I’ve heard a good deal of noise about low inflation and more deleveraging and how inflation won’t be a problem until the economy begins to recover, possible in 2010. I don’t begrudge these market analysts. They’re only trying to make a living for themselves and their families. It’s kind of noble when you think about it.
Here’s the problem. The insidious type of inflation we are creating is not the kind that feeds on a vibrant economy. It is a severe tax on working working class families and the fixed income elderly that drains the purchasing power out of every dollar they earn.
A Nation Of Debtors
A simple review of TIC, the Treasury International Capital Flow Data shows that foreign investment, used to fund our massive deficit spending, is beginning to show signs of cracking. Foreign purchases of US Treasuries for March was $23 billion, down from $91 billion in February. In order to coax foreign buyers to invest in US Treasuries the Federal Government has only two very clear choices.
The first, they can let rates rise to a level that would make them more attractive investments. This would make the debt service on the expected $3 trillion budget deficit into a noose around the Fed’s neck. This would have the additional effect of ratcheting up home mortgage rates and choking off the already feeble housing recovery they have fought so hard to promote. Doesn’t sound too likely, right?
The second choice would be to let the value of the US Dollar fall dramatically allowing them to repay this mountain of debt with a depreciating asset, i.e.; the dollar. Which do you think they’ll choose?
China, the largest holder of US debt along with a growing number of other nations have recently called for the creation of a new reserve currency citing, “serious concern for the value of their dollar based investments”… As they should be. If the value of $1 trillion dollars of your investments were about to fall off a cliff you’d be concerned too.
China and several Latin American countries have already cut deals to trade in their own currencies (the Real, Peso & Renmimbi) essential cutting out the USD middle man. Nearly all major commodities currently trade in dollars but if the the US continues to debase the currency it’s status as the World Reserve Currency will soon be a thing of the past. The only way we have been able to print money out of thin air is because as the World’s Reserve Currency every nation on earth must buy dollars to purchase essential commodities they need to keep the wheels turning… that’s all about to change.
Now I’d like to clear the air for a moment. I absolutely am in favor of abolishing the Federal Reserve and it’s shadow banking practices, it’s ability to manipulate interest rates and the money supply with impunity or accountability. With it’s secret deals with other nations central bankers and zero oversight creates the very inflation it was created to prevent. It is a government agency who’s time has come… and gone. Bernanke, by his own admission is an “inflationist,” which advocates the policy of deliberately inflating the economy by increasing the supply of available currency and credit. Anyone can see how easily this type of stimulation can quickly get out of hand.
You can find a great article on the Federal Reserve by the brilliant Statesman, Ron Paul.
Over in Europe, Spain (just had their credit rating lowered), Ireland, Greece and Hungary to name a few nations balancing on the bankruptcy highwire, the EU is in no position to be lending us money. In fact they appear to be heading off a cliff of their own as we speak. Japan, always a huge buyer of US treasuries, is in economic shambles with a 2008 debt to GDP of 196% and expected to rise to 219% be the end of 2009. Don’t look to Japan to bail us out.
The Common Denominator
In the 1970′s inflation in the U.S. was high and the economy was mired in a deep recession, commodity prices soared to unthinkable levels. As recent as the summer of 2008 the price of crude oil rocketed from $40 to a high of $147 a bbl within months. It didn’t get as much attention as oil, but at the same time there were rice shortages and grain shortages driving the price of agricultural products through the roof. People where shocked at how much it was costing for a loaf of bread. With the financial crisis, the deleveraging started and we prices began to fall. How quickly we forget.
What do these events have in common? The dollar had collapsed to a seven year low in 2008. Historically, every time there had been a sharp spike in commodity prices, it was caused by supply shortage, increased demand or a fall in the valuing of the U.S. Dollar. The “all knowing bond market” sensed the long term problems with the dollar and began to sell it off. That was before the Fed and the Treasury even started printing all the bail money, TARP, TALF and it’s policy of wholesale “quantitative easing.”
Since all major commodities are traded in dollars, a drop in the value of the dollar in an automatic increase in the cost of goods due to the loss of purchasing power.
Global agriculture inventories are at 50 year lows. The Earth’s population is an estimated 6.7 billion with an additional 1 billion people added between 2000 and 2007. Growing global demand from population growth and rising living standards will inevitably drive all commodity prices higher for years to come.
In short, you will want to own tangible assets like metals, energy, agriculture and livestock. Life’s necessities will always be in demand while the products that we bought so cheaply from China with money we borrowed from them will revert back to what it always was… “landfill.”
My only question is, “what will we do with all those rubber neon dog bones that play a catchy tune when you squeeze it?” Maybe China will buy them back.
Ray
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