The Critical Risk of Simultaneous Inflation And Deflation

The comments below are an edited and abridged synopsis of an article by Daniel R. Amerman

The US is experiencing the highest inflation rate in 13 years, and some believe that it faces a future of fast-rising rates. Others believe that inflation will be transitory and will be followed by sustained deflation.

The Critical Risk of Simultaneous Inflation And Deflation | BullionBuzz | Nick's Top Six
Macro photo of tooth wheel mechanism with DEFLATION, INFLATION letters

When we look to history for answers about whether it will be inflation or deflation, one alternative is to say it’s the wrong question. To say that it is inflation versus deflation is simple to understand, but it is also oversimplified. From an investment perspective, you could say that the whole inflation/deflation debate is dangerously oversimplified.

We have seen the combination of elevated asset prices and rising price levels before, in different nations and asset categories. The consistent historical answer is that assets can move differently from the price of money. This means that we can simultaneously have both asset deflation and price inflation. It is a historically normal result, and there is a good argument for it in the current circumstances.

Indeed, to be unable to see the two together, with asset values moving separately from the price of money, is like trying to invest with one eye open, only seeing half of what is happening.

Amerman discusses the current situation and examines a historical case study in how a 70% loss in stock values, a 70% asset deflation, was hidden by high levels of price inflation. A catastrophic destruction in the value of stocks was hidden by a catastrophic destruction in the value of money, and the average long-term investor has no idea this happened. This means that many have no protection for the future, as they are not even aware that the risk exists.

Amerman looks at the effect on sequence of returns risks for investors seeking inflation shields and shows how separating asset inflation and deflation from price inflation and deflation can have life-changing implications for gold investors. He also considers the direct and even controlling implications for real estate investment.

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