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Wednesday, September 30, 2009

What is Inflation and Deflation, and what wins?

After doing this blog for over a year, it has been interesting to me to see how my own viewpoint changes on what is the "big issue" the US faces. By correctly identifying the US's most major risk, the idea is, you can minimize risk by recognizing and reacting to the US financial landscape changing.

What everything boils down to is US Government credibility. And US government credibility is reflected in the valuation of US dollars and interest rates foreign entities are willing to lend money to the USA.

Let me explain how I can make such a bold statement. The US has many "priorities" it is trying to address, but the bottom line is the US needs financing to operate, just like any government, corporation, or person. If the US citizen profile resembled Japan, the US could finance any issues using their own people's savings as collateral.

But the US is a debtor nation, with about 12 trillion in outstanding debt, trillions more in "implicit" debt from the US backing other companies, and yet over 60 trillion more with promises to pay Social Security or Medicaide benefits. With GDP at 13-15 trillion, the US debt has serious consequences.

The most serious is, at some point of debt, the US creditors will demand more interest to lend to finance all the spending.

With large borrowing, and spending, combined with the Federal Reserve and US Treasury creating "large amounts of money out of thin air", people are concerned how will this change the value of money.

There are two camps, people for an INFLATION result and those with a DEFLATION result. Some people go as far as to see the USD total collapse, and replaced with a new currency.

A reader, Ryan Swan, gave me yet another useful link from a podcast that is running a great series on inflation & Deflation arguments. I am in the middle of listening to this series, and plan to post a series of blog entries to explain my thoughts.

In the mean time, you can listen to this series on the blog site called "Financial Sense Newshour"m and start from September 5th, and listen to current. For those who use itunes, you can subscribe at Financial Sense Newshour itunes podcast.

I'll elaborate more on inflation, deflation in future posts

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