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Rethinking Inflation

|Includes: Wal-Mart Stores, Inc. (WMT)

There has been a big debate as to whether the federal reserve's quantitative easing and actions by the administration and treasury are simply replacing money supply lost to deflated assets and tightening credit, or represent a long term inflationary trend.  Those who believe the later generally view it as a negative outcome.  Negative though it may be, at this juncture of the American economy, inflation, especially massive, "hyper" inflation, may simultaneous be the path of least resistance and the best policy for both the majority of Americans as well as the US government. 

The impending social security problem is not going away.  The fundamental increases in the cost-structure of the healthcare system are not subsiding.  The military-industrial complex is sucking up more funds than ever.  The appetite for casino-style risk taking by an American financial industry that knows it can rely on taxpayer funded bailouts continues unabated. Tort reform is dead and lawyers, the life-blood-sucking "fourth branch of the government" continue their onslaught on industrial productivity. The American economy grows increasingly uncompetitive making future repayment of debt under such circumstances nearly inconceivable. Meanwhile as Karl Denninger points out foreigner's appetites for US treasuries seem to be stretched thin.  Assuming the ruling elite doesn't want to lose its power in the form of a second American Revolution, they will chose to avoid national bankruptcy at all costs. This leaves one logical solution: monetizing the debt, also known as inflation. 

In reality, this will not be as bad as it sounds from an American standpoint, and for this very reason we must acknowledge the likelihood of this outcome.  On average Americans have practically no cash savings.  What assets they do have range in hardness from securities to real-estate to gold.  Save for those securities that are both thoroughly worthless and un-saavy enough to be bailed out by the country's corrupt political machine, all of the aforementioned assets should appreciate in nominal terms under a monetization regime.  Nominal wages should also rise and as a result the average impoverished American consumer should find it much easier to pay off credit card, auto and housing loans.  America's richest and smartest will also be fine, as their assets are sufficiently hard. The tanking dollar will be a boon to exporters, and the country will learn to ween itself off from its Walmart addiction.

Of course there will be a significant readjustment in living standard as well as a net transfer of wealth in real terms, but the biggest losers will be holders of t-bills and other such nonsense, many of whom are foreigners.  Those hardest hit will be the Chinese, Japanese, Koreans and Arabs, who unfortunately hold far too much worthless American paper.  Undoubtedly such an outcome will shatter the myth of American Exceptionalism, make it expensive for Americans to travel abroad and ensure the US will find it much harder to get foreigners to bankroll its over-consumption in the future, but in a world of political expediency, such an outcome may be deemed the most attractive. Real interest rates are already negative.  It's happening as we speak.

Disclosure: No positions