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Minyan Mailbag: Where 'Flation Will Leave Us

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It is ridiculous that we are even talking about these types of extremes...

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Prof. Succo

Per your research, inflation measured by a fixed basket of goods, (the yardstick for CPI before Greenspan lobbied for adjustments and the government started tweaking the calculations to save billions on Social Security cost-of-living adjustments), is currently at 8%.

OK, we all know that intuitively, but why is it important?

Even though we know that CPI isn't a "real world" measurement, somehow the financial media and most everyone who reads it seem to be viewing the Fed's work as containing inflation that is just "starting" to bud.

8% on a fixed basket is entrenched inflation. Inflation has MOMENTUM. The weak dollar will exacerbate it if the economy stays relatively healthy. What "might" reduce inflationary pressures is a recession. Food-for-thought.

This is NOT being actively discussed. Bill Fleckenstein
brushed very close this AM....

For the record, I believe in "Helicopter Ben's" abilities and I don't think we will see deflation anytime soon. It could come a fair piece down the road AFTER a really nasty bout of debt devaluating inflation. I think that in spite of the US's massive role in the global economy that US-specific, banana republic style inflation is "possible" while the rest of the global economy awkwardly navigates around us, much like what happened in South American countries and Russia.

I "hope" that the U.S. actually does something to effectively address the problem and a crisis is avoided, but I confess that I'm not optimistic.

Minyan Jeff

Minyan Jeff,

I agree with your premise and allow for your opinion as to where we are in the outcome. The stratagem, which has been perpetuated for years by first our central bank and then others in the later rounds, of currency devaluation and debt accumulation is coming to a head. It will end in some sort of process of hyper-inflation and then deflation in the U.S. Unfortunately we must talk in these extremes because of the immense amount of unsupportable debt that has been accumulated.

You think the coin toss comes out that we are not yet in hyper-inflation and that Golden Ben will be able to continue to inflate for a while before the collapse. The other side of the coin is that we are in some sort of hyper-inflation now and that the deflation burst is near.

Either case is plausible. I come out that we are nearer to deflation because for Ben to be successful, the market must "take" the credit that he offers; if it does not he can offer as much credit as he wants (print money), but it will not get into the system because the system is now busy actually trying to pay back that debt (or else it is already in default). A large piece of evidence is in the housing market, which at the very least will offer no more credit conduit and if there is massive movement back to fixed mortgages as the great ARM period ends, it could cause a massive move toward deflation.

Of course a default will look much different from a national point of view as it will take the form of a much lower dollar. The only question is will we get lower nominal asset prices or higher ones in that de-facto default?

It is ridiculous that we are even talking about these types of extremes. The root cause of all of this is that this great country, one born of capitalism, freedom and great resources, has succumbed to inept and self-serving bureaucracy. We have slowly given up our economic freedom and entrepreneurship for government intervention where cycles of purging excess have been numbed; economic growth is now accomplished by credit expansion and currency devaluation. This necessarily has resulted in vast debt and an attitude of "what is the government doing for us now." Ben Franklin warned long ago that giving the government the ability to print money is the beginning of the end.

Our forefathers learned their lesson about government after 1929 and the great depression. I suppose we must learn that lesson again.
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