Lawrence J. Kramer

Evidence That Big Inflation Is Coming

The problem with this analysis is that it does not account for the wealth effect and its doppelganger the paradox of thrift. When wealth has been destroyed, people do not spend their incomes as freely as when they feel flush. Rather, newly printed money comes to rest in the investment markets to buy stocks and bonds for savers who lost what they think of as "money" in the crash, in effect putting us right back where we were before except that the money will have moved from the old savers (our trading partners, mostly) to new ones (people with jobs). (This is a good thing. What else were we going to do about the accumulated trade deficit? We had to default on it somehow, and this is what we came up with. I was expecting we'd inflate our way out of it, but instead we destroyed the assets in which it was invested. Brilliant.)

Inflation may be coming, but only AFTER the wealth has been replenished in nominal terms, people are no longer underwater on their mortgages by reason of equity loss, and the stimulus keeps coming because turning it off too early replays 1937. But I think that day's a ways off.

Gold is till a good near-term play, though, because thanks to GLD, the public can effectively "corner" the physical market. GLD is gold-backed currency, and Gresham tells us that people will hoard it, putting tremendous upward pressure on the price of the physical metal.