Value Investing: Tools and Techniques for Intelligent Investment

Chapter 35. Roadmap to Inflation and Sources of Cheap Insurance^[35]

As I have written previously, I am torn between deflation unleashed by a bursting credit bubble, and the inflationary pressures of the policy response. Irving Fisher was adamant that a debt-deflation spiral could be ended by inflation. Romer has argued 'devaluation followed by rapid monetary expansion' ended the depression. In the past, Bernanke provided a list of policy options which serve as signposts to the return of inflation (although his recent comments seem to be barking up the wrong tree). I've been trying to construct a set of cheap insurance policies which either pay out under both inflation or deflation, or provide inflation protection.

• Both Albert and I are relatively agnostic over the inflation/deflation debate. We can see merits in both sets of arguments. In face of this uncertainty, I decided to return to history and see what it has to say about the way out of a depression. Irving Fisher (infamous in finance for his erroneous predictions of a new era in 1929) studied the dynamics of debt-deflation. He argued that it was always possible to stop or prevent a depression simply by using inflation.

• Christina Romer (the head of the Council of Economic Advisers and expert on the 1930s) has argued that it was 'devaluation followed by rapid monetary expansion' that brought the great depression to an end. Her work provides empirical support for Fisher's views. In the past, Bernanke has set out a clear set of ...