Inflation vs Deflation topic is becoming mainstream again. Millions of people are locked down and jobless and are trying to make sense what comes next after trillions of new đź’µ were đź–¨ last months to stimulate the economy.

There are 3 camps according to my observation.

More đź’° leads to inflation. We will face high inflation very soon.

First deflation due to crisis, then inflation.

Long term deflation. If we get inflation that will be short term event.

These 3 narratives are quite simple (and wrong?). Let me share a few ideas that are interconnected in this complex economic/monetary matter.

  • Inflation is very context specific. Consumer profiles are very different and different people experience different price dynamics. One may face inflation, while the other may face deflation. Let’s face it, CPI is worthless.

  • Generally we live in a deflationary world. We become more efficient and efficiency leads to abundance and abundance leads to lower prices. The trivial example is phone calls. Another one is IKEA furniture. Another one is travel. Hello, $10 flights. The list goes on and on. Just wait until we start 3D print houses and bring the cost of a decent house to $20-30k.

  • Money printing is reactive and not pro-active. This is abstract but very important. Central banks print money because liquidity has dried up and there are many holes to fill in the system. So money is usually printed in large quantities when money is absent in the system (hoarding like toilet paper in crisis).

  • Printing dollars and any other currency is two different universes. The world runs on dollars. The system is called the Eurodollar. For example turkish companies have large amounts of dollar debt and deposits. Not liras. Same is true for Latin America, Asia, Africa and the Middle East. If you shop from Alibaba, prices are in dollars. With ever expanding world trade and economy, the world needs larger amounts of dollars generally. That is not true for other currencies. The dollar is special, it is world reserve currency.

  • Printing money is not giving away money to the masses to spend. When the central banks print money, that money flow is quite complex. They are not handing money to people to spend. It ends up in banks’ reserves and they do the main distribution. Unless they don’t want to. And that happens a lot of times. So money printed ≠ money in the economy ≠ immediate inflation.

  • Money velocity matters. Money quantity is important but velocity is equally so. If I have more money than last year but I don’t spend it as I feel insecure about the future, money does not flow through the economy and no inflation happens. Velocity is in a long term down trend.

  • Cantillon effect. New money hits some parts of the economy and some people first. Like banks and bankers. So the first line people benefit more from it and the first line assets feel the inflation more. Good example here is financial assets as stock market. SP500 measured in dollars goes up and measured in gold is flat. So people see stock market appreciation (as SP500 is measured in dollars) but it is rather new money inflation hitting the SP500. That’s because the route to financial assets for new money is much shorter than the route to the real economy and thus financial assets feel the new money inflation. The real economy does not. Another good example is real estate in financial hubs as New York, London, Zurich. It is ballooning. Why? People living in these locations benefit more from newly created money as they are close to the financial markets that do the distribution. Consequently they bid up the prices.

  • Helicopter money. Apart from money printing in the traditional sense, governments experiment with new form of “printing”, direct money distributions to the general public. That is rather new and no one knows the effects. If controlled, it may be ok, if not, it may cause huge inflation spikes. My issue with that is that it is politically very convenient to continue the practice. After a few distributions, how do you stop. Especially if elections are in the pipeline.

Too many bullet points, let’s stop here. The point that I am trying to make is that this topic is quite complex and one should not fall for simplistic explanations. However, I have tried to draw for myself a few conclusions that I hope you find useful:

  • stock market is a little more than P/E fundamentals game. It feels the effect of newly created money early and appreciates. Part of the risk is off and that’s why we see elevated valuations. This will remain so, system is designed this way.

  • Dollar is not depreciating anytime soon against the other fiat currencies. Printing hurts it but other fiat currencies are way worse. No alternative for now.

  • Good quality real estate will probably continue to go up in value. A very natural “parking” for big (and easy) đź’° is real estate. Premium real estate. New money beneficiaries will continue to choose that. Investing is such is good idea.

  • Inequality among people will get worse. Much worse. Cantillon effect from above. This bends the society and causes anger. It is possible we face a major disruption event (revolt?, war?, social unrest?) that changes the system radically (socialism in US/Europe?, dictators coming to power?). In such case it is good idea to have a small insurance in the form of gold/Bitcoin.

Thanks for reading!