Era of Unprecedented Inflation Just Around the Corner

For the fourth consecutive week, all important monetary aggregates reached yet another new all time high. Not to mention The Federal Reserve's update to the enormous growth in their balance sheet, which now stands at 2.2 Trillion.

This was all augmented by the current press release regarding consumer spending, which saw a dramatic spike (remember we already have an unsustainable savings rate in the low single digits). This will ultimately be to the detriment of the economy as real economic growth (capital formation is a function of savings and investment) will prove impossible without the necessary investment into the various parts of the structure of production.

Without this, it will prove inevitable for continued rising unemployment to be present as well as the conveniently overlooked percentage of discouraged workers. It is amazing how people can overlook the fact that this is the worst recession/depression since 1929 even with doctored government statistics such as the unemployment rate.

Pre- 1990, unemployment included discouraged workers (those who have given up looking for a job) as well as those forced to settle for part-time work. Imagine what this statistic would be if we reverted back to how it should be and was counted before 1990. I have seen figures ranging from (17%-21%) unemployment if counted as such.


The Federal Reserves Balance Sheet as of 9/30/2009

• A 2 year growth rate of over 150% (from 869 Billion in 2007 to 2.2 Trillion as of the end of September) This contains 1.6 Trillion of GSE securities held by the Fed. A substantial portion includes almost or completely worthless commercial paper i.e. agency securities, mortgage backed securities and monetized debt securities (which artificially suppresses interest rates)
• Even If the entire mortgage backed security portfolio eventually snagged 50 cents on the dollar (which is rather aggressive given the fact Fannie (FNM) and Freddie (FRE) were the largest purchaser of MBS, of which there is a high probability these contain the most toxic MBS out there). The Fed would essentially be inflating as they printed much more currency to purchase these securities than they will ever get back.

If that isn't enough the record monetary base (now standing over 1.9 Trillion) indicates both a high likelihood of loan defaults or banking crisis expected by the Fed, (record bank reserves of 922 Billion - while the Fed pays interest on these reserves) whose actions clearly indicate incredible economic uncertainty. These banks are obviously in just as bad a shape as before the $10+ trillion bailout programs began in 2008.


So how are we able to push consumer spending up back to over 70% of the GDP if the economy is in such bad shape? Well that is very simple: A dangerous combination of record deficit spending and record sales of sovereign debt to our trading partners (The Chinese now hold an estimated 2.1 Trillion of treasuries).

Sure the actions might delay the pain for maybe a year or two, but this will end if even worse economic conditions than we are currently living through appear and the nail in the economic coffin - an eventual currency crisis. Obama has these grandeur plans of government programs that will improve everyone's standard of living, but they will come at a much greater cost in the end. It will be time to pay the piper for over a decade of increasing deficit spending, rampant debt accumulation, and easy (inflationary) money policies that will drive the cost of consumer goods. The illusory decade of excess and living beyond our means with a complete lack of savings and the exponential rise of unfunded liabilities (social security, Medicare, Medicaid, defense, etc) which is estimated to have a NPV of 90 Trillion, is over. Of course we could default on those repayments which the elderly and soon to be retirees are counting on, but that is only a pipe dream.

I would be utterly amazed If we made it through the next 5 years without inflation at least as bad (though much likely extremely worse) than that seen in the late 70s. We expect jobs to be created out of thin air which will increase government revenue, but in case it isn't obvious already: you can't print your way to prosperity - you can only print your way to poverty. Aside from the massive bailout and stimulus programs we expect to fund the record government budget (below) in addition to those things not presented - such as the enormous interest payments needed to service our debt, unfunded liabilities (healthcare, housing, etc) - all without severely de-basing our currency?


Anyone with half a brain can see that the only way to help protect the purchasing power of the USD as well as our standards of living if for government to get out of the way. Let those institutions fail that can't survive on their own, cut government spending, stop accumulating as much debt that we can get out hands on, let the market determine interest rates, (they should be very high now as the demand curve in regards the loanable funds market has shifted out significantly as it does in all economic times) so that people will be forced to save and healthy capital formation can resume.

