Thursday, April 15, 2010

Inflation or No Inflation, That Is The Question

Once again, the question of future inflation is boggling the minds of many a financial forecaster. Are we headed for a rise in prices that will carry the Dow up and away, hopefully carrying the rest of us with it, or are we going to suffer the second leg of the W Recession as commercial property and/or the inevitable rise in interest rates hits the skids?

[Thanks to for the photo.]

The questions I would pose are quite different. We are already engulfed in a sea of inflated purchasing media that is constantly roosting, taking off, and re-alighting in its search for new quick profits. Unfortunately, given the current labor market, it won't even be dipping a little toe in the ordinary person's paycheck on its way by, at least not anytime soon.

So where is it now, and what is going on? It is where it has gone for the last two years, to wit ten years or more: into speculative investment, biding its time. In America, at least, it isn't going into production, and it isn't going into salaries. It's going into profits and speculative investments, instruments like Greek bonds and credit default swaps so popular with the hedge fund crowd.

This means that the answer to the introductory question is yes, inflation, but be careful how you define it. As I have harangued before, the word is used flippantly to mean at least two things: on the one hand, price increases represented supposedly by the CPI; and on the other: excess purchasing media, the kind that used to cause price increases before the market got savvy, but that now finds itself blowing bubbles while maintaining general prices that should be falling so that the ordinary consumer gets a break. This definition we could differentiate by naming the process "inflating."

We've got the price stabilization, and we most certainly have got the bubbles blowing again. The excess "money" is now keeping Wall Street afloat--in fact higher than ever, bonuses and all, while stable prices buoy the record private sector profits we've been hearing about (which they're using to increase inventory, speculating on a price-rise opportunity), and while the Fed's funny-money sustains the whole U.S. residential real estate market.

If I were a businessperson these days, I would most certainly not invest in much capital equipment or labor, at least not until I find out:

- What the CPI is going to do over the next months, only because of its effect on what the Fed will do;
- Whether the Fed will really stop buying Freddie and Fannie issues, and/or start to raise interest rates, and/or take some other action to counter their recent balance sheet explosion and any eventual rise in the CPI;
- Whether the commercial real estate market will implode, with the resultant double dip in the economy;
- Whether we'll get a second wave of mortgage foreclosures and a second dip in the residential market, with the obligatory double dip in the economy;
- What the FDIC will look like at the end of 2010;
- What the Pension Benefit Guaranty Corporation will look like at the end of 2011;
- What will happen to the health bill;
- What Congress will look like in November;
- What party will run the country starting in 2011;
- Who will win the election of 2012;
- What the national debt projections will look like over the next two years;
- Whether or not the Chinese, Japanese, and Arabs will continue to buy and/or hold US Treasuries at the rate they are today, and what the U.S. bond market will do in response;
- What else?

Frankly, it's a wonder that the real economy turns at all.

This country is at a crucial point, both politically and economically. Will we affirm the liberty protected by our Constitution by turning away from government intervention in our lives, or will we succumb to the temptation offered by larger and larger handouts from an increasingly intrusive, blood-sucking, and short-sighted public sector?

Just as in the 1930s the electorate and the businesspeople of America are waiting to see what we, collectively, will do. In the 1930s the public sector won, and the private sector lost. After Roosevelt's about-face (his 1932 platform included reducing the debt and reinforcing the gold standard--I'm not kidding!) and after seventy years of inflating the currency, we are seeing the measure of that loss today, and the inflating continues to the detriment of all of us. What is the denouement?

In times like this, I prefer the security of gold and related investments. One thing that history has taught me is that gold tends to retain its purchasing power over time as the paper currencies lose their value. And I'm betting the dollar will lose its value compared to gold, sooner or later.

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