Inflation Tsunami

The undersea earthquake may well be occuring but the wave is still very far from shore and no more than a bump in a far away ocean...but it is coming.

It is an unavoidable cliche that governments' solutions are inevitably worse that the original problems that they seek to fix. The link to the above article from John Kemp is another warning of the severely inflation consequences of current government monetary policy. This is a phenomenon not just confined to the US, but ultimately the US is the epicentre of current world economic events along with their co-dependant partner China.

If the US can manage inflation in the low teens for half a decade they may pull this off. This is dependant on whether the US dollar holds up or drops to 20% to 40% of its current value. More likely we will see a low US dollar, high inflation and high interest rates within 2-4 years.

but for now ..... Merry Christmas and a Happy New Year to all.

The Weimar Theory

This is an article I really enjoyed reading and I recommend you go to the above link.

"In the last ten weeks total Federal Reserve Credit increased by $1290bn. This is an increase of 151% over the same period a year ago, and an annualised rise since Sept 10th of 755%! This degree of expansion in “base” money is without precedent in the Fed’s history."

I share the authors view as the inflationary nature of current US Federal Reserve actions. However when he states that this is not the Great Depression (version 2) he is only partially correct. It is a multi-generational economic disaster precipitated by the same cultural and generational factors as the one that started in 1929. Its underlying characteristics of rapid monetary expansion, contained price inflation (for different reasons), and asset price bubbles are also shared.

A controlled increase in inflation will have very positive effect in reducing consumer indebtedness, as opposed to allowing deflation to persist which would be catastrophic. So we find ourselves in a balancing game where modest inflation will facilitate a de facto default on debt. I very much doubt we will see hyperinflation Weimar Republic style but high inflation levels, as in the high teens - and accompanying interest rates are very likely. While this would assist with mitigating consumer debt burden, it could also result in a rapid decline in real incomes as increases in consumer prices outstrip increases in wages.

Recession to Depression

Peter Schiff seems to have reached a degree of cult status with the circulation of the "Peter Schiff Was Right" video on YouTube. In fact, Peter was more precient that even that video shows. I recall an interview he gave in 2002 warning of the upcoming financial implosion. There are also some critics (jealous ones I assume) claiming that because Peter didn't pick exactly when the world economy would implode that somehow he was wrong. It is a laughable notion indeed, driven by the same get-rich-quick day-trader mentality which has proven the scourge of this generation.

Just as the irresponsible monetary expansion of the early part of this decade would ultimately lead to our current financial disaster, so to will the attempted remedies and bailouts that the US is currently in the midst of, turn a severe recession, into a US and global depression. I suspect it will be more intense in the US but certainly not confined to its shores. Let me quote a comment from the above linked article:

"... it's not just U.S. stocks and real estate that are going to lose value, but U.S. bonds. This is the last bubble yet to burst. I think we're going to see a collapse of the bond market sometime during Obama's first term, and interest rates are going to spiral out of control, and the dollar is going to just be destroyed."

Read again.....interest rates are going to spiral out of control. A US dollar collapse followed by global currency instability and sharply higher interest rates will make 2008 look like party compared to 2010/11. Unfortunately we are just at the beginning of the downward slope of a multi-generational economic downturn of broadly equivalent length and intensity to the Great Depression.

So if you are out telling people how this Recession will become a Depression ask how the economy would look if overnight everyones' mortage interest rate doubled.