Until then, as many have figured out, the USD is not the place to be. Unless you believe Bernanke will somehow engineer monetary policy that will save the day (though every economic forecast he has made in his entire life has been wrong) while at the same time keeping a lid on the inflation tsunami growing ever bigger with each passing day. Protect your wealth in equities (preferably foreign), Gold, Silver and Commodities in general before there is nothing left.

Comments

[Freya:]

Way to go DG, don't forget to add in Health Care "reform" and an as yet to be determined Infrastructure Build which will pobably exceed its allocation.

The Patriotic thing to do would be to distribute the Stimulus Money among all of the Families Making 250K or less, let them decide what to do with it.

Oct 19 10:00 AM

[The Geoffster:]

Isn't all this liquidity just propping up Wall Street through their trading desks? The debt is exponentially higher than the forced liquidity. When these debts are realized, won't the result be massive deflation?

Oct 19 10:19 AM

[Bad Dog:]

Damn, but that's crap! The FDR era massively increased people's ability to save. People of the post-depression era were incredible savers. It was the 1970's, Imperial America that started the rot as workers's wages began to stagnate, women were forced out of the home into work in order to keep the household income up, then both husband and wife had to work longer hours, and then they went into debt. This is so well known, but you don't know it. Interesting.


On Oct 19 09:30 AM Mark Hagerman wrote:

> "The illusory decade of excess and living beyond our means with a
> complete lack of savings..."
>
> It isn't just one decade; this situation is a direct consequence
> of FDR's mismanagement. We've had three quarters of a century of
> government intereference, and the endgame is now in sight.

Oct 19 12:20 PM

[enegola:]

The United States created the "game". I think that they know what is going on and will correct it when the time is right. The sky is not falling so have a little patience. Once full employment is reached things will be ok.

Oct 19 12:30 PM

[John Bowman:]

<cough cough>


On Oct 19 12:30 PM enegola wrote:

> The United States created the "game". I think that they know what
> is going on and will correct it when the time is right. The sky is
> not falling so have a little patience. Once full employment is reached
> things will be ok.

Oct 19 01:10 PM

[Donald Ingram:]

You touched upon the solution by those in power - devaluation.

Pay no attention to the 'strong dollar talk', since that's all it is - empty talk. The devaluation of the dollar is ongoing and will continue, much to the delight of the administration. After all, if you can't inflate (won't take) then devalue the currency - it does the same thing as inflation in handling all the debt. One thing it's doing is pissing off all those who are holding a goodly portion of that debt. Trouble ahead.

Oct 19 01:58 PM

[Socialism c...:]

On Oct 19 10:00 AM Freya wrote:

> Way to go DG, don't forget to add in Health Care "reform" and an
> as yet to be determined Infrastructure Build which will pobably exceed
> its allocation.

Yes.

> The Patriotic thing to do would be to distribute the Stimulus Money
> among all of the Families Making 250K or less, let them decide what
> to do with it.

NO!!! The *honest* and patriotic thing to do would be to NOT have a stimulus at all!! Simply stop robbing the people!!! Redistribution to those making 250k or less "sounds good"...but it is THEFT.

Quit playing class warfare games and end ALL confiscatory taxation!!!

fairtax.org

It's the ONLY way we will reign in overgrown government.

Oct 19 03:25 PM

[grh1212:]

Right on, DG. We must get a grip on the underlying cause of governmental corruption, namely capture. Until we prevent the corporations from reducing Congress and the various federal financial agencies to mere marrionettes, the debt will continue to pile on until some point of breakdown. It is essential to ban corporate political donations. Cheers.


On Oct 19 09:34 AM doubleguns wrote:

> We are not spreading the wealth, we are spreading the debt. The very
> people that this is supposed to help are the ones that will get slapped
> the hardest.
> ...
> Until we fix the corruption in Washington, expect more of the same.

Oct 19 04:08 PM

[Mr. Big:]

It's easy to say just devalue the currency, but you can't get something for nothing. The cost may just be the credit rating downgrade of the United States government.... and the skyrocketing cost to federal borrowing.

