs.
  • Doesn’t go out of business.
  • Doesn’t have custodial risk (if you keep your bullion yourself).
  • Doesn’t pay itself ridiculous salaries and bonuses rather than increasing shareholder returns.
  • Doesn’t require a bailout or stimulus to stay in business.
  • Doesn’t commit insider trading or use Government policies to keep itself a billionaire.
  • Isn’t impacted by a slow down in the economy or consumer spending.

On top of this, when you buy Gold you:

  • Don’t get front-run by High Frequency Trading Programs.
  • Don’t get front-run by its in-house trading team.
  • Aren’t buying something that can be printed/ devalued.
  • Aren’t supporting the Big Banks.

As for the “you can’t buy assets with Gold” argument, this is a stupid double standard. You can’t buy food or anything else with stocks or bonds either. True, right now you can’t buy food or services with Gold. But will it always remain that way? Who knows? Are you NOT supposed to invest in something because you can’t take it to the supermarket?

Bottomline: Gold offers MANY advantages that neither stocks nor bonds can hold a candle to, especially in today’s environment of rampant fraud and corruption.

This is not to say I completely against owning stocks. Some companies are truly incredible investment opportunities. But blanket statements regarding entire asset class based on one or two random rules is simply idiotic. Especially when you’re talking about an asset (ie gold) that has risen over 400% in the last ten years.

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