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Inflation Rearing Its Ugly Head

Alasdair Macleod profile picture
Alasdair Macleod

The world of finance and investment, as always, faces many uncertainties. The US economy is booming, say some, and others warn that money supply growth has slowed, raising fears of impending deflation. We fret about the banks, with a well-known systemically-important European name in difficulties. We worry about the disintegration of the Eurozone, with record imbalances and a significant member, Italy, digging in its heels. China's stock market, we are told, is now officially in bear market territory. Will others follow? But there is one thing that's so far been widely ignored and that's inflation.

More correctly, it is the officially recorded rate of increase in prices that's been ignored. Inflation proper has already occurred through the expansion of the quantity of money and credit following the Lehman crisis ten years ago. The rate of expansion of money and credit has now slowed and that is what now causes concern to the monetarists. But it is what happens to prices that should concern us, because an increase in price inflation violates the stated targets of the Fed. An increase in the general level of prices is confirmation that the purchasing power of a currency is sliding.

According to the official inflation rate, the US's CPI-U, it is already running significantly above target at 2.8% as of May. Oil prices are rising. Brent (which my colleague Stefan Wieler tells me sets gasoline and diesel prices) is now nearly $80 a barrel. That has risen 62% since last June. If the US economy continues to grow the Fed will have to put up interest rates to slow things down. If it doesn't, as money-supply followers fear, the Fed may still be forced to put up interest rates to contain price inflation.

It is too simplistic to argue that a slowing of money

This article was written by

Alasdair Macleod profile picture
Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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Comments (5)

Yeah. Simple...short the USD. Buy gold. Retire in Bimini.
Nicely explained, says the novice.
I wonder, what happens to monetary assets? You mentioned non-monetary assets & real estate drops, with a freeze on borrowing and I assume margin calls.
Usually the rush to safety strengthens the Dollar.

I expect that when the news breaks on a “unexpected” new credit crisis, equities go into a tail spin, but unlike traditional risk-off trading, where dollars becomes a currency safe haven against all currencies, it my go to CHF. Or JPY

Would one short SPX against USD? (equities) yes/no?
Sounds like physical silver coins for cash flow and hyperinflation protection
How do we bet against debt assets in a debt crisis?
Drunken Brewer profile picture
I am trembling in fear.
You write, "Now that the cash alternative has been effectively closed down, the only assets for which deposits are likely to be encashed in advance of the crisis are precious metals and cryptocurrencies."

Why cyrptocurrencies? I think I understand the case you are making for precious metals. But, explain why cryptocurrencies should have an advantage over government fiat currency. Sure, one particular crypto may cap its supply, but others pop up like weeds in a field.

Disclaimer: I hold some stock in GoldMoney but was distressed when I learned it started trading in cryptocurrencies. We all know how well Bitcoin prices have held up since mid-December 2017. Are you telling us Bitcoin was (or is) "encashed?" Can you explain why trading cryptocurrencies does not contradict the founding premise of GoldMoney?
Well said,spot on, certainly comes under the category of be careful what you wish for.
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