The U.S. is at a dangerous point. The printing of money is helping to keep borrowing rates artificially low, but at the cost of a devaluing US currency and a jacked up fiscal deficit. So what do you do? We're faced with two outcomes:

1) continue on current path and keep printing and destroying the dollar. Risks to hyperinflation will be high and the country's credit rating will be threatened. But the economy will likely be temporarily stabilized by the depressed borrowing rates, with the hope that the economy may get to the point where it can stand on its two feet. If that doesn't happen, hyperinflation will kick in and force the country into chaos (typical third world hyperinflation scenario). This can happen very rapidly....the small amount of deflation can turn into high inflation in a matter of days/weeks. All it takes is for the Treasury bubble to pop....

2) Start jacking up interest rates now, stabilize the dollar and bring confidence back into the world's reserve currency. Get the Fed back into managing money supply and inflation. Energy prices will stabilize as will commodity prices. But the economy is not ready for this yet. Any increase in borrowing rates will result in the unemployment rate to spiral upwards. The housing sector will crash again as mortgage rates rise. Foreclosures will accelerate and the whole crisis will happen again....only this time it'll be worse as there is no more stimulus to hand out. We already played that card.

Either scenario results in a scary ending. I think what the Obama administration is currently doing is a "Hail Mary" play..... Keep borrowing rates artificially low and stimulus spending high as a catalyst to kickstart the economy. Get Americans to borrow and spend, thus creating jobs and establishing the self-reinforcing conditions to get out of this mess. But in my opinion, this has failed. The low rates and stimulus was not getting into Mainstreet, but was stopped at Wallstreet's doors. The average American has less access to credit now than they did two years ago. If fact, they're saving, not spending. Wallstreet has used the bailout money to trade in the markets, which explains why stock prices are up and trading revenues at firms like Goldman are at all-time highs. What's alarming is that the rapidly weakening dollar tells us that we are running out of time and the endgame is nearing.

In my opinion, a severe double dip recession/depression is in the short-term horizon and it will be unavoidable. The only uncertainty is the path that we take to get there.

There is not one person to blame here. Obama may take the fall for having the wrong strategy to manage the crisis, but the blame also goes to Wallstreet as well as those in mainstreet who were convinced that they deserved to live a life that didn't belong to them. Wrong decisions were made at all levels of government. And central banks have screwed up their share of choices as well.

We have forgotten that Democracy and capitalism, while being the fundamental building blocks of freedom, require bounds and controls. Otherwise, greed and deception prevail. And we have learned that first hand over the past two years (and we are still learning....and paying the price).

I hope after the next recession/depression, we will have learned to discipline ourselves and not repeat the same mistakes. The definition of capitalism and democracy will evolve. Freedom will have a different meaning, as it will go hand-in-hand with words like responsibility and personal accountability. But I would think that once we have these concepts engraved in our minds, we will all enjoy an extended period of stability and prosperity.

But not before the pain.....

Oct 19 04:27 PM

[Hyperinflation:]

I agree, but the fact these government doctored numbers are so bad speaks volumes about current state of affairs.


On Oct 19 08:13 AM Vuke wrote:

> Hyperflation is unlikely but a sustained and cleverly masked inflationary
> era is already upon us. Look closely at daily consumer items in
> the $1 to $5 range and calculate their % increase over the last few
> years. It's amazing. Big ticket items have to wait a bit for their
> day in the sun so with better employment figures expect the same.
>
>
> The official figures? Pay them no mind.

Oct 19 04:45 PM

[realold:]

Blame it on corporations? You elected these people. Take responsibility for your own actions. Recall them. Stop voting for them.


On Oct 19 04:08 PM grh1212 wrote:

> Right on, DG. We must get a grip on the underlying cause of governmental
> corruption, namely capture. Until we prevent the corporations from
> reducing Congress and the various federal financial agencies to mere
> marrionettes, the debt will continue to pile on until some point
> of breakdown. It is essential to ban corporate political donations.
> Cheers.

Oct 20 12:29 AM

[Freya:]

Socialism:

"NO!!! The *honest* and patriotic thing to do would be to NOT have a stimulus at all!! Simply stop robbing the people!!! Redistribution to those making 250k or less "sounds good"...but it is THEFT.

Quit playing class warfare games and end ALL confiscatory taxation!!!"

Of course, you are right. Unfortunately that Bird has flown the coop.

