Don’t Look Now, There’s a Huge Wave of Inflation Coming Toward Us

October 30th, 2008

Via: Alternet:

…The policies that Paulson and Bernanke did implement at such staggering cost have only begun to do their full long-term damage, which will probably come in a round of even more serious inflation. Together, the Treasury and the Fed have spent or loaned over a trillion dollars in financial-sector aid. As set out by economist Brad Setser of the Council of Foreign Relations, besides steering $950 billion into the U.S. financial system ($500 billion sent over by the Treasury), the Fed has provided still another $450 billion of dollar liquidity to European central banks to spread around on that continent. This decision by the United States to be the lender of last resort, in tandem with Washington’s late September and October scare rhetoric about U.S. and world economy seizing up unless Congress passed the Paulson-Bernanke bail-out plan, has internationalized the crisis and made the U.S. dollar the pretended currency of the rescue instead of the vulnerable currency of the underlying problem. Something similar happened back in August 2007, when for 4-5 weeks a flight to “safety” and U.S. treasury debt buoyed the U.S. dollar. September and October have brought this result on an even larger scale.

Administration economists have said not to worry. This trillion won’t be inflationary because that effect will be lost amid the 2008 assets deflation. This is probably more bunk from economic experts who have been right about practically nothing in the last few years. Global commodity indexes have been rising since 2003, although carefully crafted federal statistics kept that pressure from being acknowledged in the U.S. until 2008. Now the common wisdom is that declining commodity prices spell a long-term decline. The better likelihood is that inflation, still much in evidence globally, is only taking a breather, as it did circa 1971 and circa 1974 during the 1967-1980 inflation cycle. Within a matter of months, Washington’s huge 2008 borrowing and soon-to-be-record trillion-dollar budget deficits will send inflation to new heights, and the current “treasuries bubble” and “U.S. dollar bubble” will pop.

Research Credit: Eileen

Posted in Economy | Top Of Page

8 Responses to “Don’t Look Now, There’s a Huge Wave of Inflation Coming Toward Us”

  1. pdugan says:

    Yeah, Roubini and some mainstream echoes are forecasting a stagnant-deflation period, but I think it’s just disinflation preceeding a massive route on the dollar narrowly avoiding complete collapse/default due to inflation, rather than because of it (this is the catch-22 that public education trains you to miss). As such, I recommend people get significant hedge positions against the dollar within the next two months, the USDX may have some more room to go up as the next round of ECB cuts follow, but when Q4 numbers come out and the CDS thing unwinds, triggering the carry trade unwind, triggering the deficit unwind, then we’re in for it. This also goes for people who aren’t dollar holders but live in countries pegged to the dollar (such as myself).

    Don’t bank on smart monetary policy, bank on USDX puts, UDN, physical diversification, currency denominated CDs and maybe leveraged shorts if you’re really risk hungry.

  2. D says:

    What I suspect is happening: as CDS’s and other short-term debts unwind (get paid back), the dollar is becoming relatively more valuable. To quickly get these dollars, stocks, bonds, foreign currencies, and commodities are being sold by the barrel-full and driving the prices down. After the unwinding slows down, there are going to be a lot of idle dollars moving out of the stock market as (investors see poorly performing corporations as undeserving) and back into commodities which will lead to a huge spike. The amount of inflation we will experience will then completely depend on if the money supply contracts during this time. Considering that these national bailouts have focused on keeping liquidity, and hence, the money supply up, we will likely experience inflation. I’ve not studied hyperinflation much, but I suspect it’s a very strong possibility: a large, underutilized money supply controlled by large organizations that essentially only have commodities as safe havens will overwhelm the buying power of individuals to buy necessities.

  3. D says:

    Yep, what pdugan says.

    I’d only add: invest in physical assets. Seeds, plants, high quality tools, etc. Get in before everyone else figures out what’s happening and while you can still afford it. There’s some indication that the savvy are already aware… many of my favorite seed/plant catalogs are already sold out on popular items until next fall.

  4. OUTSLAW says:

    “Administration economists have said not to worry. This trillion won’t be inflationary because that effect will be lost amid the 2008 assets deflation. This is probably more bunk from economic experts who have been right about practically nothing in the last few years.”

