Inflation Worry

In the attempt to solve this current economic malaise, the governments of the world seem to be in a competitive race to devalue their currencies by printing as much money as possible and distributing it freely. They're attempting to clean up the mess of debt with more debt and too much money. Because of this approach, there are many people that are beginning to worry about inflation.

Inflation is essentially measured as the level of prices. Prices rise as you have too much money chasing too few goods.

I hated diagramming sentences in fourth grade, but let’s have a look at the preceding sentence. We are worried about prices rising (inflation). We have too much money in the system (agreed).

But now the interesting part: In the following graph, we see capacity utilization since 1970.


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For those of you fortunate enough not to be obsessed with economics, this measures how much of our ability to produce stuff is currently being used. At 100%, we are running the factories at full tilt. Currently we are at 70% which implies a large ability to create more goods if the consumers decide to crowd back into the shopping malls.

And finally, we look at the word “chasing” in the sentence, which to me means consuming. This can be measured in economic geek terms as Velocity of Money. Without wanting to spark a debate on how to measure velocity, I would simply present the following chart from Ned Davis Research, which shows the precipitous drop in velocity since 2005.


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Will we have inflation? Can we get the consumer to start spending recklessly again? Will I ever be able to flip a condo? The cold precision of homo economicus won’t give us any answers, unfortunately, so close your textbooks.

The issues that we are currently dealing with in our economy are massive and are moving at glacial pace. As I have mentioned in the past, we believe that the massive overhang of debt is the principal issue that is being dealt with, and will take quite some time to work through. But as we have seen in the past and will continue to see in the future, markets are driven by individuals who experience greed and fear, euphoria and pain. Sometimes we learn from our mistakes, and we change our behavior. Sometimes we don’t, and we postpone the inevitable lesson to be learned.

Do you want to understand what's going to happen in the next several years? Talk to your neighbors, your waiter, your siblings, your friends. Gauge their emotions, their behavior, and note the changes taking place versus their behavior of just a year or two ago. The emotion is what guides them and it is what will guide our economy going forward. Take note of these changes, and think about how they will affect our economy.

But just remember the other axiom I mentioned earlier: When everyone is going in the same direction, you can be sure that “the crowd is always wrong at extremes."



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