Soft-Core Deflationism

There are two major schools of thought on what is coming next…and two renegade, home-schools too. There are those who believe we have a recovery…though weak…that will continue and eventually bring the economy back to health. This is the line of the Obama Administration and most mainstream economists.

Then, there are those who think the recovery will not come as planned…and that the feds’ efforts to spur a recovery – along with strong demand from Asia and the emerging markets – will lead to higher levels of inflation, destroying the dollar and bonds. This is what Marc Faber expects. He urges listeners to avoid going too heavily into cash, since it might be the number one victim of inflation. Instead, you’ll do better in stocks and real estate, he says.

A third line of thinking is what Faber calls “hard core deflationism” – typified by Robert Prechter and Gary Shilling. They think the de-leveraging trend will be catastrophic – leading to outright deflation, taking the Dow down below 1,000, for example.

Then, there’s The Daily Reckoning line. You can call it “soft-core deflationism”:

1) There is no recovery; there won’t ever be a recovery
2) The de-leveraging period will be longer and harder than people expect…leading to spells of deflation and double…triple…dipping
3) The feds will fight it with every weapon available
4) However, they will not push the ‘nuclear button’ – wanton, reckless money printing – until the bond market cracks
5) It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation; at least, not soon.
6) The dollar will remain strong. Bonds will go up…for now…
7) The Dow will fall…but not below 1,000…probably not below 5,000

What does that mean for gold? Well, it means gold won’t do spectacularly well. It might decline…say, down to $850 or so.

Eventually, the bull market in gold will resume, however. You can’t keep a good metal down. Just don’t expect it to go up dramatically while the private sector is reducing its debts in an orderly fashion.

Does that mean you should sell your gold? We wouldn’t if we were you. Because something could go very wrong. Another big bank failure. A blow-up in China. It wouldn’t take much to cause a panic. Investors could turn to gold for security.

Or, maybe the feds will panic…and dump dollars from helicopters as Ben Bernanke threatened.

Besides, we could be wrong. Predictions are always difficult to get right. Especially when they’re about the future.

Regards,

Bill Bonner
for The Daily Reckoning

The Daily Reckoning