After Mr. Munger’s “Basically, It’s Over” article, I had a hard time deciding where to pick up my blog. I mean, it’s kind of hard to think in the short term when the big picture is so extraordinarily negative. And I do believe that, while Mr. Munger’s narrative won’t come to fruition exactly as he described, the inherent economic problems he has implied will spin off permutations of burst bubbles for probably decades to come.
Finally I made a choice in where to go from here. I’ve decided to visit Bob Prechter’s recent testimony that we are on the verge of huge deflation or a deflationary spiral. I think that when he made his original deflation argument in the 1980’s, there was far more possibility of it actually happening than there is today. What has changed? Greed, of course.
Deflation is a generalized decrease in the price of goods and services in an economy. It is often caused by a drop in the demand for those goods and services, which is what Mr. Prechter keeps expecting to happen any day now, as he has been for decades.
Do I believe this will happen? Absolutely not. I propose that Deflation has recently occurred on a gigantic scale, and most of us never even noticed.
Take technology for instance. Offshoring supposedly reduced the going rate of technical jobs that could be done from remote. Software Engineers in America certainly noticed the effects. But did prices for anything that consumers use go down as a result? Definitely not. Instead it saved companies billions which they in turn paid out in absurd bonuses and dividends (but not severance packages).
The moral of this anecdote is that even if prices do decrease, the American consumer will never notice because those price decreases will pad the pockets of executives and institutional investors at every step of the process of production. We will never again have deflation in this country because the current atmosphere of extreme greed and self-interest will not allow it. There is a certain basic living standard that all of us attempt to maintain whatever the cost, and big business knows that we will.
The result is that all of us will earn less and learn to live at lower and lower levels of survival, but prices will not decrease. That sounds a lot like INFLATION to me.
So the opposite side of the coin is inflation, which many people imagine will wipe out the consumer class in the coming years.
During periods of inflation, prices rise, things get more expensive. Everything that I have to buy for my family has recently gotten a lot more expensive. But the federal government says there hasn’t been any significant inflation. That’s because they lie. They come up with formulas that do not accurately reflect the cost of living that is imposed on average Americans, and they know that they are doing it. They did exactly the same thing with unemployment.
Isn’t America starting to look more and more like China?
I believe we have yet to see the beginnings of inflation. Eventually the federal government is going to have to print money to satisfy our creditors (mostly China, big surprise). As soon as they turn up the printing presses, you and I are going to suffer immeasurably. And it has to happen, there is no way that all of us can work our way out of our nation’s debt. We can’t earn the money so we’ll have to create it instead. Which makes every dollar you and I have saved suddenly worth much less.
What’s the solution? Where there is no REAL solution, American culture and the face of democracy will be forever changed by what is happening now. But there are steps you can take to stretch your dollar as far as possible, depending on what you believe.
If you do believe that we are headed for massive deflation, then your goal should be to save every single dollar that you can get your hands on. Do not spend anything that isn’t absolutely critical to your daily survival. Why? Because in a deflationary environment all of those dollars suddenly become worth A LOT more.
If however you believe that we are going to have massive inflation, your best bet is to buy every single thing you can get your hands on while you can! Push your credit to the point of bursting. Every dollar that you possess when inflation consumes our country will be worth less and less. So buy now and pay for it when your dollar isn’t worth squat. And be sure to not save a single penny, spend it! If you try to invest it, you will surely lose it, both to inflation and tanking asset values.
During times when the markets are healthy, sure you will be able to invest some money. But then what happens? Markets suddenly turn bad for reasons no one can explain (well some can but they’re not talking), and as such, everything else gets crazy as well, such as your job and fuel and grocery costs. Now you are forced to sell your investments for a fraction of what you paid just to make ends meet. This has been the story of my life so far.
Now eventually your interest payments on all your credit will consume you, but that’s the best part of the inflation plan. When you’ve gone completely broke AND lost your job, the government will surely send you a lifeline and you’ll get to keep most of your stuff and live at the expense of others.
Seems like the system has set itself up to reward incompetence and punish the intelligent and careful, doesn’t it? That is exactly what I have been observing, and I expect it will continue through most of the years of my life.
Many people will say that some sort of middle-ground is what will actually happen. But where has the middle ground been during my lifetime? There has been no such thing. I see no reason to believe that there will be.
