Inflation Looms, But More Pressing Issues Abound

I punched a good friend of mine yesterday.

In the face.

Well, let me rephrase that – I almost punched him in the face. Being the adventurous type, one evening this close friend (who we’ll call Hank – the name choice not entirely an accident), made a meager attempt to control his own finances by putting me under strict instruction to clock him square in the face should he attempt to spend more than a given dollar amount at an entertainment venue. Hundreds of dollars over his “limit”, I shamefully admit that I did not have the fortitude to slug my friend in the jaw.

I did, however, take note of the recurring theme in this man’s expenditure history.

Cash is like kryptonite to Hank. I doubt he knows who is on the one dollar bill or even how to make change, for that matter. Each and every time expenditures would occur, whether at a store or in a restaurant, the plastic would come out.

The parallels between this person and the United States economy are staggering.

Borrowing from tomorrow

When the debt would accumulate, Hank would grin and muse, “don’t have to pay for that ‘til next month!” In some ways amusing, in some ways unsettling, paying for today’s demands with tomorrow’s money. What Hank failed to realize is that tomorrow’s money is expensive.

We, as a country, are not paying for our daily expenditures with credit cards. We are paying off maxed out credit cards with maxed out credit cards that will be paid off with lines of credit from banks that may or may not exist.

I’m not going to recap the six thousand ways this country has passed around bad money for the past x-amount of decades. You’ve read, seen, and heard it all already.

The travesty I want to point out instead is that we are throwing borrowed money at bad money. At mistakes. We are travelling through an underwater tunnel that has sprung a leak, patching it with bubble gum, and pretending to ignore the drips.

This incessant dripping is forming a puddle of inflation.

The billions that will, in all certainty, lead into the trillions of dollars cannot be printed without consequence. Like any other commodity or security, the laws of supply and demand apply to currencies – the more dollars there are floating around, the less each one is worth. So, the more dollars it takes to buy something and hence inflation is on its way.

Inflation looms, but more issues abound

There are a few major issues we’re going to have to deal with as we sit in the middle of this crisis. They are: restoring consumer and investor confidence, the reduction of interest rates, and one final issue that I find very interesting… we’ll get there in a minute.

Confidence

In terms of consumer confidence, well... are you confident? Are you ready to proclaim that you have faith in our society, that it’s time to expand business and we’re ready to turn this thing around? Enough said.

Interest rates

Given the globalization of the economy in recent decades, it is equally important to monitor the steps that other countries are taking in order to help stave off this financial debacle. Well, prevent it from getting any worse, anyway.

In November, the Bank of England cut interest rates sharply (by 1.5%) to 3%. That’s the lowest rate in over fifty years, and in the 300 year history of this bank their rate has never gone below 2%.

Guess what happened last week.

Hello 2%. There’s not far to go before we’re drinking skim.

Only a dozen or so other countries slashed their rates as well. But here’s the problem: No one seems to care. And not just about that. I’ll revisit that after I make one more point.

What happens when the bailer bails out?

Gary Hager, president of Integrated Wealth Management, made a great point recently. In the mad scramble of analysts and experts attempting to put a semi-final number on the price of the government bailout packages, there has been little talk about the danger that this will be successful.

In other words, the bailouts are in danger of succeeding. Should these businesses actually get back on track and the economy receives a jump start, we should really be considering the method and consequence of the government’s eventual process of withdrawing its support. After all, much of the bailout packages did not involve no-strings-attached free money. In many cases, the government is essentially buying a stake in these entities. Unless the government plans on being perpetually and heavily invested in banks, automakers, and any other hat-in-hand corporations they have helped, they’re going to have to sell that off little by little.

As Uncle Sam slowly and carefully removes this band-aid, we’re going to see whether the wound is actually healed. In my opinion, we may need to stop picking at it.

Some great ideas that no one cares about

Cutting rates – a nice idea to stimulate growth. Unless, of course, people don’t feel like borrowing, don’t feel like expanding business, and are just trying to avoid laying off half of their employees.

Bailouts – interesting the first time, not the 23rd. I would wear out this keyboard if I committed to fully expressing how disgusted I am with the redundant, contrived, and essentially obsolete headlines proclaiming some variation of one of the following two things:

• “Stocks slump on bailout fears/worries” or
• “Stocks surge on bailout talks.”

