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Monday, July 25, 2011

Deflation vs. Inflation

Marc Faber : .... I mean, I think that deflationists, they all have families. They go shopping, their families go shopping, they pay educational cost, they pay healthcare cost, insurance cost and they see the fees on local government services increasing, taxes generally increases. Then I find this hard to believe that they would endorse the concept of deflation. But obviously, they may think that the economy may collapse and that as a result of that, we may have deflation and that, therefore, you should buy long term US government bonds. And my view is, particularly in the deflationist scenario, where you would have like Prechter said the Dow Jones below a thousand. In that scenario, you wouldn’t want to be in US government bonds and in cash for the simple reason that in that scenario, the fiscal deficits -- in other words, spending -- would exceed tax revenues even more than if you were actually optimistic about the economy. Just consider -- if the Dow Jones went below a thousand, what kind of an economic environment would we be in? We would be in a total credit collapse. We would be in a total economic collapse. And we would have a complete corporate profit collapse. And in a corporate profit collapse and in an economic depression, what do you think would happen to tax revenues? They would collapse, as well. And so the revenues of the treasury would decline very meaningfully and the fiscal deficit, which is now running, say, optimistically set at one and a half trillion. If you counted the unfunded liability stats are accruing every year. Probably the fiscal deficit is more like two to two and a half trillion dollars. But let’s say one and a half trillion dollars. If that happens, the Dow Jones below a thousand, corporate profits collapsing and revenues collapsing, then the fiscal deficit for sure would be two to three trillion dollars. And in that environment, the quality of credit of the US -- as was suggested by Moody’s yesterday -- would decline and US government bonds, which I think are already today junk bonds, would go and yield much more than less than three percent of what they’re yielding at the present time.So particularly, in the deflationary scenario, you don’t want to be in government bonds.

- In the financial sense news hour with Jim Puplava

Contrarian Investor Dr.Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

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