John Paulson Versus Paul Krugman: Inflation or Deflation

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John Paulson
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Paul Krugman

There has been a non stop debate over the past year or so, whether would would experience deflation or inflation. Economists (mostly on the left) predicted deflation which would lead to further declines in home prices, and the CPI. Economists (mostly on the right) predicted massive amounts of inflation due to the easy monetary policy of the Federal Reserve, and the trillions of dollars of spending by the current administration.

So far little inflation has occurred, and prices have mostly been flat. It is too soon to tell who will be right in this debate.

Many great investors seem to believe inflation will be the victor , and are buying gold, stocks situated to benefit from inflation, and any other asset class that would do well in an inflationary environment. Legendary hedge fund manager, John Paulson recently announced a huge stake in gold.

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There was a recent, interesting article in Business Week about this debate. The article was titled Krugman or Paulson: Who you gonna bet on?

Krugman recently penned an op-ed in the New York Times, where he stated that we are likely entering the Third Depression. Krugman is calling on the Government to spend more money to prevent a slip into a deflationary depression. Krugman is predicting a situation much worse than a “double dip” recession, Krugman is stating it will be far worse.

Krugman stated that this depression will perhaps not be as singularly devastating as the Great Depression, but more akin to the depression that followed the Panic of 1873.

John Paulson seems to be taking the opposite view. As mentioned earlier, Paulson has a massive stake in gold bullion. Paulson stated the chances of a double dip “at less than 10%”. Paulson believes this is the best opportunity to buy houses, and that housing prices will begin to rise.

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The full article from Business Week can be found here [].

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