Monday, February 15, 2010

Deflation vs Inflation & The New Inflation Propaganda Machine

I've linked to two articles that appeared this morning, one across the pond that is sensible and one from Paul Krugman's NY Times blog that feels like ghosts from the past. Embedded in this post is a film produced in the 1930's depression that was basically inflation propaganda - an attempt by the government to get people to spend their money and to embrace Inflation.

In the Financial Times article we see the error of decades of forced inflation, in the NY Times article we see a new round of Inflation Propaganda taking root. Paul Krugman is firing the opening salvo in what will likely be an all out assault to convince the American people that inflation should be embraced, not feared. Like my previous post about Richard Koo - the failed economic ideas of the ghosts of our distant past are being embraced and re-introduced so that politicians of all stripes will have politic cover when they allow even greater deficits and inflation. The irony of course is that there is a possibility that neither will happen (deficits and inflation), though given the world's love affair with the Dollar we just might see a stronger Dollar coupled with higher deficits and inflation - a truly odd scenario (which can only last for so long). This is why I tell people that even though I am extremely concerned about investing in stocks I don't discount another boom. P/E ratios are historically high, but we saw that they can go even higher when their is euphoria. Given the housing market's woes, commercial real estate and sovereign default possibilities - this time might not be so easy to climb the wall of worry.

Why we should not fear the spectre of deflation

The Case For Higher Inflation