Although I couldn’t hit Hank, I nearly want to put my fist through the computer screen when I see these headlines. Not only is it complete horse manure, but no one gives a crap about bailouts anymore. We’re looking ahead to the results, and in all likelihood, the consequences of these handouts instead.

what will the consequences be? Most likely inflation. More fruitless rates cuts. And maybe some surprises, who knows. But I do know this – anyone, analyst, author, or otherwise, who thinks that the market is moving based on whether or not there will be another bailout of “XYZ” corporation, is obviously abusing a set of prescription drugs that I would love to get my hands on.

Disclosure: No positions.

Comments

[Prudent Man...:]

Think stagflation.

Nothing the Fed, Treasury or Congress has done can or will turn worthless assets into gold. Pumping the money supply is the admission of denial.

FDR, whose policies kept us in a depression for twelve years (can you imagine Americans, with their me first attitudes struggling without their ipods and Blackberry's for twelve years?) and we only got out of it by supporting England in the war with Hitler bringing on WWII. Yet, the left academics, taught by other radical left-wing academics on the dole for government grants perpetrate the FDR myth of his ending a depression he actually expanded.

I see more of FDR's policies in Socialistic Obama, which will certainly be given cover by his compliant media and result in the same failure. Will Obama's increase of troops in Afghanistan result in a military draft and the cycle starts all over again?

Richard Nixon ended the war in Vietnam and the draft and Bush added prescription drugs to Medicare and look how the media and academia treated them. If you can't see left-wing bias in academia and the media you can't see.

2008 Dec 14 10:38 AM

[Rokjok777:]

Ok Prudentman, I will take the bait. Your thesis is that Dem philosophy caused the current mess. That argument says that all along we needed LESS regulation, not more, after all "less regulation" has been the Republican rallying cry and central ethos since Saint Reagan. The Repubs are a one-trick pony and that's their trick.
So do you think we needed less oversight on bank lending? Less oversight on allowable bank leverage? Less oversight on structured product creation? Had Saint Phil Gramm not won the day and kept the CFTC out of the derivatives oversight business, would we be in better shape right now? I think so.
The Repub philosophy is "just give business everything it wants and it will all work out". Our current mess, however, is undeniable proof that the fox did not do a very good job guarding the henhouse...big surprise. And calling the Dems Socialists is a laugh when Bush and Hank Paulson are nationalizing the entire banking system!
The history books will write the final word on this era. They will conclude that corporations can only do what's right for their shareholders, not for their country or their people (big surprise!). And when those corporations control the government, and the military, it is defined as FASCISM. So our national treasure ends up spilled in the sands of Iraq because Federal Express wants to make money shipping bottled water from Oregon to Baghdad. And at home, yes-men regulators are asleep at the switch while the hogs of Wall Street walk out with taxpayer money by the wheelbarrow-full! Marvelous. Republicanism at its finest!

2008 Dec 14 03:50 PM

[Vienna:]

Rokjok777

You are stating just what we have always been assuming in Europe. US telling about their great achievements and pushing us all to run along with their (let me please say: idiotic system).

All what we see about US and they telling US of the great free country always seemed not truth worthy to us.

Is is time for the US to realize that they are being caught up by their own history. Don't blame the chinese, government or the socialist. It is the fault of every individual in the States, since they kept on pushing for more and more from a system that can not produce this in a globalized world, where also chinese are starting to eat pork once a weak.

Find a compromise of capitalistic and social system, most things in live need a compromise.

2008 Dec 14 04:05 PM

[User 319501:]

I'm not really sure what you are trying to say here. And I'm certainly not following your reasoning on why lower interest rates are going to increase inflation.

Remember Japan in the '90s? The discount rate was 0%, government debt increased to well over 100% of GDP, and there was virtually no inflation. Why? Japan was in a "liquidity trap" -- fearful consumers weren't buying anything, which caused businesses to fail, which caused lenders to hoard cash because they were fearful of lending to both consumers and businesses, which caused consumers to buy even less...

While it's true that printing money is inflationary in a normal economic environment, it isn't inflationary now because the deflationary pressure due to the credit crisis is larger than the inflationary pressure from current monetary policy. That's why we need some kind of large fiscal stimulus -- monetary policy just has nowhere to go, now that short term interest rates are about 0.

2008 Dec 14 06:46 PM