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Inflation Or Deflation? BOTH

George Washington’s Blog [1]
Saturday, Oct 18, 2008

I have previously discussed [2] the debate between inflation and deflation. There are good arguments on both sides.

But there are strong arguments that we will experience both inflation and deflation.

How is that possible?

Inflation Lags Money Supply

Inflation does not occur simultaneously with the money supply is increased. There is always a lag time [3] between printing more money and inflation.
So a lot of people believe we will get hit first with deflation, and then – after some lag time – inflation. Even Mike Shedlock – one of the leading forecasters of deflation – thinks [4] there might be inflation coming down the road after a period of deflation.

Some Prices Will Go UP, Others DOWN

Some people think that some prices will go up at the same time that others go down.

For example, Dominic Frisby writes [5]:

Are we going to see rising prices or falling prices? Of course, it depends on the asset class – and in what currency you are measuring.
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[6]

Falling prices in assets associated with debt – houses and financial stocks – and rising prices in things which you buy with cash – food, energy and some imported goods.

Adam Hamilton of Zeal LLC agrees [7]:

Anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. Conversely, anything not typically ‘paid for’ with debt, including groceries and general living expenses, is almost certain to rise in the coming years. We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes.

So we may very well experience both inflation and deflation.