Tuesday, November 01, 2011

The house of cards will collapse

If Greece decides to default on its debt in an orderly fashion, or if it simply descends into chaos, it may be the spark that that finally collapses the global financial Ponzi scheme. Or Greece may ultimately agree to the EU's terms, thereby delaying and exacerbating the inevitable pain for a little longer. There are simply too many players involved and too many weak points in the system to know exactly when and where the triggering event will happen, or how the collapse will unfold, (inflation vs. deflation) but the collapse will happen one way or another.

I've made some preparations for both a deflationary spiral and hyperinflation, and beyond that I've resigned myself to the fact that I have little power to affect or predict the final outcome.

1 comment:

Jody Wilson said...

A reader recently asked me in an email if I really thought that a deflationary spiral was possible here in the U.S., pointing out that most experts expect the Federal Reserve to print money indefinitely and thereby cause high inflation. I've copied my answer here:
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Thanks for your kind message.

Inflation or deflation? My answer lies in your email: it all comes down to the Fed. I agree with you that under the present circumstances the Fed is more likely to print our way out of the hole than to let a deflationary collapse happen. I also agree with you that the vast majority of commentators/experts out there expect inflation for the same reason. I should point out here that I'm only interested in the ultimate outcome - the situation that occurs after the whole Ponzi scheme has finished collapsing. If prices rise for the next 12 months, but then eventually fall well below where we are today, then I'll call that a deflationary resolution.

Anyways, one of the reasons I suspect we may not get hyperinflation is exactly because everyone is expecting it. My grand investment philosophy is that, ~90% of the time, prices tend to swing in the opposite direction of what most people are expecting. I'm a contrarian investor. I realize that this conclusion rests on no details, but it's eerie how often this rule of thumb holds true.

The other reason I'm not jumping on the hyperinflation bandwagon is because things really are different than they were just 10 years ago. I think there's a much greater awareness of the macro-economic issues and power players than there used to be, and the Tea Party (more so) and Occupy movement (less so) kind of reflect this. Consider: most of the Republican presidential candidates today either want to audit, downsize, or even get rid of the Federal Reserve! That's a pretty big wildcard in the inflation/deflation question.

So yes, I'm doing what I can to survive either scenario. I have no expectation of profiting in either case, because hyperinflation would ensure that dollars gained are worth less, while in a deflationary spiral it's unlikely that I'll be employed during the worst stages.

Who would have thought we'd be talking like this even 5 years ago?