Balanced Asset Allocation - Lee Bill

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probable outcome. In other words, the printing of money – which is normally inflationary on its own – merely offsets the deflationary conditions that exist at the time. That is why we have yet to see inflation from the 2008 crisis and why printing money may never lead to inflation. The result is entirely dependent on whether too much money is printed. Printing money alone is not a sufficient prerequisite for higher inflation. In fact, printing currency is necessary to keep spending positive while the debt-to-GDP ratio is simultaneously reduced over time. By pumping more money into the economic machine the resulting increase in spending can generate positive growth rates while credit – the normal tool used to prop up the economy – is healing itself from high debt levels.

      The Importance of Balance Always, but Particularly Today

      Today's environment should be observed within this understanding of how the economic machine operates. Prudent portfolio construction should thoughtfully consider the wide range of potential economic outcomes. In a nutshell, the headwinds of deleveraging constrain economic growth and inflation. Unprecedented levels of money printing that aim to produce a tailwind of strong growth and rising inflation are meeting this negative force. Deleveraging versus the printing of currency: these two powerful forces are going head to head. Which will win? We are in uncharted waters and the potential range of economic outcomes is extremely wide. If there is too much printing of money, inflation becomes a high risk; but if there is not enough, deflation may result. More printing of currency is positive for economic growth; however, an insufficient level will be overcome by the deleveraging process and result in low or negative growth. How this dynamic plays out is a crucial input for developing the appropriate portfolio mix for the foreseeable future because of its impact on the economy.

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