68 THE BiG DROP
decide which force is more likely. Our portfolio is ready for
either outcome, but we’ve promised to monitor which force is
winning in the meantime.
As of early 2015, I believe deflation is winning in the short
run, while inflation will prevail in the long run.
Both inflation and deflation are challenging to investors who
have to guess future returns based on changes in price indexes
in addition to navigating the normal business risks of an invest-
ment. In short, both inflation and deflation make your economic
decisions more difficult by adding a wild card to the deck.
Inflation favors the debtor because the real value of his
debts goes down as money becomes worth less. Deflation
favors the creditor because the real value of amounts owed
to him goes up as money becomes worth more.
But if you take the time to understand the phenomenon,
you can profit handsomely from it while others are scratching
their head.■ “You Can’t Always Get What You Want”
It’s natural that we have deflation today because we’re in a
depression. But there are powers at work to make sure nature
doesn’t take its course.
Mick Jagger famously sang, “You can’t always get what you
want.” This is exactly the situation facing central banks today.
They want inflation and can’t get it. This is highly unusual. If a
central bank, such as the U.S. Federal Reserve, wants inflation,
they can typically lower interest rates and print money, and
the inflation is sure to follow (with a slight lag).
But the Fed has been pursuing these policies for the past
five years and inflation is nowhere in sight. The reason is that
the Fed’s efforts have been blunted by a strong deflationary
force, the strongest in 80 years. This deflationary force will not
abate soon.