The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. If faith drops in these intangible "promises" and money would suddenly begin to flow into tangible goods seeking a safe haven inflation will soar. Never before has mankind diverted such a large percentage of wealth into intangible products or goods. This includes currencies, bonds, pensions, and stocks. I contend this is the primary reason that inflation has not raised its ugly head or become a major economic issue. Like many of those who study the economy, I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which events unfold is often quite uneven and
this supports the possibility of an inflation scenario. A key issue
has to do with timing. If the price of gas jumps to
$8 a gallon overnight many people will buy gas and not make their car payment because it would be months
before their car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises are often left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.
Using the analogy of having to go across a bridge, if you are unable to get to the other
side you often have a problem. That may be where our economy is. We currently have to get to the other side of a plethora of vexing issues like how well Obamacare will play out, the future of entitlement programs, and how we will deal with paying interest on the growing national debt. A plank breaking under your feet as you cross a bridge may
spell a problem but the collapse of the total structure is a disaster.
Planning to cross a bridge and getting to the other side is not the same
thing. If obstacles develop in the process of crossing it is possible the goal may never be accomplished. Government and financial institutions have built bridges they want us to cross.
The rate and ease at which
traffic flows across a bridge can change dramatically if faith in the
structure is lost or becomes an issue. Much of how society reacts is
based on faith in its institutions. History shows that savage economic disruptions and bumps have occurred to society over the decades, still life goes on and it is very likely that tomorrow morning the sun will rise in the east. Please note, if such an inflation scenario were to unfold it could bring new meaning to the phrase "it's different this time" and contrary opinion could becoming meaningless. Even if many people agreed this was coming at us stopping it would be like trying to stop a train hurtling down the
The crux of this article is to reconcile, debunk, and counter the argument that deflation lays before us. This is the claim made by Central Banks to justify and explain how they have massively expanded the money supply far beyond just adding liquidity. If inflation were to suddenly sprout wings central Banks and the government would reach into their toolbox and attempt to produce a series of fast fixes. I would expect these to include things like a "price freeze" and limiting the flow of funds. Remember many debts may go unpaid and promises left
unfilled. The history of such actions put in place after a panic begins generally shows them to be far behind the curve. This means many intangible investments could suddenly become very illiquid.
There is a major flaw in the concept Modern Monetary Theory. What do you do when it becomes apparent the economic efficiency of
is beginning to collapse? This means as more money is poured into
the system lower rates are no longer effective in driving the
economy forward. As the extra GDP growth generated by
each batch of loans drops and momentum ends this becomes the equivalent
of pushing on a string and is a sign of exhaustion.
What I'm seeing is an "almost surreal" feeling of indifference towards reality. Companies have ushered savings from interest
paid on their debt into the earning column and a major reason inflation
remains low is they are sitting on a hoard of cash this has lowered the
velocity of money. The artificially low FED controlled interest rates are a one-time tailwind that is mainly behind us. When rates stop going
lower or reverse they will become a major
Predicting or timing inflation, stagflation, or hyperinflation is very difficult. All tend to take a few years to prepare the ground from which
they sprout. Inflation in any of these forms develops a positive
loop that is sort of a slow-motion panic. A very important thing
to remember is that the expectation of inflation can have a major effect on both sides of supply and demand at the same time.
When money begins to pursue a product or goods and the price begins to
rise those holding that item lose the incentive to sale. In reaction, more money may be pulled out of the closet before the next price jump.
This "more money" constitutes an increase in demand. If this happens at
the same time items are being held back or removed from retail shelves awaiting better prices which "reduces supply" things can really get
interesting fast. This helps explain why hyperinflation is so drastic.
Changes in the value of a currency directly affect "buying power" and
the value of assets. Trying to predict in which currency a major loss in value will first occur gives us a clue as to where inflation will strike. I don't mean just a little inflation but hyperinflation which could develop very fast. Historically, when hyperinflation occurred people did not understand what was going on,
sometimes for years. With blogs, YouTube, Facebook, and other social media it would not be
long before people realize the implications of hyperinflation. Once people understand what is occurring the
currency dies. This means instead of taking three years, the cycle could go from start to finish in only three months.
Some people have been calling for a "world currency" for years and a
meltdown with high levels of fear and contagion would present a perfect opportunity to advance this agenda down the field. Many people have a lot to gain when a major shift in the currency
markets takes place. Dislodging the American dollar as the world reserve
currency represents such a shift.
Calls for a new world currency may grow over the coming years if the
world stumbles into an economic hell. People and their leaders tend to look for easy answers and this option would represent a
new lease on life and a way to lessen the consequences of
their past actions. It is very important to remember, we are not the "important people" in how the future unfolds, those in power are the ones that count and everything will be shaped in their favor.
Footnote; Please feel free to explore the blog archives and as always
you comments are encouraged. This article ties together several posts I have made over the last few months.