Inflation "The Obvious is Obviously Wrong"


One can't help but feel a sense of unease about the consensus views on the risks of inflation. Is there any doubt that it's been Low Interest rates, as all homeowners can attest, that are near 40 year lows, that is allowing for massive home mortgage refinancing. It is the unrealistically low interest rate, Real Estate Boom; in conjunction with the availability of easy credit to people that have no credit, that has sustain this economy at a record rate of growth (3.5%) which is above trend for nine straight quarters. The economy has not seen this rate of growth since the early to mid 60"s and better the anything seen even during the Clinton era.

The ten-year Treasuries are priced to yield around 4 %. Veteran bond investors, who bear the monetary scars inflicted by the destructive powers of 20th century inflation, surely have to rub their eyes in disbelief. They know that the bond market's reputation for absolute safety is undeserved. After all, there are plenty of instances in history where bond investors were fleeced by artificially low rates that eventually found their true levels. The message today from the FED is that inflation is not a worry. The purchasing power of the dollar is secure enough, so that it is okay to tie your money up for thirty-years at 4.5%. Inflation worries are simply nowhere to be found in the nation's leading newspapers. Inflation worries have elusively slipped off-stage, and War, Terrorism, missing Daughters and Child Molesters are the new glamour girls of the news. These days there are a host of other concerns likely to get top billing before inflationary worries. Among them, the Federal Governments' massive budget deficits, record high Trade Deficits or the spiraling cost of health care and Social Security.

Yet, there are clues and warnings, beyond mere contrarian instincts, that inflation will once again have its day. The new consensus of opinion in the bond market holds [that] heavy public borrowing, fast-paced monetization of the federal deficit, and high commodity prices are non-inflationary. I had been taught and for the past fifty years or so, believed the exact opposite.

The DJ-AIB Commodities Futures Index, is up near record highs. Gold, oil, natural gas, foods and other natural resources have been rising. International turmoil may explain some of these increases, but the movements are broad enough for some to conclude that something more propels these commodities. Do commodity price increases only mistakenly represented "the latest manifestation of an inflationary environment? In the commodity pits, at least, there would seem to be some clue that the purchasing power of the dollar may not be as secure as bondholders hope. The fact that the $US had fallen 30% against the Euro before its latest corrective bounce and is even showing some significant weakness against the Yen may be telling us something. What about China's revaluation of the Yuan, against not only a $US peg but now to be against a basket of currencies?

Beyond this, there is perhaps the most powerful reason of all - fiat currency is simply no good in the long run. Theory and history agree that its value only diminishes over time. Its primary weakness is what some Fed governors think is its greatest strength. The printing press analogy, which has been used not only by critics of fiat currency, but also by Federal Reserve Board Governor, Ben Bernanke, who has often stated that "the government can produce as many U.S. dollars as it wishes at essentially no cost." Yet another shot across the bow for those who still believe inflation is dead. He may now be only a Governor but he is slated to take Greenspan's place by early 2007.

The more I study and observe, the more I consistently return to the same conclusion. The entire world is imbibing from the same bottle; the bottle of inflation inducing massive Government spending, Debt and overall Monetary and Credit expansion. Inflation and massive Credit is an American way of life. It may hesitate but never stops. Perhaps in our lifetime it may only creep, but there is always a possibility that it will start to gallop. It seems that in post-bubble America, at the early years of the 21st century, people have forgotten that this horse still has legs and the barn door has been left wide open and unattended. Inflation is a process that forcefully re-distributes wealth from one group to another. Prices do not change uniformly in this process, and those that get the new dollars before their costs have risen gain at the expense of those whose costs rise first. Any analysis of inflation must proceed sequentially as it courses through the economic system.

Moreover, it is this inflationary process that sets the cycle of boom and bust in motion. Prices are distorted and investments are inevitably made in unsustainable areas, leading ultimately to gross imbalances and finally to liquidation and/or bust. No one knows now just how much precious capital has been wasted and Real-Estate, like every thing else, will most assuredly have its comeuppance in the not too distant future.

Even though I don't have a crystal ball, I do know that there is one of only two possible outcomes that must come out of this record extended bout of money and credit expansion. Either Galloping Inflation, or a financial crises, either one will bring about a massive financial collapse.


Were it possible for the actions that the FED has and is currently pursuing to work, then why not solve the poverty problem at the same time. Let us just simply mail a yearly check for $25,000 to every family in America; bang no more poverty, no more lack of demand: While were at, why stop there? If printing money and creating credit out of thin air works, why not simply mail yearly checks to the rest of the poor throughout the world and eliminate world poverty once and for all, at the same time. Unfortunately "you can only fool all the people some of the time."

The only two ways that I can thing of to stop such a process is to 1) separate money and government. Free-Market money means money backed by something other than the decree of government promising to replace paper with paper. 2) Term limits for politicians of one eight term only. I won't be belaboring these two points at this time. They are both subjects for another time. However humans are not prone to make drastic changes without being forced to do so. So I guess we will just have to wait and see. Will it be Galloping Inflation first, or will it be a financial crises that brings about the bursting of the twin Bubbles (Real Estate, the Stock & Bond Markets) followed by Recession/Depression and Monetary collapse that eventually forces a return to some form of GOLD STANDARD.


Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL


8 August 2005

In every cubic mile of sea water there is 25 tons of gold

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