Not sure how I always seem to write a post without getting to the real point but I do it all the time none the less. What I am discussing here is inflation versus deflation and by doing so trying to make a point about how these dynamics function on the international stage.

One of the truisms about deflation that is understood by all investors is that to survive a period of falling prices in order to thrive you need money (and lots of it). Cash is king when prices begin to spiral down, labour goes on the discount block due to a huge and growing surplus and business competitors are weakened as a result bringing even well known brands to the market for a fraction of prior worth.

Only the strong survive. The rest bankrupt or get broken up and sold off piecemeal or acquired whole by the bigger fish. So we all know that if deflation is truly the risk we are facing on a macro scale (and this should be obvious by the demographics of most Western nations) that it is imperative you keep your cash intact and ready to be deployed when the opportunities arise.

Grocery store inflation looks like a lightweight issue compared with the macro of Chinese GDP continuing to fall or Europe living through a period of economic paralysis with unemployment already at depression era levels in many countries.

Ironically enough we are in fact experiencing rising inflation on the one hand for some of the reasons I mentioned in the previous post (dollars flowing back to the US) and yet this is happening against a backdrop of demographically induced deflationary trends that are certain to weigh on consumption and employment for many years to come.

It is a puzzle for most but essentially means out incomes and standard of living will be getting squeezed from both ends as jobs become scarcer, assets like real estate do not perform except with intervention and prices for imported consumption goods actually rise due to energy costs, commodity inputs and labour rate inflation abroad.

Good grief, does it get any worse?

At the moment we are living in a period that has not decisively confirmed that we are either going to deflate and see a cleansing of the past misallocation of capital or if we will suffer high inflation absent genuine demand for goods and services.

The case for both inflation and deflation are compelling. A winner has not yet been declared.

The collapse of real estate itself in the US did not fully bring on the corrective period that is ordinarily associated with such catastrophic events as the economic crisis we were faced with. That is, frequent bank closures, debt resolution at the state level through bond failures or even a reconciliation of personal indebtedness that usually creates the necessary circumstances for the next period of growth.

Instead, as we know, consumer debt remains elevated all these years later despite the tremendous losses on the asset side of the family balance sheet and student loan debt is at near epic levels against a backdrop of national savings rates that are again in decline.

Pushing the consumption economy to perform in this environment is risky. It means the limited resources that might have become available for the next period of growth are instead squandered on imports which only serves to enrich our competitors while depriving us of the capital energy needed to rebuild.

But we already know all that. It is not news and the huge trade imbalances have been discussed at length for many years now as have the poor levels of savings due to abysmal rates on offer. The thing is we have never yet arrived at the moment where it actually began to matter in a practical sense but it does seem to me that day may now be coming.

So getting back to the idea of being prepared for the end of the commodity boom, the advent of “tapering” and continued deflation expectations in some of the biggest economies on earth, it must surely have occurred to most here who actually has the cash on hand to make the most of the coming opportunity.

That would be the Chinese of course and their fat treasury of Euros and Dollars.

In my household we will be investing in the fire-sale that now exists in resources in the coming months. More particularly the equities on sale in Uranium, Platinum, Silver, Gold, Copper and others. It is foolish to ignore the upside that lies ahead in the coming decades as global populations increase by many millions every year. This is obviously a long term strategic play though with the future still looking so uncertain.

But is one household so different than the interests of a whole nation? I don’t think so.

From that perspective we will watch in interest as the hoard of US dollars held by China gets deployed more and more during the asset deflation that I believe is still ahead in many countries.

Certainly a trend is now in place where many commodities are in decline already (or have been for over a year) and this is most apparent in the risks posed by Europe not recovering to stimulate the worlds productive capacity combined with the worries that China’s overinvestment in capital infrastructure may finally be hitting the wall.

Just how much further they can push that model before it goes terminal and implodes their financial sector is unknown but the unprecedented misallocation of wealth has to date shown no signs of slowing (which suggests to me that when it finally fails the results will be nothing less than epic).

So we have a problem brewing where the lack of genuine demand in the West as the population ages is materializing as massive credit expansion in Asia to keep all the balls in the air and hide the cracks that are showing from consumption declines overseas.

The consumer here meanwhile is clearly spent out and their resources have been drained. Across the seas manufacturing is slowing and inflation due primarily to credit issues and bad policy are rising. We all know something will give eventually. I happen to think the fat reserves held by some countries will be deployed sooner than later if we actually tip into a global deflation though. That is where the rubber meets the road in the big scheme of things and will determine the winners and losers over the coming decades as resource ownership shifts from one country to another.

Remember all that cash? The chance to make it work most beneficially for the holders will come as all economies are in decline. That in itself is an unprecedented development even considering the Great Depression which was not a truly global event.

Anyway….an unfinished thought. Perhaps to be completed another day….. I am tired out now and heading to bed.

You hit the nail on the head! This is what I have been realizing as I further my research and look at what is happening – INTERNATIONAL MONEY FLOW. We live in an age where money can get transferred instantly from a keyboard, smartphone, or ipad and internationalization of markets has never been better. This to me is why we are not seeing the results of all the called for “economic models” playing out because of the international demand for dollars. The number one export of the U.S. is inflation.

BIRD…….THAT is AWESONE….I found something you enjoyed………!