Confidence is The Problem Not Simply Deflation or Inflation!

By: Julian D. W. Phillips | Fri, Jan 16, 2009
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Analysts always trust figures and rely on them completely. Next they support forecasts backed by numbers too. All of us are vulnerable to reports backed by figures from reputable firms or forecasters. But a glance back over the last 18 months shows just how far off the mark such reports were. When we look at the problems facing the globe, we factor in reports of heavy deflation unfolding, followed by unquantifiable inflation. We receive reports of economic stimulation figures that stagger the imagination, that are bound to turn the globe back to vigorous growth and quickly?

The danger is that we still believe such numbers far too much. Unfortunately the problems facing the financial world presently are human problems that cannot be accurately quantified. Best guesses are what we have. We see deflation being countered by inflation and were it simply a matter of numbers then the problems are containable and even repairable. But it is not a matter of numbers it is unfortunately, a matter of emotion. When you fire or retrench a worker, confidence drops. To raise that confidence to previous levels you need to employ two workers as re-employing the man still leaves uncertainty around.

The world is facing a buckling drop in the level of confidence on so many fronts. Bankers don't trust each other, investors are fearful of further bad news. Financial systems have not been repaired and remain vulnerable. Local and global economies are shrinking and telling us the worst. Currencies are faring badly and we see Capital Controls creeping into several emerging economies now. How can we repair this damage? Bankers can only re-lend money, [under harsher credit criteria in an economically declining environment] reassuring customers that they are easy sources of money, but then businesses must respond. Businesses can only respond if they see sales and sales can only start if there are customers out there to buy. The last long period of growth relied almost totally on vibrant consumer spending and borrowing. So it is the consumer that needs to find his confidence and ability to spend repaired first. If this doesn't happen, then all the efforts to put the global economy back on its feet will come to nothing.

The consumer must see house prices rise again. He must feel secure in his job. He must know that he can borrow without feeling threatened by new falls in asset prices or loss of income to service his debt. His confidence must be made solid for the rest of the financial system to grow again. Right now he doesn't feel that, so what does he do. One consumer we know of in the central south of the U.S.A. is fearful he will lose his job or get a salary cut. He reviewed his situation with his wife and they decided to take an offer on their house, which although was low, left them with a fair amount of capital. They intend moving into rental property and go to house auctions where they believe they can buy a cheap house and renovate it with the cash they have left over. This is wise but does the U.S. economy little good. He must be persuaded to feel secure in his job, keep his house and spend again. This means rising house prices and a liquid, growing economy. Statistics and economic measurements are unable to quantify the consumer for it is a matter of emotional confidence.

This is where inflation can serve a useful role as it allows wages and salaries to rise, debt repayments to be easier and easier. It allows house prices to rise again and for the consumer to want to spend before prices rise again. Inflation gives the illusion of increasing wealth, a needed ingredient now. So inflation is not perceived to be the enemy, deflation is. Inflation looks like a friend at the moment? Politicians and bankers need to watch the consumer and his family and put him right before they can enjoy what they did a mere 18 months ago? Inflation will be an important part of that formula! Yes, undoubtedly, this will debauch the financial systems further and can only be a short-term expedient. But the powers that be are not in a position to reform the financial system without the sacrifice of several deeply valued principles and that they have no intention of doing. Inflation provides so many short-term expedients and is far too attractive to be denied. Perhaps the powers that be, believe that they can conquer inflation quickly?

Thereafter, look forward to a future where huge social costs will be paid as the collateral damage to the path the monetary authorities are following impact each and every one of us. In such an environment how can gold and silver not rise in price. The temptation before governments will be to turn to gold. This could involve taking it away from the individual citizen once again [last seen in the 1930's]. Such an eventuality, is moving from a possibility to a probability.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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