    The government economists are lying crooks, but that’s not really an argument for deflation being bunk. It might be huge. I’ve heard good arguments on both sides. Mish continues to make a strong case for deflation.

    Great little “wake up” article today about the nature of money (despite the stomach-turning endorsements of GLD, SLV, and TIPS). I’m sending this to all my friends who still think “being in cash” means holding dollars.

    http://seekingalpha.com/article/102974-can-the-fed-really-just-print-money

  5. Eileen says:

    @D there’s only so much physical stuff a person can buy – I guess:-) yep. I had to get in early and good with my seeds and plantings for next year. I’ve been preparing for years now for the upcoming tidal wave of dollar collapse – although I can tell you – I have no idea what this will really mean! But I have lots of big soup pots. Maybe my house along a big highway will become a soup kitchen!
    @pdugan I have quite a bit of money of Mom’s in the Merck Fund – a hedge against the dollar. I’ve been swallowing hard the last few weeks looking at its performance as the dollar has been sailing upwards against all odds. How the dollar rises against all common logical sense when all the dollar really signifies right now is a NOTE OF DEBT really confounds me. The world is in this boat with us – but I think the holders of our debt may say soon – enough. A new Bretton Woods? Hah. Think the U.S. has the brains and brawn (on the current ship of state) to keep the U.S. dollar as the peg? Very, very questionable. Yah, President Obama is going to be tested alright. Even before he takes the oath of office. Dollars will be turned to less than cents even before he hits the red carpet.
    It would be the same with McCain except I think he would start a war over a US manufactured financial crisis and the worlds reaction to it.
    These avaricious dildoes have wrecked the world financial system. Hey, but, we live in interesting times. Capitalism has failed. A new system is being born and we will be part of it.
    My only comfort in Obama being president is that he wouldn’t bomb the world to pieces, over this financial crisis, because I think he is intelligent enough to know you can’t bomb it into peace (Michael Franti and Spearhead lyrics).
    I don’t have a clue as to how all of this is going to unwind, or upwind.
    At least with Obama we have a conciliatory energy. Something I think the U.S. – at least in terms of negotiating where the dollar stands in the future is what the world REALLY NEEDS.
    Concilliatory energy. Imagine what that will be like. I have been so over Bush and the rest of all their STUFF since FY 2000. Bring it on. I don’t care if its a landslide or tsunami, just wash this filth OUT!

  6. pookie says:

    @ Eileen: “Capitalism has failed.”

    I spent the first 49 years of my life in the US — no capitalism there. I like how Ron Paul puts it:

    “It’s not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!

    To condemn free-market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political parties. One may condemn the fraud and the current system, but it must be called by its proper names — Keynesian inflationism, interventionism, and corporatism.”

    from his essay “Has Capitalism Failed?”
    http://mises.org/story/2895

  7. Eileen says:

    @Pookie,
    I was all for Ron Paul or Dennis Kucinich. But oh boy we’ve got Barack Obama instead. I dunno what’s going to happen to us here in the U.S. Living here now seems very not anything I ever imagined it would come to.
    If I am reading Ron Paul correctly, he is saying capitalism failed because we had to many rules and regulations, and corporate interventions.
    I would say inrebuttle we had too little regulation. Under capitalism, people are free to make as much money as they want. But I say that capitalism has failed because there used to be rules, but successive rulemakers decided we didn’t need rules in the game.

  8. pdugan says:

    Yes, we haven’t seen Capitalism in our lifetimes.

    Hard assets are good. I’m networked with a friend whose parents have 600 hectares in La Pampa and can go work that land as a failsafe to complete meltdown, otherwise I’m riding the inflation wave of high technology to hallucinatory riches!

    Obama is the best thing since vicodin.

    Getting out of the United States in itself is a smart financial move due to the status of US tax law, just get your assets offshore before you declare your intentions. Let me repeat that: living outside the United States in itself can be equivalent to holding a valuable hard asset. Preferably a country where the agriculture system isn’t on the brink of desertification. (Rather, is baby-stepping toward the edge, but not yet on the brink).

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