Right now we’re just muddling through.

I do fear inflation, which is why I think that commodities will do well. But I fear asset price deflation a lot more right now.

I felt that way too until commodities soared. My thinking was that since we won't allow deflation, the money had to go somewhere – commodities were the last non-bubble asset class. Well, the money flowed to the low point, but the tapped out majority cried uncle. Going forward, it's the 70s without the real estate inflation.

In the 1970s, the U.S. had CPI inflation coupled with stock & bond deflation. An ugly combination for sure. But real estate (and commodities) in the 1970s inflated. So did wages. Real estate inflation not only prevented a credit deflation, it caused a credit inflation. Lenders got paid back, albeit with devalued $.

Today, I just can't see lenders getting their money back absent outright money printing. Way too many bad loans. If things play out as they should, a pile of our ficticious paper wealth will vaporize – stocks, bonds, real estate AND commodities. That said, real cost of living will rise for most. Too many foreigners willing to work for less.

A potential saving grace, if there is one, is that throughout U.S. history, real growth is not dependent upon a bloated financial sector or excessive credit.

Tough times ahead.

True, if commodities rise that is bad for inflation. But, I do think we will see at least moderate commodity inflation for a while even as credit and asset deflation take hold.

Honestly, I really can’t square the two 100% with each other. And, I do fear inflation, which is why I think that commodities will do well. But I fear asset price deflation a lot more right now.

Ed

I’m pretty bullish on commodities long-term myself

That doesn’t seem to square with your deflation thesis (credit destruction). Are you starting to fear inflation?

Nick