NEW YORK (
) -- The markets are torn between polar opposite schools of thought. There are those who believe we are in a period of intense deflation, which will continue for some time, and there are those who believe that inflation is inevitable and, in fact, is already with us as consumers can attest.
The Fed must be in the deflation camp. Why else would they continue to create $85 billion/month of new and unneeded bank reserves? Several recent academic papers have indicated that the major industrial economies of the world, representing more than 70% of the world's GDP, are so indebted (U.S. Private & Public Debt/GDP: 360%, Europe: 450%, UK: 470%, Japan: 500%) that the world has entered into a period of debt disequilibrium and deleveraging. The annals of history indicate that such periods take an average of 20 years to resolve. Because the indebtedness has actually increased since the financial crisis and Great Recession, this deleveraging cycle may be even longer.
The deflationists believe that the world's economies will continue to falter, and that no matter how much QE the Fed provides, it won't translate into economic growth if there is no ability to consume due to excessive debt loads. In this scenario, the price of gold and other precious metals have likely seen their peaks and may fall even further from current levels.
The second camp belongs to those who see inflation, not only potentially in the future, but currently hurting consumers. The CPI, as produced by the BLS, just isn't realistic for most Americans. In the Oct. 12 issue of
, commodity guru Jim Rogers opined, "The price of nearly everything is going up. We have inflation in India, China, Norway, Australia -- everywhere but the U.S. Bureau of Labor Statistics. I'm telling you they're lying."
In some of his recent daily blog posts, economist David Rosenberg (Gluskin-Sheff) indicated that if the rapid increase in home and auto prices over the past year were used directly in the CPI instead of the massaged data that is used, today's CPI would be north of 4% instead of the 1.5% that BLS publishes.
Furthermore, private sector economists who measure inflation, like John Williams of Shadow Government Statistics or Ed Butowsky, producer of the Chapwood Index, all point to real inflation as being much higher than BLS's CPI.
But, besides the actual everyday inflation experience, the final issue in the inflation camp, and the one that I think carries the most weight, is the rapidly approaching freight train of unfunded liabilities of the U.S. federal government. There are monstrous (unspoken) additions each year to those liabilities. Add to these the lack of recognition and inability of government to address these numbers, which are almost too long to write on a page ($85,000,000,000,000 to $120,000,000,000,000). That's $85 trillion to $120 trillion. Just for comparison, the annual GDP of the U.S. is about $16 trillion.
To date, the U.S. government has been able to issue trillions of dollars of debt ($17.5 trillion and growing rapidly) because the dollar is the world's reserve currency and it is used in international transactions that have nothing to do with U.S. economic activity. Unfortunately, today there are now too many dollars in the system, and other world powers are both complaining and seeking alternatives. China now settles more than 12% of its foreign trade in its own currency, versus 3% in 2010. It is likely that foreign powers will soon begin to shun U.S. debt, leaving the Fed the only buyer of the large deficits that clearly lie ahead.
So, which side is correct -- deflation or inflation? Unfortunately, both. There is too much debt, and the pace of economic growth has significantly deteriorated in each decade since the 1980s. Because both sides are correct, the result is "Stagflation," a world of slow or negative economic growth accompanied by rising prices. If this is the case, the price of gold won't stay down for long.
Robert Barone is a partner, economist and portfolio manager at
, an investment advisory firm in Reno, NV.
He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.
Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000. Barone received a Ph.D. in Economics from Georgetown University.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.