The Great "Inflation or Deflation?" Debate: Mish vs. Dr. Doom

In Marc Faber and Michael "Mish" Shedlock, we found two market watchers ready (and able) to champion both sides of this great debate.

Shedlock, an investment advisor with SitkaPacific Capital and author of the economics blog, MISH'S Global Economic Trend Analysis, made the case for deflation: Credit is contracting, despite Ben Bernanke's best efforts to flood the financial system with liquidity.

"The money supply is just sitting there as excess reserves on bank balance sheets," Mish says. "Bernanke can print this money but unless it makes its way into the real economy we're not going to see inflation."

In addition, he predicts "another leg down" in housing and commercial real estate, more consumer loan defaults, and notes state and local governments are (finally) cutting back on spending in the face of falling tax receipts and budget deficits. All these trends will contribute to the deflationary force of credit contraction, Mish declares.

But Shedlock is missing one critical factor says Faber, publisher of the Gloom, Boom and Doom Report: "When the economy's bad, governments pile up these fiscal deficits and they print money" to offset the deleveraging of the private sector, he says. "They're going to print and print and print."

If the economy sours again and especially if deflationary forces take hold, we'll have "even more stimulus packages and even more printing," Faber says. "That will bankrupt western governments - not just in the U.S. but everywhere. "

And by that, he means the dollar and other western currencies will collapse, leading to a bout of rising (if not hyper-) inflation around the globe, which will spur all manner of societal unrest and geopolitical strife. Now you know why they call him "Dr. Doom."

Check the accompanying video for more on the give and take between Mish and Faber, and stay tuned for more from this interview.

Earlier: Marc Faber: Don't Expect Another Crash ... Bernanke Won't Allow it