I feel we are entering deflation first, and later it could trigger massive inflation.
Why currently deflation?
Normally in a closed world, product prices go up when the costs of raw materials to produce them and of labour which converts them into a marketable product (productivity costs) go up. So if these two decrease, then there should be real deflation.
- What we have seen for so many years is thatraw materials, clothes, shoes, food are coming from all over the world – especially from China – and thus in real terms prices have gone down for those items. The reason – globalisation.
- Secondly, oil etc. prices have gone south, which is one large cost chunk in industry production.
- Technology is bringing in more and more automation, so we are able to produce things the world needs at a lower cost.
- All over the world, labour takes place at those production points where it is cheaper than in the rest of the developed world – so prices are going down for world products.
- The prices of many products, especially electronic products which are coming into every part of our day-to-day life, are decreasing rapidly.
- The internet is leading to price comparison, and thus the lower price wins, as you are able to find it with ease. This is driving prices down in almost all industries.
So in summary, considering some of the above, the prices should actually go down.
Now the question is, why are we not seeing those decreasing prices?
Some reasons why we are seeing price increases instead of the logical decreases may be the following:
- Governments are taking measures to artificially avoid deflation and keep the inflation, for example with quantitative easing.
- Cartels and others are using their model to increase prices. For example, OPEC countries fix the price of oil, which happens to be a raw material underlying much industrial production.
- We are seeing massive bubbles in prices because of speculation – like we saw with the subprime housing bubble – that could take our eyes off real deflation.
- You see that many people have a larger income than before (as actual costs are down) and they have more money and invest in high-risk assets (with larger loans), buy things that are not necessities, etc – this is a clear indication of deflation.
- Companies are able to produce in lower-cost countries but with their brand images sell at much higher margins. These companies are able to thrive as more people are able to buy their products.
- Terrorism is driving fear and thus global activities are slowing down to artificially drive prices up.
- The value of the dollar is increasing in spite of so much pumping. If there is more and more of something in the market, the price should decline, but here the price is increasing!! – How is that possible? It means that people are betting that undeveloped and emerging economies – rather than the American market – are going to have more problems.
The above artificial forces will see to it that prices are not going down.
Now, assume that none of the violent mechanisms are used but pacific models – then we will have deflation like in a pacific world – Japan, which has had deflation for the last 20-plus years.
- After all this monetary easing, if the price of assets like gold – which is supposed to increase in anticipation of inflation – still goes down, then gold – the trademark of inflation measures – is actually showing deflation.
- Simple essential things in life like vegetable prices are decreasing. (How is that possible?)
- When crashes happen, or any system reset happens, if the price immediately goes down, then you know that the real prices are actually the lower ones (not only attributable to demand but also to the marginal cost of supply).
- Real estate prices are decreasing as soon as you put in some state levers, like tax.
- Worldwide, as mentioned, the underlying cost of production and cost of raw materials are decreasing.
So, if the world is moving towards deflation, then economies cannot sustain themselves (as economy, banking, insurance are all based on one important principle – that prices increase!!! – they will all be out of business if deflation happens).
Nationalism pops up everywhere, state-sponsored terrorism happens, and the world again becomes more and more local rather than global. This would drive massive supply-side countries like China – which can no longer sell into the world – to crash.
We see a nationalised (regionalised) world. Companies and products based in their local economies rise in value, as they will be able to sell more with the emotions of their respective countries. Global economic powers struggle, at least until they adapt their models. A lot of M&As will happen, where global firms sell to local firms and roll back their global aspirations. Prices start to increase again … and again we are in an inflation cycle.
So the underlying world says deflation is in place, but on the surface, many actions are happening that are not letting the world fall into deflation. So there is a huge tussle. So the question is, which direction will the world move in?
I believe, unfortunately, there will be war, cyber-terrorism, nationalism, and new models of extreme terrorism. But to the question of if we are in a normal market-driven world, will this happen – I doubt not.
A lot of my friends ask how to invest now. As an investor – buy bitcoins, have some gold in case some large unwanted events start to unravel – as that will happen – go and get some real, real assets that you know are not going to drop in prices because they are definitely needed, like water. If you have some money, go and buy real estate in big cities, as unemployment will shoot up, and buy agricultural lands at a reasonable price – not at inflated prices. Let me also say, if you are on the enjoying side of the price increase, take the profit, and go and enjoy the world and get experience of the world. That is something you are going to always have in your heart and memory as the biggest asset. But do see that the wind might be blowing for quite long in opposite directions, as artificial forces always believe they can win. To be human is to err (if not in the short term, definitely in the long term), so artificial forces cannot have their way all the time, as the natural way takes over in the long term.
Let us see our world in-depth and not be carried away from what we see on the surface – and decide with a decider’s mind how we will go about our world.