What’s happening on the inflation front?
Here are excerpts from commentaries recently posted at www.speculative-investor.com on 5th April 2009.
The Fed scaled back its money-pumping efforts over the first three months of this year, which is not surprising given that it would have been almost impossible to sustain the frenetic pace achieved during the final four months of last year. But even though the Fed's actions have become less frenzied of late, the Fed-Treasury tag team has made sure that the rate at which new money is borrowed into existence continues to exceed, by a substantial margin, the rate at which money is extinguished via debt repayment. This has mostly been accomplished via the US Government increasing its debt load at a much faster pace than the private sector de-leverages. As mentioned in previous TSI commentaries, the private-sector debt bubble is in the process of being replaced by a public-sector debt bubble.
On the above TMS chart we have identified three separate periods. Period A (mid-2001 through to mid-2004) had fast money-supply growth, Period B (early-2005 through to early-2008) had slow money-supply growth, and Period C, which began during the final quarter of 2008, has thus far been characterised by fast money-supply growth. The fast money-supply growth of Period A fueled rapid price rises in houses, housing-related debt securities and commodities, and the slow money-supply growth of Period B led to large price declines in houses, housing-related debt securities and (eventually) commodities. The fast money-supply growth of Period C WILL fuel rapid price rises SOMEWHERE in the economy.
Will the Fed eventually 'soak up' the excess money?
Bernanke and his Fed cohorts will naturally say that they plan to remove much of the recently injected money once the economy recovers. In all likelihood they will also go as far as making preparations to drain away the "excess liquidity"; for example, getting approval for the Fed to issue its own bonds. This is all part of managing inflation expectations. However, there is almost no chance that the Fed will actually engineer a significant slowing in the rate of money-supply growth until it is way too late (until a major inflation problem is 'baked into the cake'). The reason is that the inflationary policies implemented to date will not only fail to turn the economy around, they will very likely make things worse. To put it another way: the harder they try to stimulate the economy by creating money out of nothing the more economic damage they will do (counterfeiting money transfers wealth from productive enterprises to the counterfeiter and thus reduces the economy's growth potential) and the longer it will take for a sustainable economic turnaround to begin.
The cost of "flexible" money
One of the most popular arguments against having gold as money is that a gold-based monetary system would be inflexible, the implication being that today's dynamic economy requires a more flexible, or elastic, form of money. Well, if by "inflexible" it is meant that under a gold-based monetary system the supply of money could not be arbitrarily expanded by governments and banks, then yes, a gold-based monetary system would be inflexible, but such inflexibility is a consummation devoutly to be wished. In our opinion the ideal money would be as constant as the sun, enabling each of us to calculate exactly how much money we needed to save to cover our future living expenses.
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