Inflation? Deflation? Nobody knows for sure

Inflation as the most likely outcome

'The changing value of money' by Ray Dalio is here. It's an abbreviated version of Principles for Navigating Big Debt Crises. In short, he explains, using history, that it's likely that the U.S. will print money and devalue the currency to get out of its increasing debt. He explains:

While people tend to think that a currency is pretty much a permanent thing and believe that “cash” is the safe asset to hold, that’s not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens.  

There are four levers that policy makers can pull to bring debt and debt-service levels down relative to the income and cash-flow levels that are required to service one’s debts:

  • Austerity (spending less)

  • Debt defaults and restructurings

  • Transfers of money and credit from those who have more than they need to those who have less than they need (e.g., raise taxes)

  • Printing money and devaluing it

Austerity is deflationary and doesn’t last long because it’s too painful. Debt defaults and restructurings are also deflationary and painful because the debts that are wiped out or reduced in value are someone’s assets; as a result, defaults and restructurings are painful for both the debtor who goes broke and has their assets taken away and for the creditor who loses the wealth arising from having to write down the debt. Transfers of money and credit from those who have more than they need to those who have less than they need (e.g., raising taxes to redistribute wealth) is politically challenging but more tolerable than the first two ways and is typically part of the resolution.  In comparison to the others, printing money is the most expedient, least well-understood, and most common big way of restructuring debts. In fact, it seems good rather than bad to most people because it helps to relieve debt squeezes, it’s tough to identify any harmed parties that the wealth was taken away from to provide this financial wealth (though they are the holders of money and debt assets), and in most cases it causes assets to go up in the depreciating currency that people use to measure their wealth in so that it appears that people are getting richer.  

If you need more detail on inflation, and who doesn't, I highly recommend this paper by Paul Tudor Jones on the Macro Outlook. He takes us through the analytical argument of why inflation is likely and what you can do about it.

Deflation as the bigger risk

What do the economists think? Some business commentators have been predicting inflation every year since the great recession based on the same exact logic. Inflation is a possibility, but deflation is the bigger risk (look at housing prices, oil prices, etc..)."

How do we relieve this debt burden? His answer:
Some governments have been running high debt burdens continuously for decades and have failed to have inflation even though they've tried (see for example Japan). Modern central banks in developed countries have made very credible commitments to raise interest rates if inflation occurs. This has kept the price level fairly stable. I think the null hypothesis should be that we won't have excessive inflation (above the stated goal of 2% - 3%). There is a chance of higher inflation which may be worth hedging, but how one could make a confident prediction about high or hyperinflation given the past 30 years of central banking, I do not know. I think the biggest risk is a replacement of the Fed by political cronies which could cause inflation. Thankfully that has not yet happened.

Chamath is no economist but he also seems to think the bigger risk is deflation. "Palihapitiya said that the Fed's actions will only exacerbate the deflationary trend that is caused by technology companies who have trained consumers to save and get more for less in terms of technology innovation"

Katelyn Donnelly