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Alchemist,

Here's what I understood from all my readings about deflation:

I have read somewhere that Ben Bernanke has doubled the base money supply in the last few months. i.e., Ben has been printing money - and therefore not borrowing. Theoretically (according to Ben), this should have stoked inflation. Why? Because Ben's theory relies on the fact that an increase in the base money should have increased the credit ! The REAL FACT as per some economists that I have read is that Ben's theory relies on the false assumptions that the additional base money created causes credit. Think of the credit being the DOG and the base money being the TAIL. The TAIL cannot wag the DOG. Instead, it's the other way around ! When really qualified borrowers stop taking new loans and unqualified borrowers are not eligible to borrow at all, there is no further expansion of credit. i.e., The additional base money, printed by Bernanke, has no effect simply because there was no creation of new debt. Debt can no longer expand because the economically is already bursting at its seam with debt. i.e., LEVERAGE = Credit/Money supply is at the extremes and can no longer be sustained.

It may seem counter intuitive. But this financial crisis is exactly why the US dollar is gaining in value. It’s because of the ongoing deflation. i.e., Debt is getting destroyed due to massive deleveraging. Therefore the dollar has become even scarcer. The Fed simply cannot print dollars fast enough to keep up with the destruction. Unless the Fed ends up printing in the range of 20 trillion dollars, deflation cannot be halted until the entire bad debt is forced out of the system. How does this bad debt gets forced out ? By a reduction in asset prices. And if you wonder why 20 trillion ? Well, beyond this, the Fed will have then the ability to create new debt.

Here's a snippet from an article by a gold dealer.

"During periods of deflation - currency and credit contraction - precious metals will fall in absolute terms, but will increase in purchasing power as the economy contracts. In other words, the price of precious metals do not fall as quickly as other goods and services traded in the economy. In fact, as the contraction worsens over time the purchasing power of precious metals actually increases at a faster rate."

So relatively speaking, GOLD should outperform all asset classes, but CASH is still the KING.

Hence my view Gold prices are capable of rising steeply in value in anticipation of the flight to safety. But it will eventually decline in absolute terms when the folks finally realize that this was yet another bubble.

Mind you, what I have written here is based from an US perspective. How the gold prices shape up in an Indian economy that has the least amount of leverage except maybe in Real Estate is anybody's guess.

In Cleveland, OH, there is a mall that is willing to SELL commercial property at the price of $20/sq feet. Is there any place in India that sells a commercial property for under Rs 1000/sq feet?
 
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