The Great Reflation: How Investors Can Profit from the New World of Money

Summary and Conclusions

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

—Charles Prince, former CEO of Citigroup, July 9, 2007

The Great Reflation has pumped some air back into the balloon. The world economy started recovering in the second half of 2009. Financial markets had accurately forecast that when they bottomed earlier in March. As the year came to a close, the music was indeed playing again, and a lot of people were back out on the dance floor. But to many, there was a huge disconnect, a pervasive aura of unreality, as we had just survived a near-death experience in the economy and financial system. Banks and hedge funds were making a lot of money again, their bonuses were under attack by governments, and their headhunters were back hunting. Worries of a new asset inflation were expressed frequently in the media and research reports. Was the crisis just a bad dream or a one-off accident? Will life return to what people had come to believe was normal? In short, should all investors be back out on the dance floor?

One of the main purposes of this book is to explain and help investors understand why the crisis was not a rare event. Rather, it was a logical outcome of the asset and credit bubble of the past 25 years, which gave us an artificial prosperity. That is over now. The private sector debt supercycle has morphed into a public sector debt supercycle. Near-zero ...