|Panic Buying Equals Increased Demand!|
In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This theory also known as stagflation is partially based on or dependent, on which way the dominoes fall. By this I mean which debt goes bad first or is allowed to go bad, this theory also extends into how quickly debt spoils. In a comment, a reader several months ago wrote, ---- It is fairly obvious that not all IOU's are deemed as trustworthy, and as trust drains from this over-indebted system, shakiest issuers' debt will lose value fastest. Junk debt is thus a Hindenburg in search of a spark all its own. Wait until corporations discover how difficult it may be to roll over all this share-buyback debt of the last few years.
A key issue in this debate is that not all debt is created equal, while a parent often absolves a loan to their child the bank seldom forgives a loan on an automobile. Sometimes like in the reality game show Survivor it comes down to who is left standing. I contend winning does not always come down to who is the best, strongest, or smartest, but that luck and many other factors also come into play in how things unfold. For example imagine two widget factories on the hill outside of town and both with the same pricing and quality product but financially weak, if a storm knocks out production at one factory resulting in its closing the other would benefit from inheriting its customers and maybe even able to raise prices. This comes down to the idea of old fashion supply and demand. This revolves around the supply of money just as much as it does to the supply of the commodity it is being used to purchase. We are often forced to question the formulas used to compute inflation.
|How to Determine Inflation Remains An Issue|
During a recent news conference, ECB Vice President Vítor Constâncio ticked off a litany of reasons why prolonged weak inflation, or sustained falls in prices known as deflation, worries central bankers. This was done to justify the massive stimulus that has been put forth. He noted that falling prices may cause consumers to put off purchases if they expect that trend to continue. As further justification, he noted that official consumer price measures may even overstate the extent of inflation. It is clear central bankers want to persuade households and financial markets that, whatever its current reading, the inflation rate will be around their target and that inflation expectations are under control. Mr. Draghi warned of a possible “de-anchoring” of expectations if the inflation rate remains low for a long time, and particularly if oil prices fall further. “These risks have gone up and we want to be vigilant,” he said.
In all truth, we must be careful not to venture too far down this path that does not reflect honest price discovery or real value. This is important not just today but when these actions filter into the future because when the gap gets too wide an adjustment always takes place. In the world today people have developed a "false' belief in financial security and the idea of "controlled" inflation. For years inflation has been used as both a political and economic tool. When people look at how much more they are earning now than in the past they realize that if they go into debt it will be easier to pay it off with inflated income. For decades people have been given pay raises to keep up with inflation meaning the vast majority of pay raises have nothing to do with either a person's work or performance. Yet it is still difficult to deny this tends to make a worker feel better that they are worth more. Many people essentially perform the same functions for 30 years; however, their pay grows much greater as time move on.
A great definition or rule about inflation, its effect on the economy, and how it impacts savings came to me long ago, it goes like this, "Inflation is a thief that robs those who are improperly invested, and gives the money to those improperly invested." This would, of course, be referring to those who had the foresight to position their investments for its emergence. The same can be said about deflation, it mimics in reverse the process, also acting as a way to transfer wealth between parties. The problem is to time and recognize the approach of these two strong economic forces. I have found the mindset of investors and of the "money people" often shifts into overdrive when opportunities for speculation arise. The distortion caused by easy money from Federal Reserve policy coupled with political and social compassion for affordable housing, medical care, has obvious implications as debt and promises continue to rise.
Most economists agree the Central Banks are not in a position to tighten the money supply at this time because such a move would have a devastating effect on markets, this would filter down into pension funds and retirement schemes. Remember, so many of the things we invest in are merely promises and such, hard assets are rare. A word of caution, while hyperinflation does not occur that often when it hits the speed at which it can occur surprises and it is clearly a game changer. I continue to contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" which is the base of our financial system and money would suddenly flow into tangible goods seeking a safe haven inflation would soar. This theory will be explored more in part 2 of this three-part series.