Deflation vs. Inflation

The U.S. dollar remains a global reserve currency.

In the world of precious metals investing, there is contentious debate between those who predict deflation versus those who predict inflation or even hyperinflation. In particular, those who predict hyperinflation at times can get very hostile towards those who predict deflation. I will attempt to show that both views are compatible and are two sides of the same coin.

The Argument for Deflation

One of the main arguments for deflation, pushed by investment analyst Harry Dent, is the “demographic cliff” facing most developed economies, which foretells reduced spending and thus contracting economies. Examples of this demographic cliff are Japan and Germany, where the average age is rising and where reproductive rates are low. As the population of seniors in these countries grows, more of the nation’s resources must be dedicated to caring for them. In the United States, 10,000 Baby Boomers retire daily, putting enormous strain on the nation’s budget and the younger labor force.

According to this line of reasoning, spending declines as people retire, given that they tend to have fixed incomes with rising healthcare costs. Generally, people spend most while raising families, since that’s the period of time when incomes are highest and when the incentive to spend is greatest. It is precisely this dynamic that led to the great economic boom in the United States in the decades following World War II, as the population of child-rearing families soared.

The Argument for Inflation

On the other hand, due to the massive expansion of the money supply, other financial analysts, including Peter Schiff and Jim Rickards, argue that severe inflation if not hyperinflation is inevitable due to loss of confidence in paper currencies. Schiff believes that any deflation seen in the U.S. economy is likely temporary while the market fails to recognize the only way out for the government is to inflate its way out of debt if not outright default by refusing to pay it. Rickards, author of “Currency Wars,” believes that central banks will compete with one another to cheapen their currencies primarily to make their sovereign debts less burdensome as well as to stimulate their economies.

Essentially, the inflationists focus on the money printing by central banks — in fact they define inflation as an increase in the money supply — whereas the deflationists look at demographics and other economic signals, such as a drop in commodity prices.

The Middle Ground

Both arguments have merits. There are both forces of deflation as well as inflation acting in concert, as well as relatively new methods of financial engineering by the world’s central banks, such as “quantitative easing” (QE), that amplify both currents. With massive money printing, inflation, at least in pockets of the economy, is inevitable. In the U.S., mass inflation has been evident in real estate, health care, and the cost of higher education in the last couple of decades. However, a significant portion of the printed money has been sitting on bank balance sheets by design, thus preventing disastrous hyperinflation. Because the printed money has in large part not been seen by the common person (“Main Street”), evidenced by the difficulty of small businesses and households in obtaining loans following the economic crisis of 2008, the U.S. dollar has not depreciated much.

Additionally, the U.S. dollar remains the global reserve currency due to turmoil around the world and the lack of competition it faces among other developed and developing nations. Despite a massive expansion of the U.S. money supply, the dollar is likely to remain the global reserve currency for the foreseeable future.


The “slow burn” in the value of the U.S. dollar is likely to continue, as it maintains its reserve currency status. Waves of deflation and inflation will likely continue to plague the U.S. economy and much of the rest of the world, as many nations grapple with aging populations and as central banks continue to experiment with new methods of financial engineering. It is entirely possible that a loss in confidence in paper currencies could happen fairly quickly, given the unprecedented tinkering with a complex yet fragile economic system. It is also possible that the world will be engulfed in horrifying deflation that no amount of financial engineering can prevent. Eventually, a default on global debts is bound to happen, which will likely bring about a new monetary system, one in which gold may play a more central role.

In case of extreme deflation or inflation, owning gold will be beneficial, given its universal recognition as money and a store of value.  Owning gold is also beneficial as a form of insurance during good times in case the system suddenly begins to deteriorate, as has happened innumerable times in history.