HardAssetsInvestor

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi, and welcome to HardAssetsInvestor.com’s video series. I’m Mike Norman, your host. Well, the debate rages on. Are we going to have inflation? Hyperinflation? Or deflation? Here to talk about that today is my guest, Peter Cardillo, who is the chief market economist at Avalon Partners here in New York. Peter, thanks very much for coming back on the show.

Peter Cardillo, chief market economist, Avalon Partners (Cardillo): Good to be here.

Norman: So, what’s it going to be? We hear it's a very intense debate raging on. Some people say inflation, maybe even hyperinflation or deflation. Those in the inflation camp are looking at the extraordinary measures taken by central banks and fiscal authorities, trying to get the global economy turned around, and also the economy, of course, here in the United States. And those in the deflationary camp are saying, “Now there's a whole movement toward austerity in Europe. Spending freezes coming down the pike here in the United States. That’s all, a playbook right out of 1937. It’s going to lead to a deflation.” Where do you see it playing out?

Cardillo: I don’t think it’s going to lead to deflation. And, for the moment certainly, we don’t have an inflation problem, that’s for sure. But we will have an inflation problem. And we could have hyperinflation if we don’t get these budget deficits under control. And I suspect that we still have wiggle room here in the States. And of course, the austerity programs that have been enacted in Europe probably mean that inflation is going to be dead for a while.

Norman: But why are you so concerned about the budget deficit? We saw the deficit during World War II run up to 35 percent of GDP. That would be the equivalent of something like a $5 trillion deficit today. We saw the national debt, the public debt, run up to 120 percent of GDP. Now we’re about 90 percent. We’re really about 65 percent, if you just consider the debt owed to the public. What is the big concern when … and you said even hyperinflation … historically, and in context, the debt really isn't that high?

Cardillo: That’s right. That’s why I said we have wiggle room. Right now, we don’t have a high debt. The question is, do we continue to spend? And when I said “hyperinflation,” I’m not talking about hyperinflation appearing over the next six months or a year or possibly even two years. I’m talking about down the road if we don’t correct these budget deficits, these imbalances, and not only here in the States, but on a global scale. Because one of the problems that we have is that we have a debt global burden that’s continuing to hurt the markets.

And if you look at the price of gold, that’s telling you something. Right now, gold is out of favor. And I think the reason for that is because it has …

Norman: Well, I wouldn’t say it’s out of favor. It came down a little bit, but got up to, like, $1,250. It’s $1,150-1,160, something like that.

Cardillo: Right. When I say “out of favor,” I mean it’s lost a bit of its luster, in the sense that we’re not seeing headlines anymore, “Gold made a new record high.” No, that’s not happening. And I think the reason for that is simply because of the fact that, from a fundamental viewpoint, there’s been a slowdown in purchasing gold products from India, which is generally, traditionally speaking, a seasonal pattern in this time of the year. And, of course, we didn’t see China come in and buy any more gold from the IMF. And of course, the IMF is selling gold.

So I think it’s just a little bit of a layback here. And the other reason, is, obviously, we’ve had a pretty strong stock market over the past several weeks. And I think some of that money is coming out of there and going into the equity markets. But, getting back to what I originally wanted to say, the price of gold is not collapsing.