Archive for December 22nd, 2010

Inflation or deflation?

Source: Wikipedia, Illustration of the Cineorama balloon simulation, at the 1900 Paris Exposition

Why does a society find it so tough to comprehend whether the future is inflationary or deflationary?

Inflation is when cash loses value and deflation is when cash has all the value. Now what’s losing value? Cash or gold? There is much more money following the same assets. Equities and commodities are where they were few years back. Gold is 30% from the psychological 1000 dollar level for more than 3 years now, agro commodities are still below multi decade resistances, and global equity fails to portray any crisis.

So should we ask again what’s losing value? Yes cash is, it’s more but has lesser purchasing value. Let’s ask another question. What is perceived more valuable, cash or non cash assets?  We as a society are still giving cash more importance. Ask yourself, what do you desire more, a larger salary or larger number of gold biscuits. Yes, many of us still desire more cash.

So is the perception regarding valuable cash correct or is it a misconception? How much more value should cash lose for the society to realize the reality, the hedonic myth that running after cash is good? Will the society ever realize till it wakes up one fine day, holding lot of worthless cash in safe deposits? Remember Germany where they used paper cash for fireplaces. There’s another important question. Till when would cash lose more value, or 90% of its value?

This article is written for Alrroya

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