The Now, is to prevent similar, more expensive proposals. Tossing around Trillion Dollar programs after digging the Hole is like asking someone to pour Dirt on you.

It should stop "right now, Right Here" but it won't.
So you have to prepare for eventualities.

Oct 20 12:41 AM

[Hyperinflation:]

We have become financially, ethically and intellectually bankrupt. It is societies responsibility to keep government in check yet we condone unethical money production (fractional reserve banking) unbacked by any asset whatsoever. We are coerced into paying the state money we know will be spent as inefficiently as humanly possible (Amtrak, Postal Service, etc). The America that was had some resemblance of capitalism, but those days are long gone. We are as socialist as they come. Just take the definition of socialism and we fit it perfectly.
"Socialism is an institutionalized policy of redistribution of property titles. More precisely it is a transfer of property titles from people who have actually put scarce means to some use or who have acquired them contractually from persons who have done so previously onto persons who have neither done anything with things in question nor acquired them contractually."

Wealth redistribution will only inflict more damage as it is precisely those people who make over 250k that are responsible for the majority of capital formation. Capital formation creates jobs, breeds productivity and higher living standards for society as a whole. Yet we ( obviously not me personally) chose to vote for a self proclaimed socialist, who although has an Ivy League education, has no clue the destruction his idiotic policies will have. So it is not the corporations or politicians that are to blame, it is the American People ( generally speaking of course).

Oct 20 01:50 AM

[Alan Young:]

"Anyone with half a brain can see that the only way to help protect the purchasing power of the USD as well as our standards of living if for government to get out of the way." So true, and so many half-brained people among us. I guess it takes a whole brain—or even better, several brains co-operating—to notice that, after several hundred years of experimenting with capitalist economies crashing and burning, they have never learned to self-correct without an unacceptable disruption of society. Bankers were allowed to go virtually unregulated for just a few years in the last decade, and effectively embezzled the bulk of our country's surplus wealth, while destroying the hopes and prospects of millions. IF getting government out of the way were the key to prosperity, then Somalia and Afghanistan would be the most prosperous places on earth. No, governments can and do make disastrous errors, but they are the only means we have to clean up the mess without unreasonably increasing the destruction, suffering, and inequity.

You have also made a fundamental error by mistaking the monetary BASE, that imaginary creature with the dramatic hockey-stick chart, for the money SUPPLY, which takes into account the VELOCITY of circulation, and which is, in fact still DECLINING. See www.federalreserve.gov.../
This is because, even though the Fed is supplying the banks with more liquidity, they are not lending the money out. Whether this is because the banks are too controlled by greed, or by fear, or because consumers don't want to borrow any more (what an idea!!), is another question. But the fact is, our money supply has been governed up until recently NOT by Austrian economic principles, but by huge levels of leverage exercised by bank lending; and, with the lending vastly reduced, inflation in the customary sense is impossible. This is not to say that the situation won't change and become inflationary in the future, but that's not the biggest threat to prosperity at present. You can't keep your eye on the ball using the wrong (or incomplete) statistics.

Oct 20 02:32 AM

[Alan Young:]

We elected WHAT people? We elected Clinton, not Rubin or Summers. We elected Obama, not Geithner, or Summers (again). No election has stopped or even slowed the Wall Street takeover of the government. It's going to take more than elections (especially elections we "stop voting" in, as you suggest) to change the way the country is run.

On Oct 20 12:29 AM realold wrote:

> Blame it on corporations? You elected these people. Take responsibility
> for your own actions. Recall them. Stop voting for them.

Oct 20 02:37 AM

[Hyperinflation:]

If people bothered to educate themselves they would have voted for Ron Paul. How can you say inflation is not on the horizon. The reason banks are loaded up with over 920 billion in reserves is to cover loan losses. This will be very inflationary because the banks will cover these losses with printed money. Banks have originated loans by depositing 10% or less of the loan amount with the FED ( and the fed creates the 90% out of thin air). This by itself is not inflationary because that loan is repatriated by the debtor or covered via the banks retained earnings. It becomes inflationary when the FED has to bailout these banks out because the original loan will not be paid back.
Deficit spending is also inflationary - They have print money to fund their spending. True the velocity of money plays a huge role but how can you say it is still declining after the consumer spending figures came out showing a near record consumer spending number as a percentage of GDP. You can't hoard and spend at the same time.


