Inflation or Deflation? What the All-star Analysts Are Predicting

The debate over inflation versus deflation in the U.S. has been relatively heated in the past few years. Given the harsh recession suffered in 2008 and our ever-growing pile of debt it has been difficult to get analysts to agree on one phenomenon over the other. Deflation is a much more rare occurrence than inflation, but can often have a heavier impact like it did on the Japanese economy. Then again, the U.S. is all too familiar with the damages that inflation can leave in its wake if it gets out of control. Below, we outline the predictions of several hot-shot analysts on whether we are gearing up for a deflationary or inflationary environment [for more economic news and analysis subscribe to our free newsletter].

Inflation

A certain amount of inflation is natural, but the following analysts feel that the next few years will see that environment go above and beyond the status quo.

• Bill Gross: In a recent, rather grim article, bond king Bill Gross stated that investors can expect inflation to cut significantly into their returns in the coming years. In fact, he went as far to say that he believes the average return on a nominal basis will fall around 0%. “An investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades” says Gross of inflation. He does not quantify the exact figure that he expects to see, but his argument is instead tailored to the fact that making a real return in the coming years will be difficult in the investing world.
• Peter Schiff: Schiff is well-known for his bold statements on the economy and what he thinks is going to happen in the future, like his prediction of gold hitting $5,000 per ounce. Several years ago he predicted rampant inflation based on the constant money printing by the Fed and our debt levels, which have recently overtaken our overall GDP. He was asked earlier this year if he still feels the same way and stood his ground. He admitted to being a bit premature with his original forecast but maintained that before all is said and done, our debt crisis will have its way in the form of nasty inflation.

Deflation

Deflation is a bit scarier for economies to deal with and while it does not occur nearly as often, some feel that the U.S. may be headed towards that environment [see also What Is Deflation? The Ultimate Beginner’s Guide].

• Paul Krugman: Winner of the Nobel Memorial Prize in Economic Sciences in 2008, Krugman has been one of the biggest names in the Keynesian school. In recent years, he has been a proponent for deflation stating that it “isn’t some distant possibility — it’s already here by some measures, not far off by others”.
• Cullen Roche: Known for his popular website Pragmatic Capitalism, Roche is another that has thrown his hat into the deflation ring. He bases his point off of the fact that people have been predicting hyperinflation in the U.S. for years (deflation is actually linked much more closely with hyperinflation that inflation is). He combats the idea that hyperinflation is on its way and feels that deflation is a bigger possibility than runaway inflation.

As a bonus, it should also be noted that hyperinflation predictions or hints have come from some pretty lofty sources. UBS recently stated that the U.S. and the U.K. are the two biggest risks of hyperinflation in the developed world.

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Disclosure: No positions at time of writing.