Today there is a widely held belief that, given loose monetary policies and continuing high federal deficits, at some point the U.S. economy is likely to experience hyperinflation. Consider this Wall Street Journal article, for example.
Despite a doomsday scenario of hyperinflation — which, no doubt, would have a deleterious impact on the nation’s economy — many prominent economists are predicting the opposite scenario: deflation. According to many economists, a deflationary outcome could be good or bad, depending on what’s driving the deflation — deficient demand or excess supply.
In a new paper, the American Enterprise Institute for Public Policy takes the position that “the monetary cliff — the U.S. potential to slip into a period of negative inflation (deflation) at the end of quantitative easing — is a more threatening precipice than the fiscal cliff the United States faced earlier this year.” The paper goes on to consider the impact of the U.S. “exporting deflation” and thus creating the risk of a worldwide deflationary spiral. Their position is that deflation is mostly bad.
The other view, that deflation driven by excess supply can be a good thing, is the position espoused by economist Gary Shilling in a Bloomberg article published earlier this year. Shilling views the coming years (after a 5- to 7-year period in which the “great deleveraging” takes place) to be much like The Great Deflation period from 1870 until 1898. During that period, U.S. consumer prices dropped by 2.5% a year while GDP rose 4.5% a year. In the same way that the advent of new technologies drove growth in the late 1800s, according to Shilling, today’s new technologies “promise tremendous productivity and economic growth” in the next deflationary period.
No one has a crystal ball as it relates to the issues of inflation and deflation. Equally qualified economists hold opposing views, both in terms of whether we’re headed toward inflation or deflation and, if deflation is predicted, whether it is going to be good or bad. The message to plan advisors who are designing fund lineups and asset allocation overlays would seem to be to not tilt their investment strategies too much one way or the other but, instead, to take more of a middle path given the uncertainty about what the future holds.
Jerry Bramlett writes about investments for NAPA Net the Magazine. He was the founder, president and CEO of The 401(k) Company and the president of BenefitStreet.