On Oct 20 02:37 AM Alan Young wrote:

> We elected WHAT people? We elected Clinton, not Rubin or Summers.
> We elected Obama, not Geithner, or Summers (again). No election
> has stopped or even slowed the Wall Street takeover of the government.
> It's going to take more than elections (especially elections we "stop
> voting" in, as you suggest) to change the way the country is run.
>
>
> On Oct 20 12:29 AM realold wrote:

Oct 20 03:27 AM

[H. T. Love:]

I posted a thought long ago that I believe addresses the underlying cause of this. In a nutshell, the direct taxation of the people and businesses by the government spelled our doom. Fair tac, VAT, tc. all carry this same flaw.

Giving the U.S. government the ability to directly tax the wealth generated by individual/corporate effort both violated "property rights" and ensured the massive growth of the corruption of the system.

H00mons do as h00mons will and once the direct access to the "private" wealth was granted, the descent began and can't be stopped as long as this is in play.

Funding the government should return to forms used during our founding or by the states, which are more responsive to their populace.

But that would grant too much visibility.

My Humble Opinion
HardToLove


On Oct 19 09:34 AM doubleguns wrote:

> We are not spreading the wealth, we are spreading the debt. The very
> people that this is supposed to help are the ones that will get slapped
> the hardest.
>
> When the financial crisis hits full force there will be major cuts
> in social programs and govt services on top of the inflation whether
> it is simply double digit or hyperinflation. The debt burden will
> become a loud sucking sound pulling capital from everything in our
> economy. Cap and trade and VAT are just more govt programs that will
> add tremendously to this problem if allowed to pass. Rather than
> fix, they destroy.
>
> Until we fix the corruption in Washington, expect more of the same.

Oct 20 08:43 AM

[a fat panda:]

Actually I do watch these items at the grocery store, anyway. I sense that longterm prices are going up, but today prices are getting crushed. If you talk to the people at the check-out, you will find that more people are using coupons, and those discounts are more any price increase over the past decade. Today I am getting branded peanut butter for $.75 a jar. You may have to go back to the 80s to get that.

Basically the grocery has become like the car lot, no one pays list.

On Oct 19 08:13 AM Vuke wrote:

> Hyperflation is unlikely but a sustained and cleverly masked inflationary
> era is already upon us. Look closely at daily consumer items in the
> $1 to $5 range and calculate their % increase over the last few years.
> It's amazing. Big ticket items have to wait a bit for their day in
> the sun so with better employment figures expect the same.
>
> The official figures? Pay them no mind.

Oct 20 10:17 PM

[a fat panda:]

It is easy to say that inflation is not right around the corner. There is so much excess capacity out there that no one has any pricing power. The economy will shake out the excess capacity, and then you will have your inflation.


On Oct 20 03:27 AM Hyperinflation wrote:

> If people bothered to educate themselves they would have voted for
> Ron Paul. How can you say inflation is not on the horizon. The reason
> banks are loaded up with over 920 billion in reserves is to cover
> loan losses. This will be very inflationary because the banks will
> cover these losses with printed money. Banks have originated loans
> by depositing 10% or less of the loan amount with the FED ( and the
> fed creates the 90% out of thin air). This by itself is not inflationary
> because that loan is repatriated by the debtor or covered via the
> banks retained earnings. It becomes inflationary when the FED has
> to bailout these banks out because the original loan will not be
> paid back.
> Deficit spending is also inflationary - They have print money to
> fund their spending. True the velocity of money plays a huge role
> but how can you say it is still declining after the consumer spending
> figures came out showing a near record consumer spending number as
> a percentage of GDP. You can't hoard and spend at the same time.
>

Oct 20 10:20 PM

[Michael Clark:]

Actually, I think Americans want to save now. But Bernanke is trying to make that impossible. Bernanke wants debt because debt (combined with inflation) make the banks rich, and rich banks are, in his philosophy, the cornerstone of a healthy economy. That's one of his flaws in thinking.

Saving is what makes an economy stable. And Bernanke is punishing savers, trying to force them to throw their savings after bubbles.

Oct 21 02:02 AM