I have been thinking lately (go figure), and I have been trying to understand the whole inflation/deflation debate. My question is below.
Almost everywhere I look I see comments that all the money printing by the US Federal Reserve will lead to inflation. Despite tripling their balance sheet inflation hasn't shown up at all. The data actually points to slowing inflation.
Are people making a flawed assumption that the money printing at the Fed will lead to inflation?
That brings me to my second point, it appears that we are more likely headed toward deflation instead of inflation. That seems at odds with conventional wisdom, but the Japanese experience of the 1990's comes to mind. Add to this the fact that Fairfax Financial has some derivatives bets on deflation, they must feel deflation is a higher probability.
What I find interesting is that people automatically link money printing to inflation, but is that a flawed assumption? Don't get me wrong, I do believe it will have long term ramifications but in the short term we see some fairly astute investors (at Fairfax) betting the other way. What gives? Is the huge amount of debt in the system going to lead us toward deflation?
I have some ideas on the subject but would like to see others think about this. You can comment, anonymous comments will be allowed, or you can send me an email.
Disclosure: Long FFH