Hyperinflation vs. Deflation

Last week, there was an article on Mises.org by Vijay Boyapati.  He says that there are two classes of people that operate the state: the political class and the banking class.  He says that the banking class (which includes the Federal Reserve) is in charge of monetary policy in the U.S.

He makes a case that hyperinflation will not happen in the U.S.  He says that the banking class will not let this happen because doing so would be destroying their own system.  I generally agree with this assessment.  At the very least, I don't think that the Fed will intentionally cause hyperinflation.

The author of this article goes further.  Not only does he not see hyperinflation in our future, but he actually sees a controlled deflation.  He makes an interesting point near the end of his piece that it doesn't matter what Bernanke says.  He says that the Fed's institutional structure is more significant.  In many ways, I agree, although I don't think Bernanke's personal views are irrelevant.

Boyapati's prediction of a controlled deflation is contrary to what a lot of other Austrian economists believe.  I tend to be more in the camp of Gary North on this one.  I think we will see high price inflation, certainly in double digits.  We may even see massive price inflation of 20 to 30 percent.  But I think that the Fed will pull back eventually and take a depression over hyperinflation.

Articles like these are very good to consider.  It gives us a different viewpoint from an Austrian perspective.  We need to ask ourselves: what if he is right?  He makes a decent case.  What will this do to our investment portfolio?  This is why I am an advocate of the permanent portfolio that was promoted by Harry Browne.  Although I think high inflation is more likely in the near future, I don't want to bet everything on this scenario.  Boyapati makes a good case for a scenario more like Japan.  While I don't think it is the most likely scenario, it certainly is a possible scenario, and we should be prepared for it.