An article on August 12 titled ‘Deflation looms in the post-crisis world’ says “Deflation one. Inflation nil. While the U.S. Federal Reserve, moved gingerly towards a more optimistic view of the U.S. economy Wednesday, saying “activity is leveling out,” it is clear that deflation rather than inflation remains the primary threat in a post-crisis world.  Evidence from all quarters of the globe Wednesday showed that as yet, rampant stimulus-driven inflation has not emerged and deflationary forces continue to have the upper hand as economies struggle to recover from recession - a process that is expected to be slow and painful”.  The article goes on to quote Brian Bethune, Chief U.S. Financial Economist at Global Insight as saying: “The bottom line here is that the Fed is sticking to its guns and maintaining a relatively aggressive posture on policy in a situation where the economy is at a critical turning point and inflation is running below the Fed’s desired target”.  If, as a result of things such as current oil prices, spare manufacturing capacity, and reduced consumer spending, inflation runs for the foreseeable future in the U.S. and Canada at less than the typically targeted 2% - 3% per year I see at least the following implications:

•    GDP growth, which clearly in a fiat currency environment or otherwise has an inflation component will have to be less than those now calling the ‘end to the recession’ likely are hoping for;

•    Government revenues will be less than governments likely are forecasting, resulting in budget deficits being higher than are being forecast;

•    China’s store of U.S.$ are not going to suffer from a fate of hyper-inflation, resulting in China being ever more powerful on the world stage as a result of continuing to use its large store of U.S.$ to make strategic (read ‘resource oriented’) acquisitions; and,

•    importantly, new job creation will be slow – particularly in the U.S. where I think many of the manufacturing jobs that have been lost are unlikely to return, and where I think manufacturing jobs will continue to be lost to both further automation and off-shore sourcing.

If I am right in these observations, for me it follows that the U.S. dollar must drop over time as it weakens against strengthening fiat currencies of those countries that have and will continue to supplant U.S. manufacturing jobs, U.S. monthly net trade deficits continue for the foreseeable future, and the U.S. Federal Government continues to run large annual deficits.  Going forward, I see none of this as a pretty picture from the point of view of the standard of living of the average American.  Rightly or wrongly, I do see gold as a ‘purchasing power’ hedge in what I see to be the likely economic ‘times ahead’ for both the U.S. and Canada – and I believe this will be the case in circumstances of either inflation or deflation.