Inflation or Deflation in the US?

A few weeks ago, I mentioned in passing to my father-in-law that I was worried that inflation would punish the savers in the US. He replied that economists are more worried about deflation right now.

After having read and thought about it, I think the answer is the US is going to be: inflation. The rest of the world, may go through deflation.

There are two factors at work. Globally, I think deflation is a concern - especially as the economic downturn forces reduced consumption as well as a drastic change in consumption patterns. For instance, it is safe to say that the price of SUVs will go down drastically :-). So will the price of large houses.

Within the US, however, there is the looming chance of inflation for imported goods. What I tell my father-in-law (and others) is:

In the US, I is for imported, and I is for inflation. D is for domestic and D is for deflation.

In other words, prices of imported goods will go up drastically (including oil), and prices of domestic goods (including real-estate) will deflate.

Inflation will happen simply because the US is printing dollars. In fact, it has been doing so for quite some time - for more than 15-20 years, and this is what I have previously called the great deception. The savers and retirees in the US have been penalized unfairly with this hidden inflation that has typically run in the range of 7%, and which is not captured in the CPI. The only reason the US population hasn't noticed it yet is because of the increased value of their stock portfolios and later the increased value of their real-estate.

But this deception is now coming to an end.

And when it does, imported goods like oil, automobiles and other imported goods will become expensive. To pay for basic necessities like oil, the US population will be forced to liquidate assets that are higher up the value chain. Things higher up the value chain (software, large houses, vacation homes, etc) will become cheaper as the Americans will liquidate those to pay for basic necessities.

At the same time, this reduced US consumption and deleveraging will force deflation in all export-oriented economies (China included).

So how do you make money in this scenario? That is the topic of another post.