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Inflation or Deflation?

May 2, 2012

Yes!

Recovery? No!

“Remember to keep your blindfold on, Dear, and take one more big step. You can trust me, I’m right here beside you all the way,” says our encouraging central banker.

I am often asked if I think this ‘recovery’ is not real — which, let me be perfectly clear about, I think it is NOT —  and what do I think will happen — either inflation or deflation? My answer is “yes, one or both.” I do not know when, but at some point we will pay a very high price for interfering with the natural order of our financial markets and, furthermore, compounding the problem with an appalling monetary policy. And yes, we will experience some serious problems with inflation or deflation. The longer we try to ignite a new bubble, or prevent the house of cards from collapsing, the longer and harder it will ultimately fall when the economic gods look down on us and decide it is time to show us just how foolish we have been.

Do you really want to understand the bottom line? The bottom line is that one cannot save a failed system. In 2008, our financial system imploded on itself because of expanding risk, leverage, greed, complexity and multiple bubbles. Instead of owning up to the truth, we have attempted to paint over our crumbling financial foundation. What color of paint did we use? The name of our paint was “Liquidity.” Since our current financial meltdown began in the fall of 2008, we have increased our national debt by more than 60 percent, or in excess of $6 trillion. And over the same period, our Federal Reserve has nearly tripled their balance sheet, increasing their books by nearly $1.8 trillion. That is a lot of paint! But paint is not the solution to our rotting foundation. Our national debt now exceeds our annual Gross Domestic Product (GDP).

Back to the original question: if not recovery then what? I don’t think the answer is as simple as a choice between inflation and deflation. What I lean towards is a mix of both. The Federal Reserve is trying their damnedest to create inflation and no amount of headwind seems to be deterring them. However, I have little faith that they will know when to shut off the liquidity valve in time to avoid very high inflation. On the other hand, a truly broken economic system is deflationary. While it seems quite counter-intuitive, I think we could have both deflation and high inflation at the same time.

 In the late 70s and early 80s we had something called stagflation, which was kind of the worst of both worlds – a stagnate economy and hyper-inflation. Is it possible that all our machinations will cause a new ‘stagflation on steroids’? I think it is very possible that we continue to see a difficult economy (unemployment problems/decreasing real wages and uncertain markets) and extremely high inflation, particularly targeting essential goods (food, fuel and energy).

Clearly our monetarists’ (pronounced: money-terrorists) main job is to keep the recovery facade going through at least November. I always enjoy how Wall Street deploys their ‘hedging strategy’ in an election year – they pour money into the coffers of both presidential candidates. As usual, they can’t lose and they will be sure to maintain their elite status of “Too Big to Fail!”

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2 Comments
  1. Chris McLeod permalink
    May 7, 2012 8:12 pm

    Jon Hamm,
    I just received my newest edition of the APB. And I have got to say “The Contrarian” is hands down the best part of the whole publishing. Its very imformative. He most recent article “Creative Taxation” touches on several important issues. As a matter of fact, the issues you touched on are a large reason why there is a mass exit of tax paying Californians. It sadens me seeing our once great state being dragged down into the abyss of governmental programs. The problem we face is much bigger than who wins he next election, its a matter of starting a grass roots effort to reeducate the masses of young adults leaving the public schools on the TRUE basic of economy and how taxes and programs are paid for. I feel we have a long hard up hill road in front of us. Any ways, keep up the good work
    Chris McLeod #17652, Barstow CHP

    • John permalink
      May 9, 2012 8:48 am

      Chris,

      True! Young adults need more education about our economy. Macroecon should be a required college course. Unfortunately most omitt this course. It’s crucial to understand how our monetary policy works. More so, understanding how the governments over taxing, over spending and over regulating really are contrary to economic stability and stimulation. Our free market is rapidly diminishing. The average middle class American is giving up!

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