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QUESTION: Hi Martin,

Ok I get the point.  Massive deflation is what awaits us.  But how do you reconcile massive deflation with rises in assets prices?  Shouldn’t it be a decline as people hoard wealth and velocity declines even further?


ANSWER: It is the same as in hyperinflation. If the currency collapses in confidence, people hoard wealth in tangible assets. You have to dissect the economy very carefully. This is NEVER a one size fits all dimension. Follow the thought process and do not listen to the promoters. Reason it out for yourself. If government is broke and they are raising taxes on everything possible, what would you do? I can tell you if Obama raised the income tax to 80%, I retire and go to the beach. I will not work like a slave for him. People stop investing and hoard wealth. That can be cash, commodities, and real estate. If there is a risk of invasion and war, then real estate is out.

There is asset-inflation right now BECAUSE people are getting out of banks. This is still not a speculative bubble. The stock brokers I know say their retail clients are not in like before. The high flying stocks are down but the quality is rising.

Deflation comes from rising taxes that creates cost-push inflation, not the typical boom you get with demand-inflation when everyone is buying like crazy. Deflation also emerges when there are pension defaults like in Detroit. We are also seeing this hit the elderly because interest rates are so low they cannot rely upon savings. At Xmas time I was stunned by all the elderly working behind counters at stores – not 18 year-olds.

This is not just inflation everything up and deflation everything down. Open your eyes and smell the roses before they slam the lid shut. Pay attention to the different components within the economy. It is never the same combination all the time.

When people fear government and banks, they spend less and hoard more.  Follow the money if you want the truth.