John Mauldin provides some insight into the muddy economic forces that dominate the financial arena in 2009. Lessons from the past do not fit perfectly, so we must listen to wise and objective people to give us some perspective in investing our retirement money. Excerpts below.
Link: The Elements of Deflation - John Mauldin’s Thoughts from the Frontline
Deflation is a major economic game changer…. We face the deflation of the Depression era, and central bankers of the world are united in opposition…. If we don’t have a problem with inflation in the future, we are going to have far worse problems to deal with.
Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. That is, if the central bank prints too much money, inflation will ensue. And that is true, up to a point. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal. The pieces of the puzzle can change shape. When the elements of deflation combine in the right order, the central bank can print a boatload of money without bringing about inflation. And we may now be watching that combination come about.
Avoid Big Losses!
If you lose 50%, you must gain 100% to get back to even!
However, if you lose 20%, you must only gain 25% to recover.
Prevent Big Losses eBookFor instance, inflation always seems to be accompanied by higher wages. That makes sense, as workers want more to justify their labor if prices are rising. But today we have wages dropping over time. Yes, even though wages went up this month by 0.3%, it was all due to a one-time increase in the minimum wage. Without that government mandate wages would have been flat or falling. Look for wages to fall over the rest of the year. [click to continue…]
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